In these difficult economic times where many homeowners have no equity, or are "underwater" as it is frequently called, foreclosures have become a topic of frequent conversation. There is often a great deal of confusion about the foreclosure process, as the laws vary from state to state. Moreover, the foreclosure process interacts with bankruptcy in very specific ways. This article is aimed to give a general overview of foreclosures and their interaction with the bankruptcy process.
What Is It?
Generally speaking, foreclosure refers to any legal process by which a creditor seizes and sells your collateral for non-payment on a loan. However, when the term "foreclosure" is used, it most often specifically refers to when a lender attempts to sell real property (a house, building, land, etc.) because the borrower has stopped making payments. The lender can foreclose because when the money was lent, the borrower gave the lender the property as collateral. The lender is in this way, "secured" by the real property, as if the borrower stops making payments, the lender can seek to sell the property and regain the amount loaned through the sale.
What Is the Process?
There are two main ways in which a creditor can foreclose on property in the United States. The first is called "judicial foreclosure." Judicial foreclosure requires the lender to sue the borrower in state court for an order from the court permitting the foreclosure. A small minority of states require judicial foreclosure. Judicial foreclosure is generally not favored by creditors because it often costs more to do and takes a longer time to accomplish.
The second main method of foreclosure is "non-judicial foreclosure." This process is now available in the majority of states and is a process that is set forth according to state law. Many states require the recording of a Notice of Default and a Notice of Sale. This process occurs outside of the courts and does not require a lawsuit. As you can imagine, this process is favored by creditors.
Non-judicial foreclosure varies somewhat from state to state, as the foreclosure process is defined by state law. Generally, the process is commenced when the lender records a Notice of Default with the county recorder in the county in which the property is located. This notice indicates that the borrower is in default on the loan, meaning that payments have not been made, and that the lender is exercising its right to sell the property. Although the law varies, the borrower usually has the right to cure the default, often up to the time the property is about to be sold. A cure occurs when the borrower pays all back payments and any penalties and fees.
Some states also require the recording of a Notice of Sale after a set period of time if the borrower does not cure. The Notice of Sale will indicate when the property will be sold. If there still is no cure, the property will be sold at public auction.
It must be emphasized that some states have far more protections for borrowers than others. For example, a state may have laws in place that require the foreclosure process to take a certain number of days. Many of these laws were enacted in the wake of the foreclosure and real estate crisis of recent years.
Foreclosure and Bankruptcy
If a lender has started the foreclosure process and you file for bankruptcy, the lender must stop all foreclosure activities. This is due to the automatic stay. If the lender has not started foreclosure, it cannot commence the process until the automatic stay has expired or is lifted. Many lender will seek permission from the court to foreclosure prior to the normal expiration of the automatic stay. This can be accomplished if the court grants the lender's motion to lift the automatic stay. Reasons to grant such a request include: there is no equity in the property, the debtor is not making any payments, and the property is not required for reorganization (only applicable in Chapter 11 and 13 cases). These motions are routinely granted. However, the bankruptcy delays the foreclosure process and often provides an opportunity to work out a solution with the lender.
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this article does not create an attorney-client relationship between the author of this article and the user or browser.