Everyone recognizes the tragedy of losing a home and its devastating effects on a family and a person’s financial health. This is why most do everything possible to keep their home. But to be honest, many approaches don’t work very well. Too many homeowners pay thousands of dollars to save their home and fail in the end.
If you are looking for some magic bullet that will instantly stop foreclosure, bankruptcy is it. There are other strategies available to a homeowner to stop a sale, such as: (a) negotiate with the bank; (b) sell the property prior to the sale; or (c) file an Order to Show Cause. In a very few limited circumstances, a homeowner may successfully negotiate a loan modification before a judgment of foreclosure is entered. But this must be done months in advance, it cannot be an eleventh hour activity. Once a judgment is entered, a homeowner’s bargaining power is slim to none. The only avenue becomes court intervention. The following are some hard truths on what may or may not work for a particular situation.
Selling the Property Prior to the Sale
If keeping the home is not an option and you would rather sell and move on, a course of action can be to enter into contract and close title prior to the auction sale date. You may be able to collect on the equity or, at the minimum, have total control over the sale. The issue with having a home sold at a public auction is that the property is sold to the highest bidder (however low that may be). The highest bid price at a foreclosure auction does not guarantee fair market value or the best price you can get on the open market with a real estate agent. At times, the sale price won’t even cover the entire loan balance. Sometimes a bank will set a minimum bidding price, sometimes they wont.
If the property is sold for less than what is owed to the bank, the homeowner and any co-signer may be liable for a deficiency judgment. Just like any other unsecured debt, the bank can pursue collection activity for the deficiency by placing a lien on assets and garnishing wages. Selling the home under your own control can ensure a high enough price to cover the loan balance and recovery of (any) equity.
Short Sale
A short sale is not for everyone. In a short sale transaction, the sale price is typically less than the outstanding mortgage balance. A lien holder may agree to a short sale if the property is underwater. For example, due to the recession, the fair market value of Jason’s home has dropped to $500,000 while his mortgage balance is $565,000.00. Jason has found a buyer to purchase the property for $495,000.00. The bank has agreed to issue a payoff letter for that sum, although they are out at least $70,000.00 on this loan. The advantageous aspect of a short sale is that a debtor can negotiate for the discharge of the deficiency judgment. In our example above, the bank can pursue the $70,000.00 directly from Jason after the property is sold. The deficiency judgment will show up on his credit report and the bank, as the judgment creditor, can place liens on his bank account, wages, and other assets in order to collect on his debt. A deficiency judgment can be avoided and waived by the bank by written agreement. This way, a homeowner in a short sale can walk away with no strings attached.
Order to Show Cause
An order to show cause filing to stop or delay a foreclosure sale is oftentimes denied by the court. As most lawyers should tell you, an order to show cause is not guaranteed to stop a public sale. An order to show cause requires an experienced legal hand. There are several components to filing – the moving party (ie person bringing the proceeding) must notify the other side (ie bank) pursuant to statute, include specific verbiage and mainly provide a compelling argument. See procedure and further explanation at https://www.nycourts.gov/courthelp/homes/foreclosureJudgments.shtml.
Relying on the sympathy of a judge to stop the sale because you have nowhere to go is typically a failing argument. On the other hand, providing into evidence an executed contract of sale and asking for a few weeks to close title may be successful, or arguing that you have the funds to satisfy the outstanding mortgage balance but the bank refuses to produce a pay off letter, may stop the sale. For example, if a homeowner died during the pendency of a foreclosure action or the lawsuit started after his death, an order to show cause can stop all court activity for one year.
An order to show cause is granted in very limited circumstances. Very frequently, clients pay several thousands of dollars in legal fees just to have their filing denied, and then have to pay lawyer fees for an emergency bankruptcy filing. But sometimes a homeowner may not qualify for a bankruptcy and has no other option but to proceed with an order to show cause. In this instance, make sure you come forth with a compelling argument as to why your home should not be sold.
Stopping a Sale by Bankruptcy
Stopping a foreclosure sale by bankruptcy can be accomplished in three ways: Chapter 7; Chapter 11; and Chapter 13. A chapter 7 bankruptcy is beneficial to an individual or a business entity that needs to delay a foreclosure sale so that they can sell the real property on their own. For example, Anna’s real estate agent was able to secure an acceptable offer on her condo. However, the condo is scheduled to sell at a public auction in three days due to the nonpayment of the mortgage. Anna files a Chapter 7 bankruptcy which automatically stops the sale and any lawsuit activity while the bankruptcy is pending. This gives Anna the breathing room to enter into contract and close on the property. This is a classic example, but every situation is different and must be consulted with a bankruptcy lawyer. Filing a Chapter 7 without knowing all the nuances and repercussions can cause devastating effects.
Chapter 11 bankruptcy can work well for real estate held by an entity such as an LLC, corporation or partnership. It is not always the case that loans are taken by individual homeowners. Corporate entities take out commercial/construction loans and may later default for lack of income on hand or delay in completing a project. As with Chapter 7, business bankruptcy is a very complicated area of law that should be handled with caution by an experienced Chapter 11 bankruptcy lawyer.
Chapter 13 bankruptcy typically works well for homeowners who want to keep the home but cannot afford to pay the mortgage arrears in one lump sum to bring the mortgage current. In this type of filing, the mortgage arrears are typically divided into 60 monthly payments (five-year payment plan). For example, Luna’s mortgage arrears total $54,000.00 due to non-payment for over two years. Unless Luna comes up with this amount, her home will be sold at a public auction. In a Chapter 13 bankruptcy, Luna can pay this balance off over the course of five years at $900.00 per month (54,000 / 60 months). In sum, the debtor’s debts are lumped together and split into payments over the course of three or five years. A Chapter 13 bankruptcy filing requires income verification and enough income left over each month to satisfy the monthly payment plan. The documents that need to be filed in a Chapter 13 bankruptcy are voluminous (see checklist here https://www.nyeb.uscourts.gov/chapter-13-checklist-0 ). As with the other proceedings, please always consult with an experienced Chapter 13 bankruptcy attorney before filing.
Contact Us
If you don’t have to lose your home to a public foreclosure auction, why would you? Call us to discuss your options. As a New York bankruptcy law firm, we help individuals and entities on a daily basis prevent devastating outcomes. Call 646-736-6328 for a consultation.