Often times, people seek out help from another party to help finance the purchase of a home. This is usually done by taking out a loan through a bank or mortgage company. By doing so, the lender gains certain rights over the property. When a homeowner uses the equity in their home and borrows against it, they are taking out a home equity loan or second mortgage. When this happens, the lender can place a lien against the home in order to secure the remaining balance and protect their interest. If a borrower fails to make payments on the loan, the lender has the option to take action and force the sale of the home to pay the outstanding loan balance. Consider the following example:
Chris and Sarah purchase a home for $500,000. To finance their home, they took out a loan of $450,000 through their local bank and paid a down payment of $50,0000. The loan requires monthly payments of $2,020.71 per month for 30 years at an interest rate of 3.5%. Along the way, the couple loses both of their jobs and cannot afford to pay their monthly loan payments. As a result, the bank can choose to force their home into foreclosure to secure their interest and pay off the remainder of the loan.
NON-JUDICIAL FORECLOSURES VS. JUDICIAL FORECLOSURES
Home foreclosures can be categorized into two types: Non-Judicial and Judicial Foreclosures. In California, the majority of foreclosures that occur are non-judicial. Within the deed of a trust is a power-of-sale clause. If the circumstances have changed and debtors are unable to repay their loan, lenders can take actions against them without receiving approval from the Court beforehand. Instead, the lender can grant a third party the authority to proceed with home foreclosure and sell the property. The resulting amount is meant to cover the loan's outstanding balance. If the sale does not cover the entirety of the remaining balance, the lender cannot collect on a deficiency judgment because they granted the third party’s authority. A deficiency judgment places a lien against the debtor, requiring them to pay the loan’s outstanding balance.
A lender cannot immediately begin a non-judicial foreclosure. To foreclose on the property, the following steps will occur:
- If the borrower has defaulted on payments, the lender must contact the borrower to discuss the current situation and consider other options before proceeding with a foreclosure. Once contacted, the lender must wait at least 30 days to begin the formal foreclosure process.
- If the borrower and lender have not developed a plan during the 30 days, the lender can now record a "Notice of Default" in the county in which the property is located. The lender must provide the borrower with a copy within 10 business days. From here, the borrower is given 90 days from the notice's filing date to cure the default. If successful in doing so, the borrower can end the foreclosure process and prevent further action from occurring.
- If the borrower fails to cure the delinquency during the 90 days, a "Notice of Sale" is recorded. A "Notice of Sale" allows for the home to be sold at an auction and sets a date and time for the auction to occur. The auction must occur at least 21 days after the notice is recorded.
- The home is sold in a public auction on the established date and time. Bidders place bids and whoever places the highest bid must pay the full amount immediately. The lender generally participates in the auction. If the lender is the highest bidder, he/she receives the home.
In contrast to a non-judicial foreclosure, a judicial foreclosure is a much lengthier and costly process, making it rare in California. Unlike a non-judicial foreclosure, a judicial foreclosure requires a lender to take court action before proceeding. The lender must file a lawsuit against the borrower. If a power-of-sale clause is not present in the deed, the Court may order for the home to be sold. Once the property has been sold, the borrower has a “right of redemption” period in which he/she may attempt to buy the property back from the highest bidder.
HOW CAN I PREVENT A HOME FORECLOSURE FROM OCCURRING?
Contrary to popular opinion, the homeowner actually does have rights during a potential foreclosure. There are certain things that can and can not be done by the lender. The California Homeowner Bill of Rights, enacted on January 1, 2013, and amended on January 1, 2019, lay out some key points that homeowners should be aware of. Please see below a summary of some key points (in addition to what was mentioned above):
- Guaranteed single point of contact: If you request from the lender a loan modification or other various foreclosure prevention options, the lender must provide you a single point of contact. This is the point of contact you should reach out to for all questions related to the loan.
- Acknowledgement of application: If you do apply for a loan modification and there are errors or deadlines that you need to be aware of, the lender must provide you that information within 5 days.
- Restriction on fees: The lender can’t charge you a fee for applying for a loan modification. Moreover, they are required to hold-back any late fees during your loan modification process.
- Restrictions on dual tracking: The lender must pause the foreclosure while they are making a decision on your loan modification. In other words, they can’t be communicating with you to work out a loan modification---and at the same time, pushing forward with their foreclosure.
- Denial Rights: The lender must provide you in writing the reasons your loan modification was denied and an opportunity to appeal.
- Transfer Rights: If the servicer of the loan approves a loan modification and then sells the loan to another servicer, the new servicer must honor the loan modification as if it were the original servicer still.
- Tenant Rights: If you are just a tenant and the home you are living in is foreclosed on, the new homeowner is required to give you 90 days before they can start eviction proceedings.
WHAT TO EXPECT AFTER A FORECLOSURE OCCURS
A foreclosure is completed during an auction. The property goes to the highest bidder. Despite the bidder "winning" the property at that moment, you will not be forced out of your home immediately. The bidder must serve you with a 3-day notice notifying you of the foreclosure and that you will be required to move out. If you fail to follow the notice and continue residing in the home after the 3 days, the bidder can choose to undergo formal eviction proceedings to remove you from the home. Once the bidder has won the lawsuit, a sheriff will escort you off the property. If any personal property was left at the residence, you are given 15 days to reclaim it, otherwise, the bidder holds the right to charge storage fees or dispose of it.
If you are tenants renting a home that has been foreclosed on, it is important to be aware of your rights. The new owner is required to honor your lease and cannot evict you under those conditions. However, if you are renting on a month-to-month lease or the owner is also residing in the home, you could face an eviction. In these situations, the owner could choose to offer you a new rental agreement or proceed with an eviction. If he/she chooses to evict you, they must provide you with at least 90 days’ notice.
HOW CAN I PREVENT A HOME FORECLOSURE FROM OCCURRING?
The biggest way to prevent your home from being foreclosed is to stay up to date on all loan payments. If you are meeting all deadlines and paying the set amount, the lender cannot take action against you and proceed with a foreclosure.
In some situations, you may not be able to afford to pay your mortgage at the moment. For example, if you have been laid off and are not receiving an income, it may be difficult for you to provide lenders with the money owed to them. In this case, filing for bankruptcy relief can help prevent the immediate foreclosure of your home. When filing for either Chapter 7 or Chapter 13 relief, the Automatic Stay is enacted upon your initial filing. The Automatic Stay prevents creditors from taking certain actions against you. This stops them from pursuing collection attempts or enforcing liens. In addition, it also prevents lenders from continuing with foreclosure proceedings at this time.
The Automatic Stay treats foreclosures differently in each chapter. For example, if a foreclosure is inevitable but you are hoping to gain some more time before being pushed out of your home, it would be appropriate to file a Chapter 7. As directed in 11 U.S.C. § 362 (d), the Court will utilize the Automatic Stay to prevent the foreclosure at this time. Instead of dealing with the hassle of going through this extra step, the lender will generally wait a few months until the Chapter 7 is complete, giving you an additional 3 to 4 months to prepare for your home’s foreclosure.
HOW CAN CHAPTER 13 BANKRUPTCY HELP WITH A PENDING FORECLOSURE?
If you are hoping to keep your home by making up the delinquent payments, it may be more beneficial to file a Chapter 13. The goal of Chapter 13 Bankruptcy is to keep as much of your property and assets as possible. When Chapter 13 is filed, you and your attorney create a Chapter 13 Plan to establish a payment plan for your delinquent payments over the next 3 to 5 years. If you follow your plan and make payments regularly to your assigned Trustee, the lender cannot force you out of your property and go forward with the foreclosure proceedings. Additionally, the Court could potentially eliminate other liens resulting from another mortgage or home equity loan.
In Chapter 13 bankruptcy, you will set up a payment plan that will need approval from the Judge, Trustee, and all creditors in the matter. The plan has to abide by the guidelines of the Bankruptcy Code. If it doesn’t, an objection to your plan can be filed and if the Judge agrees with the objection, your plan will not be confirmed.
There are several relevant parts to the Chapter 13 Plan. This discussion will be limited to the mortgage loans. In your Chapter 13 Plan, you will be given 3-5 years to catch up on the delinquent payments. For example, if you are $20,000 delinquent on your mortgage, you’d now have 3-5 years to pay that amount back. Thus, if it were a 5-year plan, you’d be paying approximately $333.33 per month towards the delinquent portion. Thus, if you do that for 60 months (5 years), you have now paid the full $20,000 delinquency amount in full. Moreover, you’ll be obligated to pay the ongoing mortgage each month too. Let’s say your ongoing mortgage payment is $1,800.50 per month. That means you’d be the $1,800.50 + $333.33 each month for the 5 years. Once that 5 years is done, you are now 100% current on your mortgage!
WHAT IF I DON’T HAVE ENOUGH TIME TO DO A CHAPTER 13?
Our office actually runs across this problem quite often (more often than we like to be honest). Sometimes we hear from a potential client and they inform us that their home is being foreclosed on tomorrow. The potential client is beyond stressed and is convinced that they will be losing their home the following day.
Our attorneys can quickly step into such a matter, analyze the situation, and potentially file an Emergency Chapter 13 (i.e. Skeletal Petition) the same day in order to stop the foreclosure from occurring! This enacts the Automatic Stay and the foreclosure sale is immediately stopped. Now that the Chapter 13 is active, you are now given a short window of time to file the remaining documents needed for a Chapter 13 case. Our office will ensure that you are properly notified of each deadline and will work with you to ensure that all documents are timely filed. As long as you follow our streamlined protocol to do this, we can have the remaining documents timely filed and now your Chapter 13 moves forward.
If you fear a home foreclosure may be in your future and are hoping to prevent it from occurring, contact us today to speak directly with a foreclosure attorney. By informing us of your circumstances, we will be able to provide you with more information and work to prevent a foreclosure from occurring.
We help clients in the following areas: Modesto, Stockton, Turlock, Ceres, Empire, Escalon, Hughson, Lathrop, Linden, Manteca, Oakdale, Patterson, Ripon, Riverbank, Salida, Tracy, Waterford