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Progression to Bankruptcy in Current Foreclosure Crisis

By
Industry Observer

 

 

A progression seems to be taken place as the foreclosure crisis evolves.  As a bankruptcy/real estate attorney with a high-traffic foreclosure website, I'm in daily contact with distressed homeowners from around the country.  A couple of years ago, most people who visited my website, www.foreclosedDreams.com or contacted me personally were interested in learning about procedures we all know about today, e.g. foreclosures and short-sales.  While interest in short sale information is still extremely high, I'm seeing a shift to questions about eviction after foreclosure and bankruptcy.

 

The progression from foreclosure inquiries to eviction and bankruptcy is reflected in the emails and phone calls I receive.  Prior to March, I think most homeowners still had the belief they could short sale their home or otherwise workout their financial problems. This may have been the consequence of the foreclosure moratoriums in place at that time.  After that, I noticed increased worry about actual foreclosure and eviction.   Here are some recent comments posted on my site:

 

"My house has been foreclosed with a sale date of August 26, 2009. How much longer until the sheriff comes? I have 3 kids and need time, What can I do?"


"I am an unemployed homemaker with 2 small children, going through a divorce, and just received a Notice of Sale on my door this morning." 


"Hello!  Our home is scheduled for foreclosure and auction on 8/24/09. Please advise: When will we have to move out?Thank you."

 

Along with worries about eviction, homeowners are increasingly concerned about the possibility they might be sued for any deficiency resulting from a foreclosure.  Some visitors are even worried about being sued after they have completed a short sale approved by their lender.  No one explained to these folks that the lender has agreed to forgive the shortfall.  

 

Interest in bankruptcy has spiked very recently.  Homeowners or former homeowners are finally  overwhelmed by their debts and are reaching the final stage of the downward progression.  I receive calls from homeowners who have spent their savings trying to make their house payments.  Often, they are just forestalling the inevitable.  

 

Bankruptcy can help in limited circumstances.  Prior to foreclosure, a Chapter 7 bankruptcy can give a homeowner with equity in their house sufficient time to sell.  If there isn't any equity, a lender will probably get the stay lifted and move on with the foreclosure.  A Chapter 13 filing helps if the homeowner has a steady income and needs to become current on missed payments.  (These are very broad generalizations, of course.)

 

After foreclosure, bankruptcy can eliminate deficiency judgments.  Debts forgiven in bankruptcy are not considered debt-forgiveness income, so bankruptcy can help save taxes.  The real advantage of bankruptcy is can help people get a fresh start.  Their nightmares are put behind them and they can move on with their lives.


DAWN COX
Weichert, Realtors - Wayne, NJ
Broker-Salesperson, REALTOR, ABR, SRES, RELO, e-PR

Is it true that, after a bankruptcy case closes, a property with negative equity would go back to the seller?

Jul 23, 2009 06:18 AM
R Thompson
Salinas, CA

Hi Dawn, By seller, do you mean lender? After a debtor files for Chapter 7, an automatic stay is put in place which immediately stops any foreclosure proceedings. Because bankruptcy does not typically impact security liens, a lender holding a mortgage of deed of trust secured by a lien can request relief from the automatic stay. The foreclosure then proceeds as before--as if a bankruptcy was never filed. The lender can also chose to just wait until the debtor is discharged and then proceed with the foreclosure. In this sense, a property in which the debtor has no equity will go back to the seller (creditor) after bankruptcy.

Jul 23, 2009 07:23 AM
DAWN COX
Weichert, Realtors - Wayne, NJ
Broker-Salesperson, REALTOR, ABR, SRES, RELO, e-PR

I met with a seller last night that is 8 months behind on 1st and 2nd mortgage payments, has credit card debt and medical bills due to illness. They sought the advice of a bankruptcy attorney in May and is paying him installments to meet his retainer before he proceeds with filing a bankruptcy. He advised them to request a loan modification from the lender. They had been waiting for an answer from the lender but, instead, they were sent a notice that foreclosure proceedings had begun. Then, they called me in for my opinion. I'm advising to attempt a short sale. If we are successful at obtaining a buyer, it's my understanding that if it occurs after the bankruptcy is filed, the lender can request a release from the trustee at that time. What do you think of my advice, based on this scenerio?

Jul 23, 2009 07:51 AM
R Thompson
Salinas, CA

The lender would probably seek relief from the automatic stay, which is done before the bankruptcy judge.  Keep in mind, that your listing agreement with the seller is an "executory contract" which means it can (and probably will) be rejected by the backruptcy trustee.  You should run that question by your client's attorney. Although bankruptcy is federal, the question of which contracts are executory is subject to your state's laws.

Jul 23, 2009 12:17 PM
DAWN COX
Weichert, Realtors - Wayne, NJ
Broker-Salesperson, REALTOR, ABR, SRES, RELO, e-PR

We're in NJ. I ran the situation by one of my attorneys and he said that I am approaching in the right way. Should be an interesting learning experience. Thanks for your input!

Jul 24, 2009 01:37 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Ralph - absolutely sage advice!  ANYONE, ANYONE that is considering a loan modification, short sale, deed in lieu or a foreclosure should contact an attorney IMMEDIATELY.  Unfortunately most wait until they have been served!

Jul 28, 2009 02:32 PM