Stopping Foreclosure in Bankruptcy
Several banks have halted foreclosures in states that require courts to approve foreclosure, like Florida and Illinois. Bankruptcy can be used to stop foreclosures even in states that have non-judicial foreclosure like Tennessee. This chart tells you what kind of foreclosure you have in your state.
The minute you file bankruptcy, the automatic stay goes into effect. It is an injunction that prevents your creditors from taking any action to seize your assets until they get approval from the Bankruptcy Judge. The procedure for getting approval is called obtaining relief from the automatic stay, or stay relief.
This means that a lender cannot foreclose on you, no matter how far along it is in the process, starting at the moment you file, so long as it knows about the bankruptcy. The foreclosure is stopped until the Bankruptcy Court says it can proceed. By the way, the lender may have to start all over again, which means you live in the house free while the matter is pending and even longer.
The first step your lender takes is to file a proof of claim. This is a document filed under penalty of perjury showing the amount it claims you owe. The lender has to file copies of all relevant documents, also under penalty of perjury. The second step is to file a motion for stay relief. Again, this document is filed under penalty of perjury, and the lender has to attach the documents that show that it is entitled to foreclose. There won’t be a foreclosure until you have a chance to examine the documents. . . .
Only the holder of the note has standing to file a motion for stay relief. The original holder is the payee named in the note. The named payee can transfer the note to another person by endorsing it either to a specific person or in blank. Almost every note has been assigned, so the real holder is always someone other than the named payee.
Typically the note is transferred in blank. When it is sold, no one signs it. They just deliver the original to the buyer. When notes are transferred in blank, the person who has possession of the original note is the holder, and only the holder has the right to foreclose. The Bankruptcy Court should require the person seeking relief to produce the original note. A copy should not suffice, especially today, when electronic copies can be found all over the place.
Rarely will the documents show that the party seeking relief from the stay is the holder of your note. The documents usually show that the original lender is the holder. Frequently the corporation that filed the motion can’t find the original note with your actual signature.
Things happen quickly in bankruptcy cases. If the corporation doesn’t have the right documents, it might get one or two short continuances, but then the motion will be denied. You can also raise all the issues Cynthia Kouril has described in her series on foreclosures, which you can read here.
Let’s suppose you get lucky, and the actual holder doesn’t show up. Your next step is to file a motion to determine that the amount owed on your mortgage is $0. This is a motion, not a lawsuit which in bankruptcy is called an adversary proceeding. You are not questioning the validity of the mortgage, only the amount of debt that the mortgage secures. You have to serve a copy of this motion on everyone who might have an interest in the note.
Again, only the holder has standing to appear contest your assertion that the amount secured is $0. If your loan servicer shows up to try to say what the balance is, the Court should force it to show that it represents the actual holder. That isn’t likely, because if it knew who the holder is, they would have proved it on the motion for stay relief. The court orders that the balance on the mortgage is $0. You wait 10 days for the time to appeal to expire. Then you file a certified copy of that order with the register’s office or whatever it’s called in your state. Now you have effectively cleared the mortgage off your chain of title.
Several things might happen. You could convert to Chapter 13, and treat the lender as a creditor with a claim of $0, pursuant to the previous court order. Now you don’t owe a mortgage, so you can pay your other creditors in full and exit bankruptcy. Or the Chapter 7 Trustee might agree to sell you the house for enough to pay your other creditors and the fees and expenses of the bankruptcy. Or your family might step up to offer enough to buy the house at its current fair market value less selling expenses for the Trustee. At the worst, the Trustee will sell the house, and your lender won’t get a penny.
Or maybe the lender will magically find some documents. In that case, the Court may force a favorable outcome, or your lender may try to cut a deal with you, and the Trustee may agree.
And just in case some Chapter 7 Trustees are reading this, I assume I don’t have to explain how easy it is to take advantage of this situation even if the Debtor doesn’t.
[More investigative reporting on mortgage issues and foreclosures on the Firedoglake Foreclosure Fraud Page]