A Chapter 13 Bankruptcy Can Be A Viable Defense Against Foreclosure

Interviewer: What happens in a foreclosure and where does bankruptcy fit in to that whole scenario?

Michael Golub: The process is a little different depending upon the banks and all of that. Basically, if somebody misses a mortgage payment, most banks will wait a few months, sometimes they'll wait several years but depending upon who the banks are. After a certain point, the banks will not accept any type of partial payment. In other words, if your mortgage is $1,000 a month and you don't pay for a year, you can't just send in $2,000, you'll have to pay 12,000 plus interest and fees. You'll have to pay it all up in order to stop them from foreclosing. But at a certain point, and like I said, it varies wildly for banks. I've seen banks file with people after six months; I've seen banks where it takes six years for them to file. But basically, they file a petition in the county where it is and that's served upon the people and then, the person then is required to file a response. It's just like any other lawsuit.

A Person Can Apply for a Loan Modification Program in Order to Avoid Foreclosure

The person files a response and then, the bank can rebut that or do a motion for summary judgment or something of that nature depending upon whether there are defenses that are put forward or not. Although attorneys make up a lot of defenses for these, typically there's not really a defense normally or some sort of technicality about not having a proper documentation or things of that nature. It goes through that court process and then, if the person doesn't respond, there'll be a default entered, if the person does respond, then they'll have to have a final hearing on it. The person has all kinds of options at that point that they can do with the bank. One of them they can apply for a loan modification and there's all kinds of government programs that can apply to that and so they can submit everything. Usually, that process is pretty lengthy.

An Individual Can Also Have a Short Sale Where they Sell the House and Pay off the Mortgage

Typically, you'll have to submit a lot of documents to the bank. The bank loses the documents about 10 times and then, it keeps asking for them over and over again. So, if the person is willing to save the house, they can try to go through the process and get a loan modification. It's a lengthy process and it's a difficult process but people can get modifications. The other thing they can do is they can try to put the house on the market for sale and do a short sale on the house and if the house has some value in it, they can just sell it and pay the mortgage off. If they're under water in them so they can request a short sale, and then that's where the bank will accept less than what it is owed on the house in order to sell the house and then waive any of the deficiency. So, that's one of the options they have.

Another Non-Bankruptcy Option to Stave off Foreclosure is to Offer the Bank a Deed In Lieu of Foreclosure

The other option is to request for the bank to take a deed in lieu of foreclosure on the case. Those are the non-bankruptcy options that you have. In terms of the bankruptcy, after the foreclosure is filed, if the person chooses to file the bankruptcy, then the attorney will file what's called Suggestion of Bankruptcy in the state court and that pretty much freezes everything that's going on in that proceeding. It's then dealt with in the bankruptcy court and then, several things can happen in the bankruptcy court. A lot of it depends upon the chapter that you're in. Typically all a chapter 7 does is just buy the person time and then, they'll go back in and then it basically goes back to the state court. The chapter 13, if they're not too far behind, the person can start making the monthly mortgage payments through the trustee and then, pay the arrearage through the plan and get it caught up in the plan and then, once the case is over and they have their discharge, then at some point, the foreclosure is dismissed.

Usually a Chapter 13 is a Lot More Successful than Loan Modifications to Avoid Foreclosure

The other thing they can do is there's a process where you can do the loan modification within the chapter 13 as well. Usually it's a lot more successful than the loan modifications when they're done in the context of the bankruptcy because the bankruptcy court keeps a tighter rein on the banks and a lot of the stuff that they get away with in the state court, they can't get away with in the federal court. The people can try to do a loan modification and try to save their house that way. If ultimately they're not able to pay the mortgage in the plan or they're not able to get a modification that they can pay in the plan, then basically they surrender the property in the plan so they'll have to modify the plan. The creditor will then file a motion to lift the automatic stay and then, it gets transferred back to the state court. At that point in time, because the person's listed the debt owed on the house in the chapter 13, the bank can't come after them for what's owed on it but they can lift the stay and take it back into foreclosure so they can just go through the process of getting the house back.