Bankruptcies and Foreclosure: Q & A

Q: I’m behind on the house payments. My bank stopped accepting payments, and I received a letter saying that my mortgage has been referred to a lawyer for foreclosure. What does that mean? Will filing a bankruptcy help this situation?

A: “Foreclosure” is the process by which the lender on real estate takes title back from the borrower because of a default, usually by missing payments. There is no minimum number of missed payments that will trigger this action. If payments are not made according to the schedule set out in the note, the bank has the discretion to foreclose.

Until foreclosure takes place, the property belongs to the borrower. After foreclosure takes place, it belongs to the lender. “Referring an account for foreclosure” means that lawyers have been hired to start the process of foreclosure, which takes weeks to accomplish. It does not mean that the bank now owns your property.

The procedure by which foreclosure happens is determined by state law. Foreclosure in Georgia is done without any court action. To do this, the lender must advertise in the newspaper in the county where the property is located that a foreclosure “sale” is scheduled for a particular date. The advertisement must run for four consecutive weeks. Afterwards, foreclosure may be “cried” on the courthouse steps at the county courthouse. Foreclosures in Georgia must take place on the first Tuesday of a month, and not otherwise. Thus, it takes a least a month after a mortgage has been “referred for foreclosure” before the foreclosure can take place.

When you file either a Chapter 7 or a Chapter 13 bankruptcy, an “automatic stay” goes into effect that instantly freezes the ability of a lender to proceed with foreclosure …whether the lender knows of the bankruptcy filing or not. (If a foreclosure has already taken place, however, a bankruptcy will not retroactively reverse it). 

Q: What is the effect of filing a Chapter 13 on foreclosure?

A: A Chapter 13 bankruptcy involves the filing of a “plan” that may propose to “cure” a mortgage default by having the Chapter 13 Trustee catch up “arrearages” over a period of years. In a normal plan, the debtor makes mortgage payments in the regular amount directly to the lender after the case is filed. In addition, the debtor pays the Chapter 13 Trustee his “plan payments” which are used by the Trustee to catch up mortgage arrearages and pay the other debt to other creditors like car notes and credit cards. So long as the debtor meets his obligations under the plan, the creditors must accept the bankruptcy and their treatment under the plan, and may not employ state law collection remedies like foreclosure.

Thus, debtors have power in Chapter 13 to stop foreclosures permanently. They can keep their property and take years to catch up defaults, whether the lender agrees or not.

Q: What is the effect of filing a Chapter 7 on foreclosure?

A: The “automatic stay” instantly stops foreclosures in Chapter 7 also. However, the purpose is not to give the debtor a chance to reorganize the debt and keep his house. Rather, it is designed to give the Chapter 7 Trustee an opportunity to decide whether there is sufficient “equity” in property to allow the Trustee to sell it, pay off the mortgage, pay the debtor certain sums called “allowable exemptions”, and still have money left over to pay creditors whose claims are otherwise being discharged without payment. Thus, filing a Chapter 7 sometimes delays the sale of the house, but in the end, the debtor is not in control. For administrative reasons, it usually takes at least three months for the Trustee to make a decision about the property, and so foreclosure or sale is often put off for about that long or longer.

In most cases, there is no meaningful equity in property, and so the Chapter 7 Trustee will eventually “abandon” his interest in it. This leaves the debtor in the same position as before with the mortgage lender, who may then proceed to foreclose under state law whether the debtor agrees or not.

If the debtor has tens of thousands of dollars of “equity” in property, a Chapter 7 may be used to protect some of that equity (because the debtor is allowed certain “exemptions”), even though ultimately, the property would be sold to pay creditors.

Call attorneys H. Brooks Cotten or Gina Karrh at 770-683-3303 to discuss your particular situation, and they can discuss your options with you.