One of the hallmarks of the current financial downturn is the number of properties in foreclosure. Not since the Great Depression have more families been at risk of losing their homes due to nonpayment. Although homeowners may balk at the idea of spending money on legal assistance due to their financial hardship, an attorney can be a valuable advisor to homeowners navigating the foreclosure process, particularly if the homeowner wants to avoid bankruptcy.
Attorney assistance is perhaps most helpful if the home owner is seeking defense against foreclosure, but for many homeowners the reality is they will not be able to keep the house they are currently living in. For these people, the financial and emotional loss of the home can be overwhelming, so an attorney can be of great assistance with the formal foreclosure and post-foreclosure processes.
Foreclosure is governed by state law, so it varies considerably from one state to the next and often one mortgage to the next. Generally, there are two basic types of foreclosure – judicial and nonjudicial. As the names imply, judicial foreclosures are conducted in court while nonjudicial foreclosures are not.
Most judicial foreclosures are not contested by the homeowner so the lender wins via default judgment. If a homeowner does contest a foreclosure, the case is litigated as a typical civil action. The most common defenses, particularly since the 2008 financial crisis brought to light questionable mortgage handling practices, are procedural. One of the unique aspects of judicial foreclosure is the remedy if the foreclosing party wins – the court typically orders the sale of the property, often by sheriff’s sale.
Nonjudicial foreclosures can occur completely outside of the court system. However, they often end up in court in order to add legitimacy to the final outcome. In order to bring a nonjudicial foreclosure, the foreclosing party must typically notify the homeowner of the default and publicly advertise the property as for sale in the newspaper of record for the community. The property is then auctioned off. The purchaser, which is frequently the lender, will often bring a judicial action for quiet title after the sale to ensure it is legitimate. Nonjudicial foreclosures can also end up in court if the homeowner challenges the foreclosure, which effectively transforms it into a judicial foreclosure.
If the foreclosure sale did not generate enough money to fully satisfy the mortgage debt, the lender may seek a deficiency judgment against the former homeowner for the remaining amount of the debt. Deficiency judgments are considered unsecured debt, so the debt holders often sell this debt to third-party debt collection companies. The debtor typically cannot contest a deficiency judgment, but they have every right to protect themselves from unscrupulous collection practices. Attorneys are often called on to help debtors assert their rights under the federal Fair Debt Collection Practices Act.
Homeowners who have been foreclosed on may also call on the assistance of an attorney in negotiating the timeline for vacating the property. Foreclosure sales are often delayed or cancelled, and the homeowner has the right to maintain possession of the property until the sale is concluded, so the actual process of vacating the house can be chaotic. The purchaser will often work with the former homeowner to negotiate a timeline for vacating the property for two reasons. First, he or she wants the property to be kept in good condition, so he or she does not want to anger the current occupant. Secondly, the eviction process can be lengthy and expensive, so it is easier to work things out directly with the occupant. An attorney can help ensure that the agreement is fair and is properly memorialized so it is enforceable in court should either side violate the agreement.
In some states, homeowners have a post-foreclosure sale “right of redemption.” The specifics vary by state, but basically the homeowner can reclaim title to and possession of the house if they can pay the full amount owed within a specified time after the sale. This right is so rarely exercised that homeowners who attempt it may need legal assistance.
If the homeowner is not going to fight foreclosure, they should be informed of other options that are available to them. While these options do not allow the homeowner to save his or her home, they can save some of the hassle the foreclosure process invites.
- Short Sale – Lenders may allow the homeowner to sell the house for less than the debt – hence the name short sale. The lender gets the purchase price and a deficiency judgment against the debtor. The debtor is released from the mortgage without having the black mark of a foreclosure on his or her credit report. The lender may also forgive the deficiency, but if they do it is typically considered taxable income for the homeowner.
- Deed in Lieu of Foreclosure – Some lenders will allow property owners to surrender title and possession of the property voluntarily. The lender gets the property to re-sell without going through the expense of the foreclosure process. The homeowner can often negotiate the timeline for vacating the property, and avoid having a foreclosure impact his or her credit report.
The foreclosure process can be emotionally trying and difficult for the average homeowner to navigate. It is imperative that you contact an experienced attorney if you are facing home foreclosure.