Foreclosure and Bankruptcy
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| Judicial Mortgage Foreclosure - | 1.not required in every state 2.even in states that allow non-judicial sale by mortgage holder or trustee(trust deed situation) judicial mortgage foreclosure is available
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| 13 steps in a judicial mortgage foreclosure - first 10 steps | 1.default 2.notice of default 3.acceleration 4.identification 5.plaintiff's pleadings 6.defendant's pleadings 7.determination of the law suit 8.judgment and order for foreclosure 9.pre-sale redemption period 10.foreclosure sale
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| steps 11-13 | 11.confirmation of the sale and collection of the balance of the bid price 12. conveyance by sheriff's deed 13.post-sale redemption period
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| Default - the debtor’s failure to honor promises made in the mortgage or the mortgage note. | 1.A failure to pay the note is the most common default 2.there can be other defaults, including waste, or failing to insure the property or pay real estate taxes.
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| Notice of Default | required to give the debtor an opportunity to "cure" the default.
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| Acceleration | in order to sue for the entire remaining debt (not just the payments owed at that time of an uncured breach) and to foreclose against the property, the lender must “accelerate” the debt, causing its balance to be due in full.
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| Identification of the Necessary Parties - the lender must sue the holders of all claims with a lower priority than mortgage (including the debtor) | 1.Unless the junior lien holders are brought to court&given an opportunity to participate in lawsuit, their rights cannot be cut off or "foreclosed" 2.first step- identify all with an interest in property by having title insurance company do title search
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| those with claims junior to the mortgage being foreclosed | are ripe to be included in the action and to have their claims terminated
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| Plaintiff's Pleadings 1.-Filing and Serving the Summons and Complaint - a Complaint is filed with the Court and a certified copy is delivered to the defendant (often the Sheriff delivers it in person), along with a Summons. | All parties who must be brought into the suit by the plaintiff will be named as defendants, even if they have done nothing wrong.
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| Plaintiff's Pleadings 2.Filing a "Lis Pendens"-How do people know that property is subject of a foreclosure action? What happens to the rights of a lien holder whose interest first arises after lawsuit is started and who is not a party to the lawsuit? | Put a Lis Pendens in the real estate records to give the world notice that litigation affecting the property is pending. Later claimants take “subject to” the action.
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| Defendant’s Pleadings - Defensive Motions or Answer - | a failure to respond is called a "default“ in the action
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| Determination of the Lawsuit - | the case is decided by summary procedures or a trial is held. The result is that the Court determines a winner and a loser.
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| Judgment and Order for Foreclosure - if the foreclosing lien holder wins, the Court makes findings of the important facts and orders the sale of the property. | As part of its decision, the Court determines the priority of the other lienholders, just in case there is enough money to pay off more than the first lien holder.
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| Pre-Sale Redemption Period | historically, the courts created an equitable right to recover the property from foreclosure, before and even after sale(equity of redemption). 2.there can also be a statutory postponement of the sale to allow the debtor a chance to come up with the money
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| Foreclosure Sale - 1.the auction of the property, typically by the County Sheriff 2.winning bidder is pays a portion of purchase price deposit immediately upon acceptance of bid | 3.When calculating their offers, bidders deduct any real estate taxes owed (and any other senior liens that may exist) from what they are willing to pay 4.winning bidder gets property subject to those senior liens
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| Confirmation of the Sale and Collection of the Balance of the Bid Price 1. the price must be "adequate", but need not be fair market value 2.Court takes evidence and determines reasonableness of bid | 3.If sale proceeds exceed amount owed to most senior lien holder,Court also supervises distribution of proceeds among junior lien holders. 4.If bid price exceeds all liens on the property, the "surplus" is given to debtor for his equity in property
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| Conveyance by Sheriff's Deed - | a deed without warranties, like a quit claim, is delivered to the successful bidder.
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| [Post-Sale Redemption Period] - | Think about how inconvenient a post-sale redemption opportunity is for the successful bidder at the foreclosure sale 1.Should she spend money to fix the property up? 2.Can she sell the property to another person?
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| Deficiency Judgment –Unless the right to a deficiency is barred by law or waived (in order to shorten the redemption period or for some other reason), any excess owed by the debtor after foreclosure may be reduced to a money judgment | a separate lawsuit is not required. 3.Like other judgments, a docketed deficiency judgment will be a lien on other real estate or be collectable in some other way.
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| In states which allow foreclosure without a court action, the mortgage (or deed of trust) can be foreclosed by action of private parties. | This is called a foreclosure by Power of Sale, or Foreclosure by Advertisement.
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| Steps in Power of Sale Mortgage Foreclosure In states which allow foreclosure without a court action, the mortgage (or deed of trust) can be foreclosed by action of private parties. | 1.Default 2.Notice of Default and Acceleration 3.Notice of Foreclosure to the Debtor 4.Publication of Sale Notice and Pre-Sale Redemption Period 5.Foreclosure Sale 6.[Deficiency Action]7.[Post-Sale Redemptions]–usually not available.
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| Notice of Foreclosure to the Debtor – | personally and often by recording a notice in the real estate records
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| Foreclosure Sale - the auction of the property by the lender or a trustee (under a Deed of Trust) | Considerations concerning taxes and other senior liens that go into bidding for a property in a judicial foreclosure sale still apply. The proceeds are applied to the liens, without court supervision
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| [Deficiency Action] – | lenders who are not fully paid may be able to sue to recover balance owed. Not all states permit deficiency claims, and some require a judicial foreclosure
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| Deed in Lieu of Foreclosure 3 main ideas | 1.Typically a quit claim of the real estate to a lien holder with power to foreclose. 1.A “Deed in Lieu” avoids the delay and expense of a foreclosure action.
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| 2nd idea | 2.Fraudulent conveyance can be a concern in a Deed in Lieu case - An insolvent person’s transfer of valuable property for an unfairly low value can be undone (by the debtor or his or her creditors) through a court action
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| 3rd idea | 3.The lien holder accepting a Deed in Lieu of Foreclosure must be careful about title
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| Typically a quit claim of the real estate to a lien holder with power to foreclose. A “Deed in Lieu” avoids the delay and expense of a foreclosure action. | 1.debtor might be willing to give up property without a fight in exchange for concession 2.lender might be willing to take property if sufficient value in relation to debt, to the costs of holding and disposing of property, and if no liability attached
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| problems for a lender accepting a Deed in Lieu of Foreclosure | There can be title, environmental, and public relations problems
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| Fraudulent conveyance can be a concern in a Deed in Lieu case - | An insolvent person’s transfer of valuable property for an unfairly low value can be undone (by the debtor or his or her creditors) through a court action.
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| Fraudulent conveyance - 2 things that might help | 1.an estoppel affidavit can help 2.an appraisal can help
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| The lien holder accepting a Deed in Lieu of Foreclosure must be careful about title. | 1.Without protection of foreclosure,lender will take debtor’s property subject to any liens on it 2.If there are significant liens (even if they are junior to the foreclosing party’s lien), the only practical route may be a foreclosure
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| bankruptcy - to give an insolvent debtor a fresh start | 1.By eliminating some debts entirely (Ch. 7 - liquidation), or 2.By creating a "time-out" to allow the debtor time to settle debts and continue its business (Ch. 11 - reorganization
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| 2 primary forms are Ch 7 and 11 | there are others
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| In Ch. 7 bankruptcy | the debtor’s property (except certain exempt assets) – the “Bankruptcy Estate” - becomes the property of a “Bankruptcy Trustee” who uses it to pay off creditors
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| In Ch.11 bankruptcy | the basic rule is that creditors must receive at least as much money as they would if the debtor were liquidating through a Ch. 7 proceeding.
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| exempt assets | 1.assets that you must list on your Statement of Financial Affairs 2.schedules that you may shield from your unsecured creditors. 3.assets you may protect this way defined by federal and state law
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| in about 15 states you may choose either of the two laws | in most states you may use only the state exemptions
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| homestead exemptions vary widely under the new bankruptcy law | 1.you may not be able to take advantage of homestead exemption in your state if you bought home within 40 months of filing for bankruptcy, you can exempt no more than $125,000 of its value2.if homestead exemption in your state is lower, it applies
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| look at examples of 3 different states in outline for this section - page 4 |
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| bankruptcy is a federal system | but it relies on state law for determining the validity and priority of liens and other claims on property
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| a debtor's bankruptcy does not: | 1.Overthrow the priority ranking of the secured parties among themselves; or
2. Give unsecured parties any direct interest in the debtor’s property.
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| The Bankruptcy Trustee | a "perfect secured creditor" from and after the time the bankruptcy is filed, maximizing amounts available for unsecured creditors by defeating poorly secured debts and preferences
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| Automatic Stay - bankruptcy halts collection actions except as permitted by the Bankruptcy Court. | 1.A creditor getting a security interest in a debtor’s property must perfect its lien before bankruptcy is filed or creditor will end up as an unsecured lender 2. secured creditor in midst of foreclosure learning of debtor's bankruptcy must stop
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| Sometimes a foreclosure is stayed, but, | because the property’s value is not great in comparison to liens, there will be nothing for the Trustee to get (for the unsecured creditors or the debtor.)2. creditor can ask BR court to abandon the property
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| see page 6 of outline for excerpts of the bankruptcy code concerning automatic stay | take a look
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| bankruptcy preferences | : pre-bankruptcy transfers that can be reversed by the bankruptcy court in order to make more assets available to pay creditors in the order required by the bankruptcy code and state law.
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| A preference is a: | 1.Transfer to or for the benefit of creditor within 90 days of filing(1 year certain circumstances)2.In payment of an antecedent (pre-existing) debt3.While the debtor is insolvent4.That gives the creditor more than it would have received in Ch. 7
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| fraudulent conveyance | lso a concern: 1.Will a foreclosure sale or other transfer hold up if the debtor files for bankruptcy 2.will the value given for the property be so inadequate that the transaction can be undone?- Yes
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| Discharge: | The end result of a bankruptcy is the release of the debtor from those debts that cannot be paid through the bankruptcy.
The slate is wiped clean (though the debtor can reaffirm a debt to a favored or feared creditor.)
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| May I use Chapter 7 bankruptcy to get rid of all my debts? from aba.org - No, bankruptcy does not discharge all types of debt. If a debt is excepted from discharge you remain legally responsible for it. | aExceptions include most tax claims, alimony, child support, all property settlement obligations from a divorce or separation, most student loans, fraud debts, and debts from a drunk driving problem.
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| Chapter 7 bankruptcy also will not release you from damages for "willful and malicious" acts such as assaulting another person. | Many debts incurred though the debtor’s fraud are also non-dischargeable. In this regard, there is a presumption of fraud in last minute credit card binges in either cash advances or luxury purchases within sixty days before a bankruptcy filing.
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