Which bankruptcy and who must file to stop a foreclosure

In this day and age the internet is abound with articles that advise you that if you want to stop a foreclosure on your home then filing for bankruptcy is an effective way of doing that. As now retired Judge Mitchell of the Alexandria, Virginia Bankruptcy Court was fond of saying bankruptcy is “the cheapest injunction in town.” However, what is easy to overlook is which person or entity must file the bankruptcy in order to stop the foreclosure and what bankruptcy needs to be filed in order to stop the foreclosure.

First rule to keep in mind: only the person or entity that owns the piece of real estate headed for foreclosure can protect the real estate by filing for bankruptcy. So, with the proliferation of corporation and especially LLCs these days it is important to recognize that if the real estate is owned by a company then it is the company –the LLC for example- that must file for bankruptcy protection. And it is the deed (not the deed of trust or the promissory note) that will tell you who owns the property. Same goes for married couples. One cannot always assume that both own the home. Again, look at the deed to the house.

For those of you who are intellectuality curious the reason for that is that when a bankruptcy case is filed the “automatic stay” goes into effect-that’s the injunction that Judge Mitchell was talking about. And the automatic stay applies to all “property of the estate.” The property of the estate is just about every conceibale thing that you, the individual or entity that files for bankruptcy owns on the day you file your bankruptcy case. In short, the bankruptcy “shield” only applies to the property that is owned by the debtor.

Second thing to keep in mind is which bankruptcy you select to file matters. Chapter 13 cases can virtually always be voluntarily dismissed by the person who files for bankruptcy. But, that is not the case with chapter 7 cases; there is no automatic right to dismiss such cases once they have been filed. So, if the house happens to have a substantial amount of equity, and you are just looking to buy yourself a few more months do not make the mistake of filing a chapter 7 bankruptcy.  Why? Because the chapter 7 trustee is going to want to sell your house for the benefit of your creditors! In other words, you may find that exiting the bankruptcy arena is not nearly as easy as it is to enter it. So choose carefully!!

And if the mortgages on the house(s) that you are trying to save from foreclosure are in excess of about $1,150,000 dollars then be prepared to have to file an individual chapter 11 case. And here too dangers lie ahead for those who own real estate with equity and are just trying to buy themselves a few months while they work things out with the bank.  As with chapter 7 bankruptcy filings there is no automatic right to have your case dismissed. In other words, you cannot just tip your toe in the water if you decide to file an 11. If you are in it, you are in for the long run if you have equity in your home(s).

And speaking of chapter 11, if a corporate entity owns the real estate, like an LLC, then that particular LLC must file a chapter 11 case (a chapter 7 bankruptcy rarely makes sense for an LLC and chapter 13 is for individuals only) to save the property from getting foreclosed on. Again, here too caution must abound since there is no right to automatically dismiss the chapter 11 case. If the property has significant equity the court may be inclined to allow the case to be converted to a chapter 7 which will result in the real estate being sold by the chapter 7 trustee for the benefit of the creditors of the LLC.

Final point, for spouses who own the home jointly it may be beneficial to not file a joint case in order to leave the door open for the other spouse to file a bankruptcy at a later time if the circumstances prove necessary. This can buy the couple a great deal of time, put the foreclosure off for a very long time and avoid the whole “serial filing” issue.

THE FORECLOSURE PROCESS IN VIRGINIA

With all this talk out there about foreclosure you may be wondering just how the process works here in Virginia? What requirements are imposed on the lender before foreclosing on your home? Surely, before someone can take your house there is bound to be some court intervention right? After all, this is the country that holds the term “due process” in very high regard.  There is bound to be at least some administrative hearing as would be the case with a parking ticket that you sought to challenge right? And if nothing else, you are entitled to be served with the foreclosure documents as would be the case with a civil lawsuit where you are being sued for $5,000.00 right? Regretfully, the answers to the foregoing questions is no! The fact of the matter is that the foreclosure process in Virginia, from the lender’s stand point is fast, cheap and easy. Here is why:

Non-Judicial Foreclosure-

  • Shocking as it may sound, a lender in Virginia is not required to sue you in court prior to foreclosing on your home. That power is derived from that huge document that you singed at closing when you purchased/refinanced your house called the deed of trust. This document states that the home is to serve as collateral for the loan that you are receiving form the bank.  It also states that in the instance of a default (such as not paying your mortgage) the bank has the right to sell your home in order to satisfy the mortgage they gave you. That is the “power of sale” clause that is enforced by the trustee appointed by the lender. The trustee is acting as the agent for the lender.
  • Advertising requirement- If the deed of trust contains a power of sale clause that specifies the terms of the foreclosure sale and the time and place of the sale, then the specified procedures must be followed. More often than not the deed of trust is silent on the details of how and where the foreclosure is to be conducted.  Ditto on the need to advertise the foreclosure sale in the local paper. Virginia law states that if the deed of trust does not provide for advertising, then the ad shall be run once a week for four successive weeks. This is why homeowners receive the unsolicited offers in the mail from bankruptcy law firm, realtors and scam artist to help them with their upcoming foreclosure of their home. The fact that your home is going up for foreclosure must be advertised in the local paper.
  • Notice of Trustee Sale Letter- This is the 14 day rule. The trustee, the agent for the lender, typically the attorney conducting the sale, simply has to send you a letter advising you that on such and such date and time, in front of the court house steps, your home will be sold at foreclosure. A copy of the advertisement or a notice with the same information must be mailed to the homeowner at least 14 days before the foreclosure sale. That’s it. A lousy 14 day advance notice is all they have to give you. Most law firms will mail you this final letter by certified mail and regular mail, but are not required to personally serve you as would be the case if you were being sued in just about any other kind of situation.

The foreclosure sale ad must include anything required by the deed of trust and may include a legal description of the property, a street address and a tax map identification or general information about the property’s location. The notice must include the time, place and terms of sale. It must give the name of the trustee and the address and phone number of a person who will be able to respond to inquiries about the foreclosure sale. Granted, this letter is typically preceded by one other letter advising you that you are in default and the loan has been accelerated.

That’s it. That is all it takes to foreclose on a property in Virginia. Put an ad in the paper for 1 month, mail out a couple of letters and the bank now owns the house. Other draconian measures:

  • No right to reinstate loan prior to sale- You would think that if you could come up with the –for example- 7 months of unpaid mortgage debt plus the other junk fees tacked on top of that the day prior to the foreclosure sale date that you can stop the foreclosure of your home. But, in Virginia, in order to cure the default at this point you would have to win the lotto first since the bank can require you to pay off the loan in its entirety before they call off the foreclosure.
  • Deficiency judgments- Talk about adding insult to injury. Lenders may obtain deficiency judgments, without limits, in Virginia. If the house ends up selling for less than what is owed on the mortgage(s), the lender can pursue you for the balance. A separate lawsuit must be file with the court.
  • Redemption after sale- About half the states in the country give the homeowner a period of time after the foreclosure sale occurs to buy back their home, but not in Virginia. Once the hammer falls at auction the house is gone.

Va. Code Ann. §§ 55-59 provide the key foreclosure statutes in Virginia at this time.

 

Foreclosure Defense or Foreclosure Delay?|Foreclosure Defense in Virginia

Wondering what the state of “foreclosure defense” in Virginia is these days? Wondering what your chances of success are of stopping a foreclosure here in Virginia without filing for bankruptcy? Can you possibly keep the house without paying the mortgage in Virginia? Well, a recent ruling by the federal court here in Alexandria, Virginia certainly seems to shed some light.

Here is what the United States District Court For The Eastern District of Virginia, Alexandria Division, had to say in a opinion handed down on April 10, 2012 in the final paragraph of the court’s ruling: “….Plaintiffs’ counsel’s experience in other foreclosure-avoidance actions should have made clear that the claims and theories advanced here and in those cases lack merit. In this district alone, all of the many foreclosure-avoidance actions plaintiffs counsel has initiated have been voluntarily dismissed, remanded, or ultimately unsuccessful on the merits. In the Fourth Circuit, plaintiff’s counsel has fared no better; to the contrary, the Fourth Circuit has never concluded that any of his foreclosure-avoidance theories was meritorious. It is therefore unsurprising that plaintiffs’ counsel has been specifically and repeatedly admonished for his practice of advancing meritless claim in foreclosure-avoidance actions, and yet, as this case shows, he continues to assert substantially similar claims based on many of the same arguments.”

The Court then concluded the opinion by essentially stating that in a show of mercy they would spare the attorney and not sanction him! As in not order him to pay thousands of dollars for bringing a case before the court that lacked any merit or validity. Let me say that again, the Federal Court in Alexandria, Virginia not only stated that all legal arguments made by the homeowners against the bank in an effort to stop the bank from foreclosing were not valid, but the arguments presented were so lacking in merit, where so contrary to Virginia law, that the lawyer representing the homeowner ought to be punished for wasting the bank’s and the court’s time!

So, while “produce the note” or “show me the note” may get you somewhere in Florida, here in the Commonwealth of Virginia, you better think again.  Same goes for that whole notion of attacking MERS and their right to foreclose or claiming that the substitute trustee on the Deed of Trust may not foreclose. As the Court stated: “Virginia does not recognize a cause of action for wrongful foreclosure.”

Bottom line: before you hand over one-half of your mortgage payment each month to a law firm specializing in “foreclosure defense” (which is typically how these law firm collect their legal fees) understand that what you are buying is months of delay while the matter is litigated in court.  At the end of the day, there is no such thing as a free lunch and there is certainly no such thing as a free house. This is not Massachusetts, Florida or New York where these arguments may fly. This is the Commonwealth of Virginia and there is a reason that it has a reputation for being conservative and creditor friendly.

Besides, if delay of the inevitable is all you are looking for, if merely buying time before the foreclosure ensues is your objective, then a chapter 13 bankruptcy can do that for you at a fraction of the cost.