Foreclosures
Certain creditors may have special rights when faced with collecting bad debts. One of these rights is the availability of a procedure called foreclosure. Foreclosure is most often exercised in relation to unpaid mortgages on real property. In a foreclosure proceeding, the creditor exercises its option under the mortgage to force a sale on the property that is the subject of the mortgage in order to use the proceeds to pay the debt.
The rights of a mortgagee (usually the lender), when the mortgagor (borrower) defaults, vary considerably from state to state. There are, however, a number of similarities. Generally, there are only two types of foreclosure sales: a judicial sale and a sale pursuant to a power of sale clause contained in the mortgage documents. Judicial sales still are considered the traditional route of foreclosure. Although the details of judicial sales are mainly a matter of local law, they usually require notice of a hearing, a hearing, a judicial determination of default, notice of sale, a sale, confirmation of a sale, possible redemption, and entry of a judgment for any deficiency (the difference between the sale amount and what is owed on the debt).
In order for a mortgagor to avoid a judicial foreclosure once he or she has defaulted in making scheduled payments, the entire debt must be paid. In about half of the states, the period in which the mortgagee can exercise this option, or redeem the debt, extends even beyond actual foreclosure. In that case, the redemption amount is the sale price plus interest, not the amount of the debt secured by the mortgage.
In a judicial foreclosure, the sale is not enforceable by the buyer until it has been confirmed by the court. Legal rules limit the court's discretion on whether to confirm the sale. Mere inadequacy of price without more is not enough to justify the court's refusal to confirm a foreclosure sale, but adequacy of price is a primary concern. In many states, the property must be appraised before the foreclosure sale, and the sale will not be confirmed unless the sale price is at least a certain percentage of the appraised value.
Because judicial foreclosures are time-consuming and procedurally complicated, some mortgagees include in their standard mortgages a power-of-sale provision permitting a sale without any judicial intervention if the mortgagor defaults. Not every U.S. state recognizes that type of foreclosure. In the states that do allow it, the sale must be public and preceded by a notice (usually by advertisement) that specifies the amount due, the property description, the date and location of the sale, and whatever other matters the statute and the mortgage specify. Because courts tend to be critical of non-judical sales, they are quick to grant relief against such sales for even slight irregularities. This reluctance to accept non-judicial sales can result in uncertainty of title, which remains one of the main problems of power-of-sale foreclosures.
Worksheet: If You Are Considering Bankruptcy
If you are thinking about bankruptcy, you need to take a careful look at your current situation and decide what path makes the most sense for you. Bankruptcy can be avoided in many instances, but it will require care and discipline. Use this worksheet to help assess your current situation. You can add you notes in the space provided. Take this sheet with you when you visit your attorney to see if he or she can help you with other alternatives or make your bankruptcy easier. Be sure to take any documentation you mention here with you as well.
1. Do you have loans that are "secured" with your property? __Y/__N
Examples of secured loans are your mortgage and your car loan. You will need to pay your secured debts after filing bankruptcy in order to keep the property.
2. Do you have debts that are exceptions to discharge? __Y/__N
Examples of debts that are not dischargeable are student loans and child support obligations. Creditors holding those debts will be able to collect them after bankruptcy. However, recent changes in the law have tightened available exemptions.
Note: Some debts that are not dischargeable in a Chapter 7 bankruptcy may be dischargeable in a Chapter 13 bankruptcy. An experienced bankruptcy practitioner can help you determine whether certain debts will be discharged in a Chapter 13 case.
3. Are you past due on your mortgage or car payments? __Y/__N
You may be able to "cure" the defaults (make up the past due payments over time) in a Chapter 13 bankruptcy.
4. Do you have a pretty good income, even though you cannot make all of your monthly payments? __Y/__N
If you file a Chapter 7 bankruptcy, the United States Trustee may move to dismiss your case for "substantial abuse" if he or she thinks that you are able to pay at least some of your debts. A Chapter 13 bankruptcy may be a good alternative for you because it will allow you to make stable, orderly payments to your creditors over time. However, recent bankruptcy law changes make it more difficult to obtain a discharge of debt. There is an increased focus on whether a consumer debtor, e.g., has the means to repay a portion of his obligations out of future income.
5. Do you anticipate incurring additional debt in the near future? __Y/__N
If so, you may want to delay filing bankruptcy until a later date.
6. Do you anticipate a substantial rise in income in the near future? __Y/__N
If so, you may want to consider filing sooner, and filing for Chapter 7 bankruptcy, which provides for an immediate discharge, rather than a planned schedule of repayment. However, if your debt involves a consumer debt, future income may be considered.
7. Do you own a significant amount of non-exempt property? __Y/__N
Examples of non-exempt property may include additional automobiles, recreational vehicles, valuable collectibles, jewelry, or interests in real property other than your home. These will vary from state to state, but a Chapter 7 bankruptcy may cause you to surrender these as part of the estate, but a Chapter 13 plan will allow you to keep them.
8. Have you received a discharge in a Chapter 7 bankruptcy within the last six years? __Y/__N
If so, you will not be able to receive another discharge in a Chapter 7 case.
9. Are some of your debts "cosigned" or guaranteed by others? __Y/__N
If so, a Chapter 7 bankruptcy will not do anything to protect the cosigner. The creditor will be able to collect the debt from the person who cosigned or guaranteed the debt. However, you may be able to protect a cosigner by filing a Chapter 13 bankruptcy.
10. Do you have any debts to family members or close friends? __Y/__N
You must list those debts on your bankruptcy schedules because all of your debts must be listed. However, nothing will stop you from voluntarily paying those debts after bankruptcy if you choose to do so.
Remember: If you fail to list a debt on your bankruptcy schedules, it will not be discharged in the bankruptcy.
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