Foreclosure is a much talked about topic these days, whether in hushed circles, private conversations with the family, or around social gatherings. Let’s see if we can shed some clarity on what foreclosure is and what foreclosure isn’t.

Foreclosure is a form of legal action taken by a creditor (in most cases, the bank with which you have your home mortgage), and not something you do. What you didn’t do, i.e. making mortgage payments, is what triggers a foreclosure down the line. Foreclosure, in the context of single family homes, is generally not a lawsuit, but is a “non-judicial” way of taking your home back. When you got your home loan long ago, you probably didn’t read the fine print that said the bank could take back your home if you didn’t pay them. Well, you did.

Foreclosure Example 1

Mr. and Mrs. Williams bought a home a few years back when the whole real estate market was crazy and it was insane NOT to buy one. They got a loan through a “good” friend, who assured them that they could really afford this house. Sure, in the beginning, the payments were nice and affordable. In fact, they seemed to have some money left over, so they decided to take out a home equity line of credit for about $100,000 to start Mr. Williams’ dream business, a Harley Davidson bike shop (ok, it was a small shop).

After a year or so, they noticed that the payments were higher and their principal had not gone down by a single penny. Then Mr. Williams’ Harley shop took a big hit. Turns out that when the economy’s not so good, people don’t buy extra luxuries like Harley bikes. Instead, they get scooters when they have a job to go to. Now they were stuck with a business lease they couldn’t pay and money owed to Harley Davidson for franchise fees. They maxed out all their credit cards to keep the business afloat, but alas, the economy was like a huge cruise liner. It was taking forever to turn around.

Long story short … the Williams noticed that their mortgage payments were climbing. While Mr. Williams managed to go back to his mechanic’s job, they could not afford the new mortgage payments. Mr. Williams soon discovered that he had an adjustable rate mortgage that was due in 2 years from Countywide. The Countywide agent had not told him about the loan being due in 2 years ! Mr. Williams was devastated.

The home wasn’t worth 2/3 of what they purchased it for and so a refinance was not an option unless a rich uncle died and left them a hefty sum. No longer able to make payments, the Williams began receiving collection calls and letters. The letters all had the words “Default” written in there somewhere. Then they got one with a nice green border that came via certified mail. It had some official wording with the words “Notice of Default” in not such large letters. They talked to friends, family and even their accountant, but could not get a consistent answer. So after several months, they finally got the “Notice of Trustee Sale” which said that the house would be sold on June 15 at 8 in the morning in front of the local county courthouse. The “Notice of Default” started the foreclosure process with a 90 day wait period, and the “Notice of Trustee” sale set the sale date 21 days after. This was the bank’s way of taking back that house.

The First Mortgage:

Usually, the first mortgage forecloses on your home.

The Second Mortgage/Home Equity Line of Credit:

Normally, it is not cost efficient for the second mortgage to foreclose because there is not enough equity in this market to justify the costs involved in a foreclosure. But, after the first mortgage takes back the house, you are stuck with the second mortgage as a personal liability. Much like a huge credit card debt. So then, the second mortgage can sue you, get a judgment against you and start going after your wages, bank account, etc.

Chapter 7: A Chapter 7 bankruptcy temporarily stops a foreclosure, but the lender often goes to the bankruptcy judge and asks that they be allowed to continue the foreclosure.

Chapter 13: A Chapter 13 bankruptcy filing also stops a foreclosure, but it is a more permanent way of figuring out your personal plan of reorganization if you intend on keeping your home.

Misconceptions about Foreclosure

Misconception #1: After the foreclosure, I no longer have to pay the first and second mortgage.

Truth #1: You are still stuck with a personal liability on the second mortgage.

Misconception #2: I can always just give the bank my house.

Truth #2: This is known as the “Deed in Lieu of Foreclosure”. Most banks do not allow this because they might be stuck with unknown judgments, taxes, etc. They’d rather foreclose.

Misconception #3: I can file several Chapter 13 cases to stop foreclosure whenever I want to.

Truth #3: While there was never a time when such successive Chapter 13s were condoned, it was certainly much easier prior to the 2005 Bankruptcy law changes. Now, almost automatically, you are either barred from refilling in 180 days if you had a prior filing and/or you do not get to enjoy the benefits of the “automatic stay” that stops foreclosures. So, moral of the story is, be care in choosing the right bankruptcy and the right bankruptcy lawyer.

Want to know what to do about your foreclosure in Los Angeles?

Feel free to call us to speak with a Los Angeles bankruptcy lawyer.