For Lawyers: Why is bankruptcy usually a terrible idea to stop an Alabama foreclosure?
This is the first in a series of articles for lawyers. We often get calls from lawyers around the country (and the state of Alabama) and we thought it would be helpful to include some of our answers in articles.
This article is specifically focused on Alabama lawyers who are advising their clients on how to stop a foreclosure. Should you use bankruptcy as a last resort or a first choice in stopping a foreclosure?
Bankruptcy can stop a foreclosure, but is it the best option?
It is true that if you file bankruptcy, then typically this will stop the foreclosure under the automatic stay provision. (Of course, if your client does not qualify for the automatic stay then it is a worthless move).
But what is the cost to your client?
- Literal cost of the bankruptcy
- Credit reporting cost of the bankruptcy
- Always having to say, “Yes, I filed bankruptcy” when your client applies for credit in the future
- The consequences this can have on your client’s life in general — employment, housing, etc.
If no other option, then look at doing this but normally you have much better options for your client.
Check first to see if you can do loss mitigation to stop the foreclosure.
Loss mitigation is simply anything that can stop the foreclosure. Here are some common examples:
- Loan modification
- Short sale
- Deed in lieu of foreclosure
So here are some questions for you to answer about your clients:
- Has your client asked verbally for all loss mitigation options?
- How about in writing — for all loss mitigation — not just a loan modification?
- How many days before the scheduled foreclosure was this asked for?
- Was the loss mitigation application fully filled out and completed more than 37 days before the foreclosure?
- Has there been any response from the mortgage company to the loss mitigation application?
- Is there anything the mortgage company can claim it is waiting on from your client?
- Even when the mortgage company is lying, has your client provided all documents (even multiple times) requested?
- Has your client used RESPA letters to help with the loss mitigation process?
Bottom line is you must recognize the mortgage company will lie and delay. That’s just the character of these companies. I’ve been suing them for many years — if anything, they are getting worse. So protect your clients by having them apply for every loss mitigation option and do everything the mortgage companies say.
Next, is the mortgage company following the requirements of the mortgage?
Here is the typical mortgage provision — often paragraph 22:
22. Acceleration Remedies. Lender shall give notice to Borrower prior to acceleration following Borrower’s breach of any covenant or agreement in this Security Instrument. . . . The notice shall specify (a) the default; (b) the action required to cure the default; (c) a date not less than 30 days from the date the notice is given to Borrower by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform the Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may invoke the power of sale and any other remedies permitted by Applicable Law.
So here are some questions as you look at the acceleration and default letters:
- Is your client’s mortgage the standard one as described above? Make sure you verify this.
- Was a separate default letter sent and then a separate acceleration letter sent?
- Did the default letter contain all four requirements quoted above?
- Did the default letter tell your client he or she has the right to bring a court action to have their defenses heard to the foreclosure sale?
There are other questions but these are the big four questions to ask. It is quite common for the mortgage companies to combine the acceleration and default letters.
Or to not list all the requirements.
Most commonly, however, is the intentional failure to tell your clients they have the right to bring a court action. Either this will not be mentioned at all or it will not tell them to bring a court action.
This leads consumers and homeowners into thinking there must be a foreclosure lawsuit. Not true — the mortgage company will foreclose without the court’s involvement and then claim your client waived their defenses by not suing first.
The Alabama Supreme court has ruled this is a violation of the mortgage provision above and makes the foreclosure invalid.
Can you sue before the foreclosure to have your defenses heard so that the foreclosure is stopped?
This is normally the best option — sue under the provisions of paragraph 22.
There are arguments that judges have bought that say your client has fewer rights to challenge a foreclosure after the foreclosure than before the foreclosure.
So don’t take a chance — file suit before the foreclosure.
The smarter crooked mortgage companies will stop the foreclosure. That’s great for your client.
The dumber crooked mortgage companies will go forward with the foreclosure. This will ultimately cost them a lot of money as it is a terrible violation of the mortgage quoted above to do this.
Of course you have to decide if you are willing to go into litigation and if your client is willing to run the risk of the mortgage company doing something so stupid.
I’m comfortable with this because if you don’t do this, then you are left with filing an unnecessary bankruptcy.
As a last resort, will bankruptcy stop the foreclosure?
It probably will but then what?
You stopped the foreclosure, but can your client pay their normal mortgage payment and the arrearage payments? We see lots of lawyers use chapter 13 bankruptcy to stop a foreclosure but then the foreclosure happens 4-6 months later anyway.
So now your client has a bankruptcy and a foreclosure.
Seems like a terrible idea to me.
We don’t get involved in ongoing cases but if you have not yet filed a suit and want to talk, we’ll be happy to chat with you about how to help your client stop a foreclosure.
We often get calls from lawyers wanting us to help them in ongoing cases. Our policy is to not do this as it is best if we can file the case from the beginning. Often choices are made that have bad consequences for the entire litigation.
So if you have already filed suit, we can’t help you.
But if you have not filed suit, feel free to reach out to us and we will be glad to help you strategize your next move. Some lawyers want us to co counsel or to refer the case to us. Others want advice about how to handle it on their own.
We look forward to helping you any way we can and best of success in stopping the foreclosure against your client in Alabama.
PS — call us at 205-879-2447 or fill out our contact form and we’ll get right back to you.