Foreclosure: Case study of family choosing between bankruptcy and suing mortgage company to stop the foreclosure
Put yourself in the position of a lawyer who is meeting with a family facing the loss of their home due to foreclosure. What will you advise them? What are their options?
Let’s walk through a hypothetical example that is repeated every day in Alabama.
We will use an example of a typical family facing foreclosure who is considering filing bankruptcy. Let’s call them Bob and Betty Smith and they live with their two kids (10 and 15).
We will call them Bob and Betty Smith and they live with their two kids (10 and 15).
Here are the basic facts:
- Bought their home in 2006, shortly before the economy and housing market tanked
- Struggled but close to getting back on track now and able to make regular payments of $1200 a month
- They have asked for loss mitigation and loan modifications but were not successful
- Mortgage loan changed hands (servicers) several times including the last one being Nationstar/Mr. Cooper (I know goofy name but that’s what they call themselves now)
- At the time of the transfer they were eight months behind — they are able to make their payments but can not catch up the past due payments for several years
- Nationstar/Mr. Cooper has serviced the loan for the last 9 months
- Nationstar/Mr. Cooper has sent a default letter (notice of default)
- The Smiths could not bring the loan current and now they have received a notice of acceleration and a foreclosure date 30 days away
- The foreclosure ad is running in the newspaper and the Smiths are afraid family and friends will see this
- The house is worth $200,000
- The total amount owed on the loan is $190,000
- They have nowhere to move and do not want to take their kids out of school in the middle of the year
- Keeping the house is a priority and also wanting to do something proactive is what they are looking for
The notice of default letter was bad enough but now the acceleration letter and date of foreclosure has caused a great upset at the Smith house. Bob and Betty are scared that they may lose their home.
Let’s walk through the following with this family:
- What does the notice of default mean?
- Is there time to do loss mitigation?
- Will bankruptcy stop the foreclosure?
- Will a chapter 13 bankruptcy work or is it merely a short-term solution that gets them right back into foreclosure?
- Is bankruptcy the cheapest option to stop the foreclosure?
- Can they sue their mortgage company instead of filing a chapter 13 bankruptcy?
- What happens if they do sue the mortgage company?
What does the notice of default mean?
This is where Nationstar/Mr. Cooper told the Smiths that they were in default. Because of not having the payments current.
Since they were eight months behind, the amount to “cure” or “fix” the default was $9,600 (8 months at $1200 per month).
It also mentioned that they could reinstate their mortgage and could assert defenses in any foreclosure proceeding.
Unfortunately, the Smiths could not cure the default so about 30 days later they received a notice of acceleration . . . .
What does the acceleration mean?
Instead of having 19 more years to pay the mortgage, all the amount is due right now. The full $190,000.
Nationstar/Mr. Cooper told the Smiths to pay that full amount or the foreclosure will happen in 30 days.
And it is being advertised in the local paper for three consecutive weeks.
So, what are the possibilities to stop the foreclosure?
Is there time to do loss mitigation?
Maybe you suggest this or the Smith family asks about this — what about loss mitigation? Is there still time to do this?
You explain that basically, a consumer gets one bite at the apple with a mortgage servicer on loss mitigation.
“Have you ever requested loss mitigation from Nationstar?”
The Smiths respond, “No — we tried with a few other mortgage companies but they would lose our documents and it just never worked out.”
So they have the right to request loss mitigation but here is a problem. You know that if the loss mitigation is submitted less than 37 days before the foreclosure, it does not have to be reviewed the same as if submitted more than 37 days. More than 37 days stops the foreclosure.
Here, the Smiths are less than 37 days away.
So should they skip it?
No — they should still try loss mitigation. It costs some time but you know the Smiths must be willing to spend the time to save their home. There is no time for delay — instead, time must be spent doing whatever it takes to save their home.
“But what if it doesn’t work — should we file bankruptcy? Everyone is telling us to file a chapter 13 bankruptcy. Can you explain that to us?”
Will bankruptcy stop the foreclosure?
Yes. At least temporarily.
Since the Smiths have not recently filed bankruptcy, by filing a chapter 13 this will automatically stop the foreclosure. This is known as the “automatic stay” and as long as it is filed before the foreclosure, it will stop it.
A quick word about a chapter 7 bankruptcy. This will also stop the foreclosure but unless the Smiths can get caught up on the payments ($4,800) then the mortgage company will not let them re-affirm the loan. So the loan will be discharged — gone — but they will then be foreclosed as soon as the bankruptcy is over. This means now they have a bankruptcy and a foreclosure — not what they came to see you for!
So we will focus our discussion with them on a chapter 13 solution where they make payments into court.
Let’s make sure that is explained to the Smiths. They must make their regular payment. And they also must make payments on the back amount owed (the “arrearage”) as well as any other debts put into the bankruptcy.
So every month the bankruptcy court will either take this money from their paychecks or they must do this on their own:
- Pay the regular payment of $1,200 a month
- Make payments on the back amount of $9,600
Sounds like this might work for them but let’s look at this a bit more closely to see if this solution works.
Will a chapter 13 bankruptcy work or is it merely a short-term solution that gets them right back into foreclosure?
Here’s the dirty secret of bankruptcies — the vast majority (almost all) chapter 13s fail. People file a bankruptcy — trashing their credit — to save their home from a foreclosure.
They end up not being able to keep up the current mortgage payments and the arrearage.
When they can’t keep up those payments, then the mortgage company files a “motion for relief from stay”. This is asking the court to undo — to lift — the “automatic stay” that prevented the foreclosure.
When this is granted, the foreclosure can proceed.
So if we know that almost everyone who files a chapter 13 ultimately is not successful in completing their chapter 13, don’t we need to tell the Smiths?
Let them know that we can temporarily stop the foreclosure but the odds are they will face a foreclosure in a matter of months.
And when that happens, they will have filed bankruptcy — a life-changing event — and will also have a foreclosure. Talk about a “double whammy” hitting their permanent record and their credit reports!
This concerns the Smiths but before they will talk about another option, they want to know how much will the bankruptcy cost . . . .
Is bankruptcy the cheapest option to stop the foreclosure?
Yes and no.
Yes because some lawyers will file the chapter 13 and only charge say, $500, for the filing fee.
And then the bankruptcy court takes the arrearage out of the Smith’s paychecks.
But the regular mortgage payment needs to be sent to the mortgage company.
And what are the long-term costs?
Bankruptcy on credit report for around 10 years.
For the rest of your life having to answer, “Yes I filed bankruptcy” when applying for credit, etc.
And then if a foreclosure happens? The cost is astronomical.
Compare this to paying more money up front — but less on a monthly basis — and avoiding a foreclosure. And avoiding a bankruptcy. So let’s talk to the Smiths about whether they can sue their mortgage company instead of going the bankruptcy route.
Can they sue their mortgage company instead of filing a chapter 13 bankruptcy
Yes, almost certainly.
First, we look at their mortgage — do they have paragraph 22? (You can read an article that discusses this paragraph — or a similar one — that is in almost all mortgages). If so, this expressly gives the Smiths the right to bring a lawsuit against their mortgage company. The purpose is to have their defenses heard — defenses to default, acceleration, and the actual foreclosure sale.
Second, we go through their defenses to the default. Is the default letter/notice of default done correctly by Nationstar/Mr. Cooper? If not, then there can be no default. If no default, no acceleration. No acceleration means no foreclosure is allowed.
Third, we look at other defenses. Were mortgage statements mailed out? Were all the loss mitigation rules and regulations followed by the mortgage company? Is it clear who is the alleged owner and does this company and/or Nationstar/Mr. Cooper have the right to foreclose? Bottom line is we go through a checklist with the Smiths to see all the arguments and defenses we have. We look at the FDCPA (Fair Debt Collection Practices Act), TILA (Truth in Lending Act), RESPA (Real Estate Settlement Procedures Act), FCRA (Fair Credit Reporting Act), and state law.
Fourth, we see if the Smiths are willing to do the work to file a lawsuit. Are they prepared to hire a lawyer to sue their mortgage company? Are they ready to stop being the punching bag and instead fight back against the mortgage companies? Ready to take the initiative and have a judge and/or jury decide who is right and who is wrong?
If they are ready, then they can go this route instead of filing a chapter 13 and hoping against hope they will be one of the lucky few who make it through a bankruptcy.
The Smiths are excited about this idea — finally, they are given a voice and can fight back. But they do wonder, “What happens after we file the lawsuit? What’s the next step and how does the foreclosure get stopped?”
What happens after the lawsuit is filed? How does it stop the foreclosure?
First, the lawsuit is filed in Alabama circuit court against the mortgage companies. Nothing happens until the lawsuit is actually filed.
Second, a copy of the lawsuit is sent to the foreclosure lawyer. The reason this is done is to alert the foreclosure lawyer that his or her client has been sued and to ask them if they will stop the foreclosure. With one exception in many many years of doing this, every foreclosure lawyer has stopped the foreclosure. Any mortgage company that does not stop the foreclosure is very foolish as they will pay dearly for breaking the contract — remember the contract gives you the right to file the suit to stop the foreclosure.
Third, when the foreclosure is stopped, then it is time to talk. Time to talk about how to get the relationship back on track. So we discuss what is the solution so there is no foreclosure. This may be a loan modification or other solution. And sometimes the conduct of the mortgage company has been so bad that the only solution is the debt has to be wiped out — not the normal but it happens.
Fourth, when the case is ultimately settled, the lawsuit is dismissed. This means the homeowner is no longer in the lawsuit and the mortgage company can close this case down and take it off the books.
Finally, the homeowner and mortgage company get back to a good working relationship. The mortgage company knows not to cheat or lie to the homeowner. Or what will happen? Another lawsuit….
So what should the Smiths do? What should you do if you are in this situation?
Ultimately it is up to the Smiths and every other family to decide what is best for them.
Which one do you believe the Smiths should choose?
For the vast majority of homeowners who actually want to save their home, bankruptcy is not the best option. Filing bankruptcy leads to a foreclosure anyway in most cases.
I hope this case study was helpful to you. Let us know if we can help you in any way.
You can call us at 205-879-2447 — let the receptionist know when your foreclosure is set.
Or you can fill out the form below and we’ll get right back with you.