Legal Myths on Trial: Foreclosures
Article Date: Wednesday, February 15, 2012
Written By: Tyler J. Russell
The foreclosures process is a technical, complicated and often misunderstood process. The number of foreclosures has increased over the last several years, and popular myths surrounding the process continue to prevail. A few of those myths are “put on trial” and judged below.
Myth: “The bank told me that my loan was ‘charged off’, so I do not owe the money anymore.”
Verdict: A “charge off” is a determination by the lender that a debt is unlikely to be collected. Federal guidelines require lenders to charge off certain loans and accounts after prescribed periods of delinquency. While a charged off loan may be considered uncollectable by the lender, the underlying debt is still legally valid and enforceable against the obligated parties. The labeling of a loan as “charged off” has no impact on the borrower’s legal obligation to repay their debt.
Myth: “The bank is foreclosing because it wants my house.”
Verdict: Lenders do not foreclose on collateral because they want to own the property. Instead, lenders want repayment on the money they loaned. Foreclosure is typically a last option for repayment employed by the lender. Often, lenders will work with borrowers to modify, forebear or otherwise workout the debt to avoid further default and the need to foreclose. Although lenders may not “want” the house, they will look to recover from their collateral if the debt cannot be otherwise repaid.
Myth: “Filing a bankruptcy petition will stop the foreclosure and save my house.”
Verdict: Filing a bankruptcy petition invokes the protection of the Bankruptcy Code’s automatic stay provisions, preventing further action to foreclose or otherwise collect on the debt. However, the automatic stay’s protection is limited. The Bankruptcy Code places various compliance requirements and obligations on a debtor. If the debtor is not able or willing to meet his/her obligations under the Bankruptcy Code, their case could be dismissed and/or the automatic stay could be “lifted” to allow foreclosure to resume.
Myth: “If the bank takes my house through foreclosure, I will not owe them anything else.”
Verdict: A mortgage loan involves a promissory note secured by a mortgage or deed of trust on real property. If the loan goes into default, the lender has at least two non-exclusive remedies. It can sue the borrower under the note and/or it can foreclose as allowed by the security documents. Foreclosure is the process through which the lender sells real property securing a debt to obtain some amount of repayment. If the foreclosure sale brings sufficient proceeds to payoff the costs of the sale and the underlying debt to the foreclosing lender, that debt will be fully satisfied. However, if the net proceeds of the foreclosure sale are insufficient to fully repay the debt, the borrower generally remains liable under the note for the deficiency amount.
Myth: “If my house is foreclosed, I will go to jail.”
Verdict: People are not jailed for failing to repay their debts, including a mortgage. The house may be taken, but the borrower will not be incarcerated.
Myth: “Once the foreclosure sale occurs, I have lost the house forever.”
Verdict: North Carolina law allows the owner of real property pledged as collateral to “redeem” their interest in that property at any time before the foreclosure sale is finalized. The mere completion of the foreclosure sale does not cut off this right. Instead, the rights of the parties in a foreclosure proceeding are not finalized, and the owner does not lose the ability to redeem his/her interest in the property, until the statutorily prescribed 10 day upset bid period has expired. After the sale of the property, the 10 day upset bid period begins to run. If any upset bids are placed in accordance with state law, that 10 day period begins to run anew. Until the upset bid period expires, the borrower can save his/her property from foreclosure by paying an amount equal to the expenses incurred in the foreclosure process plus the entire debt owing to the lender.
Myth: “The bank cannot make me pay their legal fees.”
Verdict: Yes, they can and they will. North Carolina law authorizes lenders to collect legal fees incurred in collecting a debt (including foreclosure actions) so long as the promissory note or other loan documents clearly allow for that recovery. Attorneys’ fees can reach as much as 15 percent of the outstanding balance due at the time collections efforts are undertaken. Lenders are savvy and seek to reduce their costs and exposure to losses. If your loan documentation allows for the recovery of attorneys’ fees and other legal expenses, expect your lender to recover them in the process. •
Tyler J. Russell lives in Greenville and focuses his practice on collections and bankruptcy law at Ward and Smith, P.A.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.