Foreclosure and Bankruptcy

In Florida, all foreclosures are judicial - the bank needs to take you to court to gain title to the property.  It's a long and expensive process for the bank.  The owner being foreclosed upon doesn't need to do much of anything.  The judicial and eviction process take on a life of their own and wind slowly down to the end.  (If you want to fight it, see the bankruptcy section below.)

If you're in a foreclosure, here is a list of what to expect.

1.) The bank files a notice of a pending foreclosure lawsuit (Lis Pendens) with the court.  You are normally notified by mail or by a notice delivered by the Sheriff's office.  All other parties, such as second mortgage holders, are also notified.

2.) A court date is set and a hearing is held.

3.) The Court will rule against the defaulting borrower, award title to the bank and set a foreclosure sale date.

4.) The property is advertised in the paper.

5.) The property is sold on the Courthouse steps to the highest bidder.  In certain cases the bank will bid to protect their interest.

6.) The proceeds are distributed according to state law.

7.) If the proceeds of the sale are not sufficient to pay off the loan(s) including accrued interest, fees and costs, the bank(s) asks the court to issue a deficiency judgment against you.  If you have second or third mortgages, expect those banks to seek deficiency judgments also.

8.) The bank(s) proceeds with enforcement of the deficiency judgment, and through judicial means, can seize and sell your remaining assets and garnish your wages.

9.)  If you are still in the house, an eviction proceeding will be started.

This link provides a more in-depth look at the process.


Bankruptcy

Although this web site is not designed to answer any bankruptcy questions, many folks who go through a foreclosure also are forced into bankruptcy, particularly those who have deficiency balance judgments.

You can use the shelter of a Chapter 13 Bankruptcy (Personal Reorganization) to stop or delay bankruptcy proceedings.

We recommend that anyone considering bankruptcy hire an experienced bankruptcy attorney.  Do this early in the foreclosure process.

Deed in Lieu of Foreclosure

An option to a short sale is to sign over the deed to the house in exchange for mortgage.  In essence you’re saying, "I know you can foreclose.  I give up. Here is the deed to the house in payment of everything that I owe you".

It sounds great.  You just have to walk away and everything is forgiven.  Your debt is canceled and you move on with your life.  You don't have to help sell the house.  You may have a few tax problems with forgiveness of debt, but you can manage that.

However, the bank may not be happy.  Now they have to sell the house. For the bank, this is another aggravation with more time and expense.

But more importantly, the bank may not have clear title after it gets the deed from you.  It needs to deal with any second mortgage or lien holders.

If the bank had just foreclosed, the second mortgage or lien would have been taken care of by operation of state law.   If they take a Deed in Lieu of Foreclosure they need to deal with the other mortgage holders.  It can be complex, messy and expensive.  So, if you have a second mortgage, the bank may want to move straight to foreclosure and get a clear resolution of the title issues.

But if you only have one mortgage, it can be a great way to step off the merry-go-round.  Just make sure, like a short sale, that any deficiency is forgiven or waived.  Make sure the written agreement or release is clear.  Consult an attorney.

Your credit rating may or may not be affected.  It all depends on the bank's credit reporting policy.  They can report it as a "foreclosure", an "account paid-off at less than full value" or just report the loan as "satisfied".  Be sure to ask; the bank may be able to furnish you a written copy of their credit reporting policy.

Links and references

The following are some links to reference sources and other materials you might find interesting:

Florida Statues:

UCC - Secured Transactions
Mortgages

Sub-prime article:

Can these Mortgages be Saved?

Foreclosures:

Anatomy of a Mortgage Foreclosure in Florida

Lender/Bank web sites:

Ageis Loan Resolution site
Ageis Loan Resolution - worksheet

Tax issues and legislation:

IRS Foreclosure Relief Site
H.R. 3648
IRS Form 982 - Discharge of Indebtedness