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Your Rights in the Mortgage Foreclosure Process

Preliminary Notices. To protect your rights, you need to be informed about what is happening—the worst thing you can do is ignore everything. If you are behind on your mortgage payments, stay on top of things: carefully read the notices you receive, keep track of deadlines, and contact the servicer or foreclosure attorney at regular intervals.

In every state, you are entitled to notice of a pending foreclosure on your home. But do not rely on the fact that you will get this notice—either because of servicer negligence or problems with mail delivery, you may not get the notices. Always pick up any certified or registered mail, even if returned to the post office. Keep all the notices that you receive from the servicer, lender, or foreclosure attorney in one place, such as a folder or notebook. Make a note of and retain the notes for all related phone calls with the date, time, name of person that you spoke with, and the substance of your conversation.

Notice of Default. You will almost always get a “notice of default” or “notice of delinquency” from the loan servicer that says that you have fallen behind on your payments. It may look like any other collection letter. It tells you how many payments you are behind and the payment amount to catch up and get out of default, often called “the arrears.” It will also give you a deadline to make this payment to avoid foreclosure.

Typically, your payment of the total amount of the arrears will stop any foreclosure. Partial payments are often rejected unless they are made as part of a workout agreement or loan modification.

If you cannot pay the total arrears, review the prior chapter about seeking a workout agreement or loan modification. Otherwise, do not delay, but review immediately your other rights to deal with the foreclosure. The deeper you get into the foreclosure process, the harder it will be to stop it. A big advantage to paying off an arrearage when you get the initial notice is that you will not yet be responsible for major foreclosure fees and costs that come due after the case is referred to an attorney for foreclosure.

Notice of Acceleration. After notice of default, or sometimes combined with the notice of default, you typically receive a notice of acceleration. It says that now you don’t just owe the past-due installments, but you owe the full mortgage balance, payable either immediately or by a certain date. Receipt of a notice of acceleration indicates that the foreclosure process is moving quickly and that you must act immediately to deal with the pending foreclosure.

The Right to Reinstate. Many states and mortgage contracts allow you a second chance even after the servicer demands the full balance on the loan, by “reinstating” the mortgage. Usually, this means getting caught up on your missed payments together with foreclosure fees and costs. Many mortgage contracts give you this “right to reinstate” up until five days before the foreclosure sale, and some servicers accept payment right up to the sale date. Your servicer may require that the payment be by certified or bank check and sent to the law firm handling the foreclosure.

Occasionally, servicers claim you did not meet your obligations in some other way, such as failing to keep the property insured. These defaults can also be “cured” by taking care of the problem.

Even where you do not have a legal right to reinstate your mortgage, servicers often will agree to reinstate voluntarily, although others will not. When the servicer will not allow reinstatement, you can often force the lender to allow a reinstatement by taking the matter to court. Most judges will not want to put your family on the street when you have money to pay the arrears, and even in states where judges do not have this power, offering to pay in front of a judge sometimes embarrasses the lender into accepting the payment.

Using Bankruptcy to Cure the Default. Even where the servicer will not accept payment of your arrears to reinstate the mortgage, if you file for bankruptcy before a foreclosure sale is completed, you then have a right to cure any default by paying the amount overdue. In a chapter 7 bankruptcy, you have to pay the arrearage immediately if you want to avoid foreclosure. If you file under chapter 13, you can make those payments in installments over a period of years.

The Right to Redeem. You also can “redeem” your home up to the time of a foreclosure sale (and in a few states for a limited number of days after the foreclosure sale). To redeem, you must pay the servicer the whole mortgage balance in one payment plus the lender’s foreclosure fees and costs. Some states allow a second type of redemption where, after the foreclosure sale, you pay the person who bought your home at the foreclosure sale the amount that person paid to purchase the home plus the person’s related costs. Unless you can obtain a new loan to do so, either type of redemption is clearly impractical for you if you are having trouble even making your monthly payments.

How Long Does Foreclosure Take? A foreclosure can take from three months to a year or more. Much depends on your state, the servicer, and your own actions. Check local practice and stay on top of all foreclosure-related notices. But no matter how long the foreclosure takes, your own delay in developing a plan always will make matters worse for you.

How a Lender Gets Permission to Foreclose. Foreclosure procedures are established by state law and by local practice. In some states, the lender first files suit in a court, usually in the county where your home is located. You receive a summons or a similar notice usually brought to the house by a sheriff, constable, marshal, or process server. This notice gives you a period of time to respond to the foreclosure lawsuit and to raise your defenses.

Your answer must be in writing and filed with the court. If you do not respond at all, a default judgment will be entered against you. If you file a response the court may only enter a judgment against you if it finds your defenses have no merit. A court judgment for the lender gives the lender permission to sell your home unless you can work out an agreement or take some other action (such as bankruptcy) to prevent the sale.

Other states use “non-judicial foreclosures.” Servicers are allowed to hold a foreclosure sale without court or other official permission to go forward. They advertise the home for sale, using a legal notice in a newspaper. The servicer sends you a notice of the time and place for the sale. If you want to challenge this type of foreclosure, you must either file for bankruptcy or file a lawsuit and ask the court to stop the sale. With a lawsuit, you may have to file a bond protecting the lender.

The Foreclosure Sale. Servicers must send you notice of the date and time your home will be sold. In some states, this notice is combined with the notice of acceleration, discussed above. The sale date is a key date because that is when you lose your rights as the owner to obtain a workout or to use the bankruptcy process to prevent foreclosure.

Generally, a foreclosure sale is a poorly advertised and poorly attended auction, either at your home or at a local courthouse or government building. In a few states the sales are conducted online. Where a court ordered the foreclosure, the auctioneer will be a sheriff or court official. Otherwise, it will be conducted by someone hired by the servicer. Often only the foreclosing lender attends, who bids no more than the balance of the debt. You can bid at the auction, but you will have to make an immediate down-payment and pay the balance within a short period of time. After a foreclosure sale you will receive notices about eviction. In most states the servicer must go through a separate court procedure to get permission to evict you. Only a government official can carry out an eviction. The eviction consists of a supervised change of locks and removal of your personal property from the house.

The Mortgage Deficiency or Surplus. Once a foreclosure sale is completed, pay careful attention to all notices you receive. These may include notices of who bought the property and how much they paid. Always ask on your own who bought the property and the sale price because sometimes this information is not sent to you.

If the sale does not bring in enough to pay off the amount due on the loan, in many, but not all states, you will remain responsible for the balance, called a “deficiency”—the remainder due on the loan plus costs, minus the amount the lender was paid from the sale proceeds. You may also receive notices about the deficiency, including collection letters and court papers. In some states your deficiency can be limited if you act to protect your legal rights by responding to these notices or court papers. If you do have to pay a deficiency, this will be an unsecured debt like credit card or medical debt and it is thus low priority debt, until the lender sues you for that debt. Because deficiency claims are unsecured debts, they can be discharged in bankruptcy.

An exception is if your loan is insured, guaranteed, or made by the VA or the Rural Housing Service (RHS). When these agencies seek a deficiency, they can seize your federal tax refund. They can also seize a portion of your Social Security and certain other federal benefits, although the first $750 a month is protected from seizure. Nevertheless, even though the debt is owed to the federal government, you can discharge it in bankruptcy.

On the other hand, if the sale brings in enough to pay off the amount due including all foreclosure costs, you are entitled to any amount by which the sale price exceeds that, called a “surplus.” Although consumers are rarely owed a surplus, if your home sells for more than the outstanding balance, contact the servicer or its foreclosure attorney. If they say you are entitled to a surplus, be sure to give them your new address when you move, so they can send you a check.

If the servicer does not tell you whether you are entitled to a surplus, send a Qualified Written Request to the servicer, as described in Chapter 16. If fees and costs eat up your surplus, and they seem unreasonable, dispute them or even challenge them in court.