January 2011 Archives

January 31, 2011

Bankruptcy and Foreclosure: Fighting a Motion to Lift the Automatic Stay

Recently, homeowners are having more success in preventing mortgage lenders from continuing with a foreclosure (by lifting the "automatic stay") after the homeowner has filed for bankruptcy.

Bankruptcy's Automatic Stay

When you file bankruptcy your creditors must stop all activities related to collecting a debt, with a few exceptions (usually involving child support and taxes). The prohibition against collection activities is part of what's called the automatic stay, meaning that collection activity is stayed while your bankruptcy case is pending, and that this stay occurs automatically upon your filing. In some situations creditors can file a document known as a "motion to lift the automatic stay" which requests the bankruptcy court to give them permission to proceed with the desired activity listed in the motion.

The most common reasons for requesting that the court lift the stay are:

  • when a landlord is attempting to evict a tenant
  • when a mortgage lender is attempting to proceed with foreclosure activities, and
  • when a lender on a car note is seeking to repossess the car because of non-payment.

As a general rule the bankruptcy court will lift the stay as to a particular creditor when the bankruptcy filer (the debtor) has no equity in the property (for instance when premises are being rented) or when the creditor will suffer economic harm regarding the property at issue if the stay is not lifted (as in the case of a foreclosure or car repossession).

Change in How Courts Treat Motions to Lift the Stay in Foreclosures

Until recently, courts routinely granted motions to lift the automatic stay and there wasn't any reason for the bankruptcy debtor to show up at the scheduled hearing. However, in the last year or so, bankruptcy attorneys are having some degree of success in fighting motions brought by mortgage lenders on the ground that the lender can't establish who owns the mortgage and therefore has no legal right to ask the bankruptcy court for relief (this is called "lack of standing."). The main reason why ownership can't be established is that during the housing boom many mortgages were transformed into securities that could be sold on the bond market and then sold and resold so many times that proof of ownership became lost or unavailable.

What Happens if the Motion is Denied?

In a Chapter 7 bankruptcy, success in fighting a motion to lift the stay would typically mean a one or two month extra delay in implementing foreclosure proceedings (which without the stay being lifted couldn't proceed until you received your discharge). In a Chapter 13 bankruptcy, however, successfully fighting a motion to lift the stay might mean that the mortgage may not be enforceable at all--although the more common outcome is for the lender and homeowner to settle the dispute on terms greatly favorable to the homeowner. 

Other Ways to Raise Ownership Issues and Fight the Foreclosure

The ownership issues that can be raised in a hearing on the motion to lift the stay can also be raised in state court after you receive your Chapter 7 discharge. That is, if you are in a state where the foreclosures go through state court, you can use the failure to prove ownership as a defense that may stall your foreclosure indefinitely--or produce a favorable settlement. And if you live in a state where foreclosures occur outside of court (as in California and about half of the other states), you can file an action in the state court challenging the foreclosure on the same grounds, and with the same outcome. (To learn more about challenging foreclosure in state court, see Nolo's article False Affidavits in Foreclosure: What the Robo-Signing Mess Means for Homeowners.)

Because bankruptcy is a federal court, and because federal courts often have different "standing" rules than state courts, you may not have as much success in the state court as would be true in federal court.

Get Help From a Lawyer

Obviously this can all get pretty complex in a hurry and you would be well advised to shop for a lawyer who knows this stuff inside and out. But beware paying a lawyer (or anyone else) very much money up front to fight your foreclosure in state court. At the very least, negotiate a fee agreement with the lawyer that will give you a healthy refund if the case is not successful. And make sure the lawyer you choose knows the likelihood of your case being successful, however success is defined.

January 12, 2011

Massachusetts Court Refuses to Give Clear Title in Foreclosures

In earlier blogs I've mentioned some of the ways that homeowners can resist foreclosures. For at least a year some state and federal courts have favorably entertained homeowner arguments regarding shoddy paperwork, robo-signings, and the inability of those bringing the foreclosure action to "show me the note."

As I've noted these decisions I've cautioned that it's too early to know whether these decisions will be widely followed by other courts or whether these cases will be upheld--or tossed out--on appeal. This can be a problem when you are paying an attorney megabucks to advance your argument. Few of us want to sacrifice thousands of dollars to a lost cause.

Massachusetts Supreme Judicial Court Refuses to Give Clear Title to Improperly Foreclosed Homes

Suddenly things have changed a whole lot--for the better from the homeowners' perspective. Late last week the Massachusetts Supreme Judicial Court--the highest court in that state--unanimously decided that the foreclosures in the cases before it were improper because the all important notice of foreclosure was recorded and published before the banks bringing the foreclosures actually owned the mortgages by way of legal assignments from the original issuers of the mortgage.

In the Massachusetts cases, foreclosures had already occurred and the homeowners had moved out after the bank bought the property at the foreclosure auction. When the banks initiated the foreclosures, they had no proof of the chain of title showing that they now were the mortgage owners.  For example, in one of the cases the original mortgage traveled through six different institutions including the initial issuer and the foreclosing bank.

After the banks decided to clean up their act--and after the foreclosures--they recorded what they alleged was proof of ownership with the local land records office. They then filed actions requesting that a judge issue a "quiet title" order--an order stating that the banks had proven clear title to the properties. Much to the surprise of the banks, the court refused to award them clear title, given that the foreclosure was legally deficient. The fact that the banks tried to correct the record after the foreclosures could not retroactively legitimize the foreclosures themselves or the titles to the property taken by the bank as a result.

The banks appealed this decision to the Massachusetts Supreme Judicial Court, which affirmed the lower court and also ruled that the title held by the banks in the improperly foreclosed property was not clear title--that is, the banks had no legal claim on the property.

This Case Will Likely Affect Foreclosures Nationwide

The potential implications of this decision are staggering. It means, in essence, that an unknown number of homes that have been improperly foreclosed on by the nation's mortgage lenders have title problems that may be difficult or impossible to clear up. This can only result in a brand new real estate crash of gargantuan proportions.

How important is the Massachusetts case? The way law works in the United States, once a major state's highest court decides a new point of law, that decision quickly travels to other states where lawyers use it to achieve the same or similar result. Homeowners who are called on to invest in litigating their foreclosure will be much more willing to part with their money knowing that they have a Massachusetts Supreme Court arrow in their quiver. While every state's foreclosure laws are at least somewhat unique, the basic premise of the Massachusetts case will likely be upheld by most courts that consider it--that is, a bank can't legally foreclose on a mortgage if it can't prove it owns it, and a bank can't go back in time and undo an illegal foreclosure  by obtaining a judicial declaration of clear title.

But in many cases litigation may not be necessary. Banks throughout the country are now on notice that the houses they still own as a result of foreclosure might well be worthless in that they won't be able to prove ownership at the time the foreclosure was initiated and therefore won't be able to pass clear title to prospective purchasers. And future foreclosures may be impossible given the chaotic state of mortgage-related records caused by the mortgage securitization process and sloppy bank practices. The only value banks may be able to glean from their huge stock of houses--whether before or after foreclosure--is whatever they can negotiate with the current owners.

Banks also will likely face class actions brought by thousands or hundreds of thousands of former homeowners who have been illegally foreclosed on. Investors are also likely to sue the banks for illegally jeopardizing their investments, and while banks may be forced to cut fire sale deals with homeowners, investors are unlikely to settle for anything less than they think they are owed. Undecided at present is what will happen to illegally foreclosed homes that have been subsequently purchased by buyers who had no reason to doubt the validity of their title. Will the invalid foreclosure apply to their title or will a doctrine known as "bona fide purchaser for value" invest the buyer with clear title? One thing for sure, the title to these properties is not as secure as was once thought, and the value of these properties may plummet even further because of a possible shaky title.

In closing, I offer a brief quote by concurring Justice Cordy:

"I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that this legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it....."



January 7, 2011

Bankruptcy Filings Increase by 9% in 2010

According to a recent National Bankruptcy Research Center report, bankruptcy filings increased by 9% in 2010 (versus 2009). The total number of bankruptcy filings in 2010 was a little over 1.5 million - which comes out to a whopping 1 in 150 Americans. This is the highest number of bankruptcy filings since 2005, when Congress revamped the bankruptcy laws.

The news isn't all bad tough. Although the 2010 numbers are huge, yearly filing increases since 2006 have been closer to 30%. So the 9% increase in 2010 actually represents a slowdown in the growth of filings. Perhaps a very cautious indication that the number of Americans in financial distress may be starting to wane?

It's also interesting to note that the number of Chapter 13 bankruptcy filings represent only 28% of the total. So, despite Congress' 2005 law changes intended to push people into Chapter 13s, it appears that the majority of Americans still prefer, and still qualify for, Chapter 7 bankruptcy (something Steve Elias has been saying all along in his blog posts).

By: Guest Blogger Kathleen Michon

January 3, 2011

Using a Bankruptcy Petition Preparer: Consult With an Attorney

If you are planning to use a bankruptcy petition preparer to assist you in filling out and filing your bankruptcy papers, it's always wise to consult with an attorney prior to filing. And if you are a bankruptcy petition preparer, it's an excellent idea to encourage your customers to seek attorney consultation. Here's why.

As I've explained in previous blogs, about 20% of those filing for bankruptcy may run into some difficult issues. And among the 80% who are unlikely to run into any trouble with their case, a small percentage shouldn't file bankruptcy at all -- either because they are judgment proof and there is no need, or because they have valuable property they will lose unless they do some careful pre-filing planning.

For bankruptcy filers, these numbers indicate that it's best to get some expert advice prior to filing, even if your case appears to be simple. Because Section 110(e) of the bankruptcy code prohibits a bankruptcy petition preparer from giving you even the most basic type of advice or information, only a lawyer can provide it. And if your case falls into the 20% "problematic" category, a talk with a lawyer is indispensable.

If you are a bankruptcy petition preparer, having your customers consult with an attorney is beneficial to you as well. Absent an attorney in the picture, the trustee may assume that the information necessary to make certain choices--particularly what exemptions to use and what chapter to file under--came from you the preparer--often a no-no for which you can be fined and barred from future bankruptcy work. If, however, your customer pays some money to an attorney for the consultation, even a nominal sum, the attorney's name will appear in Item 9 of the Statement of Financial Affairs and the trustee won't even inquire about the origin of the customer's information. In other words, having your customers engage an attorney for a fee is a kind of insurance against trustee harassment.