Defending The Foreclosure
If surrendering the property is not an option, a debtor may want to avoid bankruptcy by defending the foreclosure. Defenses to foreclosure are limited and, in most cases, only a temporary solution. If the lender failed to follow proper state procedures or mortgage terms in the process of foreclosing on the homeowner, the lender may have to go back to square one. However, my experience is that most judges are not interested in trivial errors or ones that don’t result in substantive harm.
One defense that I have used both in state court and in bankruptcy court is a lack of standing. If the foreclosing party (usually an investor group) can’t establish it owns the mortgage, a defense of lack of standing may be raised. This strategy is sometimes referred to as the “produce the note defense.” But this defense may be difficult due to the complexity of some mortgage transactions and may result only in a delay until the proper party with standing can be established.
Another defense arises from the fact that lenders and mortgage servicers often make serious mistakes when dealing with borrowers. From inaccurate reinstatement quotes to misapplied mortgage payments to failure to pay property taxes, lender errors can be used to stop a foreclosure.
Finally, a foreclosure may be fought on the basis of unfair lending practices under the Truth in Lending Act (TILA) or the Home Ownership and Equity Protection Act (HOEPA). Both of these laws allow a debtor to sue for damages and may even allow the cancellation of a mortgage under certain circumstances (but the debtor would have to refinance the balance of the loan). Although these defenses sound attractive, most lenders are either in compliance or have ensured that the laws don’t apply to their loans.
If defending the foreclosure is not an option due to a lack of plausible defenses (or a lack of available funding), the next step should be to consider bankruptcy.
How you structure a solution depends on whether the client is trying to avoid foreclosure, recently has been served with a complaint or has a sheriff sale date pending. The most common solutions include:
- Loan modification application if there is sufficient time prior to the filing of a foreclosure complaint.
- Workout in mediation after answering a foreclosure complaint.
- Bankruptcy either to halt a pending sheriff sale or buy more time to get a response on a loan modification application.
- If no foreclosure has been filed, have the client file a loan modification application immediately.
- If a foreclosure has just been filed, answer the complaint and request mediation.
- If there is a pending sheriff sale, bankruptcy is probably the only option to save the home.
- Always stay in close contact with the lender’s representative and understand the particular challenges he or she faces within the institutional structure.