It’s surprising how often I hear this question. The short answer is that even though a client discharges a home mortgage through a bankruptcy, after the bankruptcy case is closed, my client still owns the home and the mortgage is still a lien on the property. The only way for the lender to get my client off of the title to the home is by foreclosing on the mortgage. That’s the short answer. Here’s the longer version.
When a client receives a bankruptcy discharge under 11 USC § 727 (Chapter 7), the effect of that discharge under 11 USC § 524(a) relieves the client of any judgment that determined his/her “personal liability” on a debt he/she owed before the client filed the bankruptcy case. The discharge also acts as an injunction against a creditor suing the client after the bankruptcy case to collect on a debt the client owed before filing the bankruptcy case. The key term here is “personal liability.” Section 524(a) does not prevent a creditor from collecting/foreclosing on property my client owned before he/she filed the bankruptcy as long as the creditor had a lien on the property before the case was filed.
Okay. So a lender has the right to foreclose on my client’s home after my client files bankruptcy if my client hasn’t made the payments on the mortgage. That is not to say that a client should ignore the foreclosure proceedings when they start. Paying attention to the foreclosure documents could be very important for a variety of reasons. First, a short explanation about the foreclosure process.
There are two types of foreclosure processes here in Oregon: judicial and non-judicial. A non-judicial foreclosure involves a lender publishing and recording a notice of default and election to sell the home under its deed of trust (similar to a mortgage). The lender must give the home owner at least 120 days notice of the sale under ORS 86.740. There is no judge involved. The lender just shows up at the time and place indicated for the sale and sells the property. The new owner (which may end being the lender) gets title to the property right away after the sale. The lender is not entitled to a “deficiency” against the borrower under ORS 86.770 when the lender forecloses non-judicially. A deficiency is the difference between the amount of the debt and the sale price. If the sale price is less than the amount the homeowner owed on the deed of trust, the lender would not be allowed to pursue the homeowner later to collect the balance owing on the deed of trust.
A judicial foreclosure involves the lender filing a law suit in state court. The home owner is allowed 30 days from the date he/she is served with the summons and complaint to file an answer to the complaint. The complaint may or may not ask for a deficiency judgment or may even be silent about the deficiency. This is where it can be tricky. Under Oregon’s civil rules of procedure, a bankruptcy discharge is an affirmative defense that must be asserted. ORCP 19B. If the lender states in the complaint that it is not seeking a deficiency, then the homeowner is probably safe in not responding to the complaint. However, if the lender won’t commit to not seeking a deficiency even with the knowledge of a client’s bankruptcy, the homeowner must make a choice. If the homeowner files an answer that includes the affirmative defense of bankruptcy discharge, the homeowner is entitled to his/her attorney fees in the case under ORS 20.094. If the homeowner ignores the lawsuit, the lender could argue that the homeowner waived the bankruptcy discharge defense. The lender could then end up with a deficiency judgment against the homeowner. If the judgment is not fully paid off by the sheriff’s sale of the home, the lender could then try to pursue the homeowner personally to collect on the balance by garnishing the homeowner’s wages or bank accounts. At the very least, the unsatisfied deficiency judgment would remain unsatisfied and would create a lien on future real property the homeowner purchased.
I have been practicing bankruptcy law for over 25 years. During that time, I have advised hundreds of Central Oregon clients in Bend, Redmond, La Pine, Madras, Sisters, and Prineville. When a client of mine that I have represented in a bankruptcy case brings me a copy of a summons and complaint in a judicial foreclosure case, I normally assist my client in getting a stipulated judgment of foreclosure that does not allow a deficiency judgment. The fee is usually nominal compared with having to file a motion to reopen the bankruptcy case and file a lawsuit seeking sanctions against the lender.
If you have a foreclosure issue, give us a call at Basham Law Firm to set up an appointment to discuss it. We also offer a free consultation if you are interested in filing a bankruptcy case to stop the foreclosure.