Category Archives: Mortgages

It is possible to eliminate a second mortgage through bankruptcy

Things can get tricky when filers have second mortgages or home equity lines of credit (HELOCs) when they file for bankruptcy. And thanks to the housing market that collapsed in 2007, many Americans currently do have multiple mortgages or loans attached to their homes.

A common misconception is that mortgage liens can not be removed through bankruptcy. In fact, 2nd mortgages (and HELOCs) CAN be stripped and/or discharged through bankruptcy.

Here’s how they’re treated by the bankruptcy court:

  • A HELOC in Chapter 13 bankruptcy: In Chapter 13, filers are required to make payments to their primary mortgage lender and to the bankruptcy trustee. The trustee distributes these payments among priority debtors. After the case concludes, the HELOC may be eliminated (discharged). The lender will have gotten a percentage of trustee payments during the case.
  • A HELOC in Chapter 7 bankruptcy: Chapter 7 may cancel the debt on a home equity credit line, but it cannot cancel the lien that creditor has on the house. In fact, a HELOC lender may still be able to foreclose on a filer’s house after bankruptcy is over (though if there’s no equity in the house, this would be unlikely). One way to avoid post-Chapter 7 foreclosure is to reaffirm payments to a HELOC lender in during bankruptcy.
  • Second mortgages in Chapter 13: Second mortgages that are no longer secured by a home’s value can be discharged in Chapter 13 bankruptcy. Underwater homes may have second or third mortgages that are not secured any longer by the house’s value (that is, the amount of the loans totals more than what the house is currently worth). However, discharging a second mortgage will not affect what a bankruptcy filer owes on a first mortgage.

Brian Cahn,

Senior partner with Perrotta, Cahn & Associates

Perrotta, Cahn & Associates represents clients throughout Georgia and the Southeastern United States.  We have offices conveniently located throughout Georgia.  To schedule a free consultation with a lawyer at our firm, call us toll-free at 866-382-8900 or visit us online at www.northgabankruptcy.com.

We have offices in: Cartersville, Calhoun, Dalton and Dallas

Serving clients in: Bartow, Floyd, Paulding, Cherokee, Polk, Whitfield, Douglas, Cobb, Fulton, Chatham, and all of Northwest Georgia.

Georgia Bankruptcy Lawyer: “O.C.G.A. § 44-14-161 Needs to be Amended to Protect Consumers”

The foreclosure crisis in the State of Georgia is staggering. Georgia typically ranks 3rd or 4th in the NATION in the number of foreclosures. The trend continued last month, with Georgia ranking 4th overall.

Georgia’s high foreclosure rate is attributable to a number of factors. First of all, the the foreclosure rate, obviously, is tied to the unemployment rate. According to the United States Bureau of Labor Statistics, Georgia has one of the highest unemployment rates in the nation, ranking 8th highest.

Furthermore, Georgia has a “fast track” foreclosure process, allowing a lender to complete a foreclosure in less than 90 days. Unlike other states, Georgia law permits non-judicial foreclosures. In other words, a lender does not have to go before a judge to obtain permission to foreclose. Instead, in the event of a default, the lender simply privides the borrower a notice of default and intent to accelerate the loan. Then, prior to actually selling the property, the lender must publish notice of the pending sale in the legal newspaper where the property is located for four consecutive weeks. The notice of sale must contain the date, time and place of the sale along with a description of the property, the names of the borrower and lender and a reference to the power of sale provision.

Foreclosure sales in Georgia are usually conducted by the lender’s attorney, and may only be conducted on the first Tuesday of a calendar month. Sales are conducted in an auction format, and take place literally on the courthouse steps.

When the property is sold, the foreclosure is over. The new owner may evict the borrower. The new owner may be an investor, but more commonly, the new owner is the lender. The lender may purchase the property (from itself) by virtue of a “credit bid.” We use the term “credit bid,” because the lender doesn’t actually pay itself; it simply applies the purchase price as a credit against the borrower’s loan.

Georgia’s fast-track foreclosure process is a huge advantage for Georgia banks and mortgage lenders. One may argue that the process makes loans cheaper and easier to obtain for Georgia borrowers, but the forelcosure laws must not deprive borrowers of procedural due process.

The concern is as follows: With no judicial oversight over the forelcosure process, our citizens must be afforded certain protections – procedural due process – to prevent abuses that could result in an unreasobable deficiency balance being assessed against the borrower, and/or unjust enrichment of the lender at the expense of the borrower. Assume, for example, the following scenario:

ABC Mortgage Company conducts a foreclosure sale against John Smith’s residence on the steps of the Bartow County courthouse on Tuesday, October 4th, 2011. The mortgage balance owed by Mr. Smith is $350,000. Because of a decline in home values, Mr. Smith’s home is only worth $275,000 as of the date of foreclosure. When ABC Mortgage Company (“ABC”) sold Mr. Smith’s home, the highest bid was by ABC: ABC was able to “credit bid,” and purchase the Smith home (from itself) for the sum of $100,000. Assume, also, that 3-months after the foreclosure sale, ABC sold the home on the open market to a new family for $275,000. Now, why was the winning bid at foreclosure so low? Who knows, unless a judge hears evidence (which is not necessary in Georgia). Maybe it was raining or cold that day, so investors didn’t want to stand on the courthouse steps. Maybe ABC’s auction was late in the day, after most investors had purchased other properties or left. Maybe, just maybe, ABC is not an ethical company (gasp!) and “whispered” the foreclosure sale in a remote corner of the courthouse steps, or didn’t show up within the legal hours of auction.

The due process concern, is Mr. Smith’s potential liability for the foreclosure deficiency. The deficiency is defined as the difference between the loan balance ($350,000) and the foreclosure sale amount ($100,000). In this case, the deficiency owed on the loan is $250,000. ABC stands to become unjustly enriched by “double dipping” (i.e., collecting the deficiency from Mr. Smith AND recovering the deficiency upon re-sale on the open market, when the property sells for true market value).

Bankruptcy attorneys see cases where creditor collect deficiencies from borrowers ALL THE TIME. If your car is repossessed by Ford Motor Credit, for example, the car will be sold at an auction, and you WILL BE SUED for the deficiency.

In our example above, is it fair for Mr. Smith to be sued for a $250,000 deficiency, in light of the fact his house wasn’t sold for a reasonable price, and perhaps not sold in a reasonable manner? The Georgia Legislature didn’t think so. That’s why they enacted O.C.G.A. § 44-14-161.  Here’s what the law says:

O.C.G.A. § 44-14-161. Sales Made On Foreclosure Under Power Of Sale — When Deficiency Judgment Allowed; Confirmation And Approval; Notice And Hearing; Resale.

(a) When any real estate is sold on foreclosure, without legal process, and under powers contained in security deeds, mortgages, or other lien contracts and at the sale the real estate does not bring the amount of the debt secured by the deed, mortgage, or contract, no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.

(b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale.

(c) The court shall direct that a notice of the hearing shall be given to the debtor at least five days prior hereto; and at the hearing the court shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.

The statue is often called “the judicial confirmation statute.” Essentially, if the lender wants to sue the borrower for a deficiency after a foreclosure sale, the lender must file a petition “to confirm” the sale. The petition must be filed within 30-days of the foreclosure sale, and the lender must produce evidence demonstrating that the property was sold for “its true market value.” In our example, ABC would have a difficult time “confirming” the sale of Mr. Smith’s property. Without judicial confirmation, ABC is legally precluded from suing Mr. Smith for the deficiency. Mr. Smith is, therefore, afforded DUE PROCESS.

So, what’s the problem?

Even though the judicial confirmation statute protects Mr. Smith from being sued, the statute does not protect any additional collateral that Mr. Smith may have pledged to ABC for the loan.

Let me give you a REAL EXAMPLE of the problem. (I have altered the names, slightly, and used round figures.) Several years ago, I had a discussion with a client named “Mike O.” Mike is very well-known and respected member of our community. Mike decided to open a restaurant in Dalton, Georgia, and applied for financing from Cheatham Bank (get it, Cheat-him?). To open the restaurant, Cheatham Bank loaned Mike the sum of $400,000, secured by the restaurant building. The restaurant building appraised for $425,000, but Cheatham Bank wanted additional collateral, just to be safe. Mike’s home was owned free-and-clear, so he pledged it to Cheatham Bank as additional collateral. The home’s value was $550,000. The loan was closed, and Mike was in the restaurant business. Cheatham Bank had $975,000 worth of collateral for a $400,000 loan.

About 5-years into the operation of the restaurant, business began to decline. Eventually, the restaurant could not generate enough cash-flow to meet its fixed costs, including the monthly mortgage payment to Cheatham Bank.

Cheatham Bank foreclosed on the restaurant. Although the restaurant was worth $425,000, Cheatham Bank bought it by virtue of a “credit bid” for the sum of only $110,000!! Mke seriously doubts that there were any other bidders, and the low price raises concerns about the time an manner of the auction. Everyone, including Cheatham Bank, would concede that the $110,000 foreclosure sale price was far below the property’s true market value. Cheaham Bank did NOT file a petition to confirm the foreclosure sale.

After crediting the $110,000 sales price to Mike’s loan, the balance on the loan was $315,000. Cheatham Bank listed the restaurant for sale with a real estate agent, and sold it within 2-months for $395,000. Under the law, however, Mike didn’t get any credit for the re-sale profits. The bank got to keep the entire profit, and turned next to Mike’s residence to collect the $315,000 “balance.”

Cheatham Bank proceeded to foreclose on Mike’s home in Bartow County. Cheatham Bank bought Mike’s home with a credit bid of only $300,000. Cheatham Bank never confirmed that foreclosure sale either, but eventually re-sold Mike’s residence on the open market for $425,000.

Cheatham Bank sold Mike’s properties for $325,000 plus $425,000, totalling $750,000. Not a bad return on a $400,000 loan. Some people would call that unjust enrichment. Some people, like Mike, would consider that legalized theft.

Mike and his wife were near retirement age when they were tossed out of their home. Starting over wasn’t easy.

Mike came to me, wanting to know if this could POSSIBLY be LEGAL??? Sad truth: the Courts, so far, say it is.

Cheatham Bank didn’t have to confirm EITHER foreclosure sale because the bank never sued Mike for a deficiency.

It seems to me that Mike was deprived of his rights under the Constitution.

The Fourteenth Amendment to the United States Constitution provides that citizens are entitled to the constitutional right to procedural due process, which has been broadly construed to ensure that no one is deprived of “life, liberty, or property” without a fair opportunity to affect the judgment or result.

So, then, how is it possible that a court of law would allow a lender to deprive the borrower of his property with no procedural due process?

Bankruptcy courts must follow precedent of the United States Supreme Court in the case of BFP v. Resolution Trust Corp. Pursuant to that decision, a bankruptcy court can not second-guess the price obtained for foreclosed real property. The reasonable equivalent value of a property sold at foreclosure is the price in fact received at the foreclosure sale, so long as all the requirements of the State’s foreclosure law have been complied with.

The Georgia Court of Appeals has also considered the issue. Although the Court didn’t address the constitutional implications, it ruled against the borrower by applying the strict language of the statute in Taylor v. Thompson, 158 Ga. App 671, 282 S.E.2d 157 (1981). In Taylor, the Georgia Court of Appeals reviewed the history of the Georgia judicial confirmation statute, and concluded that a lender may sell the borrower’s additional collateral without judicial confirmation. “The confirmation statute was enacted during the Depression when many mortgagors were forced into bankruptcy by the deficiency judgments which were sought and obtained against them after mortgagees had acquired the property at nonjudicial foreclosure sales for nominal or depressed prices.” The opinion goes on to say:

This statute is in derogation of the common law and it has been and must be strictly construed. First National Bank v. Kunes, 128 Ga. App. 565, 197 S.E. 2d 446 (1973). Through case law interpretation of this statute several principles have evolved, to wit: The confirmation required by the statute is not an equitable proceeding. Dockery v. Parks, 224 Ga. 369, 162 S.E. 2d 332 (1968). The failure to obtain confirmation of a sale does not operate to extinguish the remaining debt; rather, it simply precludes the person exercising the power of sale from instituting suit to obtain a deficiency judgment. Powers v. Wren, 198 Ga. 316, 31 S.E.2d 713 (1944); Turpin v. North American, 119 Ga. App 212, 166 S.E.2d 588 (1969). Failure to confirm does not estop a creditor from pursuing other contractual security on the debt. Salter v. Bank of Commerce, 189 Ga. 328, 6 S.E. 2d 290 (1939). “A creditor who holds a promissory note secured by a deed is not put to an election of remedies as to whether he shall sue upon the note or exercise a power of sale contained in the deed, but he may do either, or ‘pursue both remedies concurrently until the debt is satisfied.’ (Cits.)” Oliver v. Slack, 192 Ga. 7, 14 S.E.2d 593 (a941); Marler v. Rockmart Bank, 146 Ga. App 548, 246 S.E.2d 731 (1978); see also Trust, etc., Co. v. First Ga. Bank, 238 Ga. 309, 232 S.E.2d 828 (1977).

The Court of Appeals concluded that, under a strict construction of the statute, the lender could foreclose on additional property of the borrower without confirming a prior foreclosure sale of the borrower’s other property.

“For the benefit of bench and bar we restate the holding of this case as follows: When a creditor who holds a promissory note secured by a deed to secure debt containing a power of sale sues on the note and obtains a money judgment and thereafter elects to exercise the power of sale in the deed to secure debt, and the proceeds of such sale are not sufficient to satisfy the judgment, he is not required to comply with [the judicial confirmation statute] before attempting to enforce further his judgment. We are not unmindful that this holding permits the avoidance of judicial confirmation of such foreclosure sale. However, as previously noted, the confirmation statute is in derogation of the common law and requires strict construction. When the creditor wishes to exercise a power of foreclosure prior to obtaining a judgment on the note and thereby save time and expense, he will be required to comply with the confirmation statute before instituting any action for a deficiency judgment.”

Taylor, 158 Ga. App. at 672, 282 S.E.2d at 159.

Essentially, the Court in Taylor, suggested that the strict language of the statute controls, unless our State legislature amends the statute.

I write this article for two reasons:

1. Awareness. Georgia citizens need to be aware that the Georgia foreclosure process is fundamentally flawed. In the case of Mike O., the Bank was unjustly enriched. The supposed “safety net” of the judicial confirmation statute has a giant hole in it. Our citizens, or neighbors, the GOOD PEOPLE of our communities, are being deprived of their property by greedy banks that have the money to influence legislation.

2. A proposed solution. This article is a call for reform. Bankruptcy attorneys are well-aware of our predicament. We represent the poor. Banks have money, therefore, they have the power to lobby and influence the lawmakers. Our clients do not have money or political power. The 2005 “reforms” to the Bankruptcy Code are a perfect example. We, as bankruptcy lawyers and consumers, need to ACT NOW to bring this problem to the attention of our lawmakers. I have written 2 State Senators, and suggested an amendment to O.C.G.A. § 44-14-161(a), by adding the words “or against any additional security or collateral” into the statute. The statute, as amended, would read as follows:

O.C.G.A. § 44-14-161. Sales Made On Foreclosure Under Power Of Sale — When Deficiency Judgment Allowed; Confirmation And Approval; Notice And Hearing; Resale.

(a) When any real estate is sold on foreclosure, without legal process, and under powers contained in security deeds, mortgages, or other lien contracts and at the sale the real estate does not bring the amount of the debt secured by the deed, mortgage, or contract, no action may be taken to obtain a deficiency judgment, or against any additional security or collateral, unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.

(b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale.

(c) The court shall direct that a notice of the hearing shall be given to the debtor at least five days prior thereto; and at the hearing the court shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.

What’s the down-side of the proposed amendment?

Help me, and the citizens of our State, by contacting your local Senator and Congressmen. Together, we can help make a change to protect our property from legalized theft.

Brian R. Cahn
brc@perrottalaw.com
www.NorthGaBankruptcy.com
www.PerrottaLaw.com
Cartersville | Dallas | Dalton | Calhoun

2nd Mortgages can be Eliminated through Bankruptcy

Things can get tricky when filers have second mortgages or home equity lines of credit (HELOCs) when they file for bankruptcy. And thanks to the housing market that collapsed in 2007, many Americans currently do have multiple mortgages or loans attached to their homes.

A common misconception is that mortgage liens can not be removed through bankruptcy. In fact, 2nd mortgages (and HELOCs) CAN be stripped and/or discharged through bankruptcy.

Here’s how they’re treated by the bankruptcy court:

■A HELOC in Chapter 13 bankruptcy: In Chapter 13, filers are required to make payments to their primary mortgage lender and to the bankruptcy trustee. The trustee distributes these payments among priority debtors. After the case concludes, the HELOC may be eliminated (discharged). The lender will have gotten a percentage of trustee payments during the case.
■A HELOC in Chapter 7 bankruptcy: Chapter 7 may cancel the debt on a home equity credit line, but it cannot cancel the lien that creditor has on the house. In fact, a HELOC lender may still be able to foreclose on a filer’s house after bankruptcy is over (though if there’s no equity in the house, this would be unlikely). One way to avoid post-Chapter 7 foreclosure is to reaffirm payments to a HELOC lender in during bankruptcy.
■Second mortgages in Chapter 13: Second mortgages that are no longer secured by a home’s value can be discharged in Chapter 13 bankruptcy. Underwater homes may have second or third mortgages that are not secured any longer by the house’s value (that is, the amount of the loans totals more than what the house is currently worth). However, discharging a second mortgage will not affect what a bankruptcy filer owes on a first mortgage.

find us at www.northgabankruptcy.com