I’m a law student and we were in a clinic today. Several attorneys supervise us and we were kicking around a (fairly) common problem that we get from the clients we help.
They have a Ch 7 bankruptcy discharge from three or four years ago, listed their home, and got a full discharge on the note.
Now, years later, the banks are starting to foreclose again and instituting foreclosure proceedings. So, these people who are three to four years into reestablishing good credit, are getting hit with a foreclosure judgment that appears fresh on their credit reports.
I came up with this thought: A foreclose is both in personam and in rem in that it seizes the property and (can) hold the borrower personally liable for the debt. I argue that since the bankruptcy has discharged the debt, the liability is in rem ONLY. Therefore when a case is styled: Sleazy Bank, Inc. V. John Doe for foreclosure of his property at 123 Main St., a Motion should be filed with the court answering an affirmative defense of discharge in bankruptcy.
Then make a motion to dismiss the case against John Doe as he has no personal liability and a motion to re-style the case In re: 123 Main St. Property and let the bank proceed as it will. The home will still be taken but a judgment shouldn’t be entered against John Doe and he shouldn’t take a credit hit.
What say you all? Would a judge agree to these motions? I know it’s going to be state specific, but is there any general legal doctrine that makes my idea garbage? Our supervising attorneys said they didn’t see why it shouldn’t work, but have never heard of it.
I thought it is the policy of this Board not to pose school questions.
Anyway, a foreclosure is an in rem proceeding. If unable to personally serve any defendant, publication will suffice. If, however, you also seek a deficiency judgment for the balance between the amount the property is sold for and the amount owed, you would need personal service on the debtor. (Usually the bank bids the amount owed.)
The bankruptcy discharges the debt, but not the lien. During the bankruptcy proceedings, the foreclosure is stayed unless the court authorizes the mortgagee to proceed with the foreclosure. Once the bankruptcy proceedings end, the foreclosure can be resumed, but the personal liability is gone.
Edited to add that an owner of his home has homestead rights in it, which means that property that is a person’s home cannot be foreclosed, except for the fact that the mortgage contains a clause waiving homestead rights. If the debtor is married and the spouse does not also execute the mortgage, the waiver is invalid. (Some courts have held that in that case the entire mortgage is void.)
First, it isn’t really a school question. More of a legal one asking for advice which won’t be acted upon unless a licensed attorney gives it the go-ahead.
Second, I agree with everything you said, but in these situations the bankruptcy was discharged several years ago. The (future) clients are trying to get the subsequent foreclosure (when it happens; not trying to avoid it) from being one that dings them personally on their credit reports.
There cannot be a foreclosure judgment (i.e., a deficiency judgment). There will be a foreclosure order or decree, ordering the property to be sold at a public sale. Since they are not pecuniarily liable, I don’t see how that will appear on their credit report. Perhaps I’m wrong and the credit bureau picks up names on all equity actions too. In that case, you can make the motion you propose, but why don’t the parties merely quit-claim the property to the bank, thereby avoiding foreclosure action completely? Or even a special warranty deed, the consideration being the bank not foreclosing?
Yeah, the credit bureaus pick up the names and see “foreclosure” in the document and people get dinged again on their credit. I think part of the problem is that the bank files the same basic suit, discharge in bankruptcy or not. Then a foreclosure judgment gets entered and then once it is noticed that there is a discharge in bankruptcy, they don’t pursue a deficiency judgment, but the original judgment looks like any other regular foreclosure order.
Sometimes the bank does accept a special warranty deed, but more and more they are refusing because they say they need a foreclosure to guarantee that all junior liens are extinguished.
My (wild ass and untested) theory is that if we move to dismiss the defendants, move to have the action re-styled as “In re: (description of property)” while consenting to jurisdiction of the court for purposes of acting on behalf of the property, then the bank could get clean title with an in rem judgment and our clients wouldn’t have their credit further sullied.
But what do I know? I’m just a law student. I don’t see any case law on point, so I’m wondering if there is something glaring that I’m missing.
I don’t see any case law on point, so I’m wondering if there is something glaring that I’m missing.