Two of the biggest threats that creditors have over you are repossession and foreclosure. With the possible exception of garnishment, those two threats lead people to bankruptcy more than everything else put together. If you are going to make an informed decision about filing bankruptcy, or if you are already in a bankruptcy and you want to understand what might have happened, or what still might happen in the future, you need to know what these words mean.
Repossession and foreclosure are like two branches of the same tree. They both refer to a creditor taking away property that was used as collateral on a loan. In some ways, the two processes are very similar, but there are a few important differences. Any creditor with a lien on property can repossess or foreclose on that property if the right situation arises. That is essentially what “lien” means; the right to take something away if something goes wrong.
There are a few different ways that a creditor can get a lien on property. If you ever bought a car, or new furniture, or major appliances, then you may have purchased it with money borrowed from a bank or a finance company, or you may have financed the purchase directly through the seller. That is what’s called a “purchase money loan,” which gives the creditor the strongest kind of lien (other than outright possession). This is one kind of “secured” loan or debt. The property that the creditor has a lien on can also be called the “security” for the loan. The creditor might not be the same one that you bought the thing from in the first place. Creditors have the right to sell the note to someone else, and that person then has just as strong a lien as the first creditor did. (If you paid in full with cash, no lien was ever created. Also, once the loan is paid in full the lien should be dissolved.)
If you ever borrowed money and used property that you already owned as collateral on that loan, that is a “non-purchase money lien.” This is still a secured debt (the creditor has a lien on the collateral), but it brings up one of the biggest differences between debts secured by real estate and debts secured by personal property (anything else but real estate). If the collateral is real estate, and if the creditor follows all of the proper procedures, then he has a “mortgage,” which is one of the strongest types of liens.
On the other hand, if the collateral is “household goods,” then all or parts of the lien can be “avoided” (dissolved) in bankruptcy. (Without bankruptcy the creditors’ lien is just as valid as a mortgage.)
So far we have only talked about voluntary, or consensual, liens. There are also such things as involuntary liens. The two most common kinds of involuntary liens are judgment liens and tax liens.
A judgment lien happens when a judge orders you to pay money to someone else, usually after a lawsuit. The person who sued you can then register that court order with the county. That gives him a general lien on anything that you own in that county, whether it’s real estate or personal property. If he can show that he has not been able to collect on that judgment by garnishing your paycheck or your bank account, or by collecting from you directly, then he has the right to force the sale of your property. This doesn’t happen very often, mostly because the property has to sell for enough to pay off any mortgages or liens that already existed, plus any city or county property tax that is owed. Judgment liens can often be avoided (removed) in bankruptcy.
A tax lien could be imposed by the IRS, or any branch of the city, county, or state government. It could be imposed by a judge, or by any proper taxing agency. Once a tax lien is in place, it becomes very much like a mortgage, and it cannot be avoided in bankruptcy. A tax lien cannot be imposed after the bankruptcy has been filed (that is to say, for tax debts that were owed prior to the filing of the bankruptcy). Just because a tax lien has been registered does not necessarily mean that there’s nothing that can be done about it. This is a very complicated subject, and any situation involving tax liens requires a fact-specific analysis. I plan to write more about this subject in the near future, but for now, there are too many complications for me to make a general statement about when taxes and tax liens might be discharged in bankruptcy (which is more often than you might think).
When a creditor exercises his lien rights by taking property (other than real estate) away from you, it is called “repossession.” We usually think of cars when we think of repossession, and that is the most common type of repossession, but it can also apply to furniture, appliances, electronics, and anything else that you may have used as collateral. Cars are repossessed more often because they are more valuable, and because they are often out in the open, where the repo man can get to them.
If you default on your security agreement (contract), a secured creditor (other than a mortgage holder) has the immediate right to repossess the collateral without warning, as long as he can find it and get to it. He can come into your yard, or driveway, or into the public garage at your workplace. He can follow you to the grocery store and take your car out of the parking lot. There have been several good programs on various cable channels over the past several years, such as “The Repossessors,” about repo men. You would be amazed at how patient and persistent those guys can be. They will wait and watch you for days if that’s what it takes.
The only rule is that the creditor (or his repo man) cannot “breach the peace” in the process of taking the property. For instance, he cannot pick or break a lock, or break through a door or a gate, or get into a fight with you. He has to be able to take the property without damaging or moving any other property. Some people have even been known to chain their car to a tree to keep the repo man from taking it. (If your car disappears, the first thing you should do is call the police. The repo man is required to notify the police as soon as he takes your car, so the police won’t have to waste their time looking for a car that wasn’t really stolen.)
The same basic rules apply whether you are talking about a car, or a refrigerator, or anything else (except real estate). But it is a lot easier to get a car out of your driveway than it is to try to get the refrigerator out of your house. On top of that, the car is probably worth a lot more than the frig, so creditors are more likely to go after cars than anything else. The more valuable the property is, the more likely they are to try to take it, and the sooner they will try. (The rest of this section will use cars as an example, but the same rules apply to any other kind of personal property.)
If the repo man can’t find the property, sooner or later the creditor will go to court and get an order (usually called “Replevin”) requiring you to give the property back to them. Don’t ignore that court order.
The creditor cant send you to jail, but the judge can. BUT if a repo man or a debt collector ever threatens to have you arrested or to call the Sheriff on you call me immediately, because they may have just violated the Fair Debt Collection Practices Act, which would give you the right to sue them (at no cost to you).
Filing a bankruptcy stops all repossession efforts. If the repossession has already happened, you can get the property back by filing a Chapter 13, as long as the property has not been sold, and assuming the arithmetic works out (and it usually does).
What Happens After the Repo
Once the creditor has the car (or whatever), he has to send you a letter telling you that he took it, how much it will cost you to get it back, and when it is going to be sold. That is your deadline. Once its sold, its gone forever. The letter will be addressed to the last address that they have on you. It is not their responsibility to keep up with you. If they don’t have your current address, you may never even see the letter. Note: they don’t always sell it on the first try, so there is sometimes a chance to get the car back even after the date of that letter.
The car must be sold at a “commercially reasonable sale.” That means that they cannot just give the car away, or sell it to themselves for next-to-nothing. They must try to sell it for as much as anyone could normally get in that situation. Typically, they will hold an auction where a few people might bid as much as the wholesale price, but never more. Wholesale price is a lot less than what you would normally pay. Its the price that car dealers sell cars to each other for. It is often the trade-in price that you get from the dealer for your old car when you buy a new car from them. But the sale price is usually even less than that.
Many people think that once their car has been repossessed and sold, that’s the end of it. That might be true in some cases, but most of the time the outstanding debt is more on the car than it is worth. For example, your car might be worth $10,000.00, but you might owe $15,000.00. We call that being “upside-down” on the car. If the creditor sells it at auction for $10,000.00, you still owe him the other $5,000.00. The papers that you signed when you first bought the car say that, and a lot more.
After the repo sale, the remaining debt is no longer secured, but they can still sue you for that money, and they usually will, unless you work something out with them before it gets to that point, or unless you file bankruptcy in the meantime. You may also have to pay them for all of their court costs and attorney fees, which are typically one-third of whatever the balance is. In this example, that would add almost $2,000.00 to the $5,000.00 debt. They will get a judgment against you for roughly $7,000.00, and they will then try to garnish your paycheck, go after your bank account, or take any other legal collection action.
So you not only lose your car; you still have to pay for part of it, too. It doesn’t always happen exactly like this, but it usually does. If you go to General Sessions Court at 140 Adams Ave. any day of the week, there will be at least one courtroom where most of the docket is taken up with cases involving car dealers taking judgment against people for cars that were repossessed, or even voluntarily returned. (Voluntarily returning a car is usually treated exactly like a repo.) Most of those people had no idea that they could still be sued after the creditor had taken the car back.
Note: if you have been sued by a company other than the original finance company there is a good chance that they cannot prove that you legally owe that debt. You may be able to win that lawsuit, but you have to show up in court to do it or hire an attorney to do that for you. If more than four years pass between the date of repossession and the filing of the lawsuit, not only can you win the lawsuit, but you may also have the right to file a suit against them under the Fair Debt Collection Practice
For the most part, the word “foreclosure” is only used when talking about real estate. We usually think of it as referring to your home, but it could be any land, whether or not any buildings are on that land. It could be an apartment complex, or a rental house, or commercial space, or farmland, or even a vacant lot. As long as we are talking about real estate, the repossession process is called “foreclosure.”
Note: Tennessee is a non-judicial foreclosure state. Many states require the mortgage holder to file a lawsuit in which hearings are held and a judge oversees the process, but 99.99% of all foreclosures in Tennessee do not follow that process. If you have read something that suggests that all you have to do is force them to “produce the note” or that contains any other advice involving in-court proceedings, that does not apply in Tennessee. As of this writing (year 2010), there has been some talk in Nashville about changing the law to require the mortgage company to give more warning to homeowners, and that could happen, but in my opinion, it is extremely unlikely that Tennessee will require any sort of judicial process for foreclosure in most cases within my lifetime.
In some ways, foreclosure is very much like repossession of personal property, as described above, but there are a few very important differences. The biggest difference is that a foreclosure has to follow a specific process. A car can be snatched from your driveway at one minute after midnight of the day that your missed payment was due, but your house can only be taken away after the mortgage company notifies you by certified mail, posts a notice in a local newspaper for three weeks in a row, and holds a public auction on the courthouse steps.
The whole process takes at least a month if not two. That’s not much, but it gives you a little time to make plans and to take action. If you can come up with the money to bring the mortgage up to date at any time before the auction (including late fees, attorney fees, foreclosure costs, etc.), they will stop the auction and keep the house. The amount of money will be a lot more than just the missed payments. You will also have to pay late fees, and the mortgage company’s foreclosure expenses and attorney fees, all of which will add at least several hundred dollars to the total, if not a lot more. They will only accept the full amount; not a penny less. If you send them a check for less than the full amount, they will just send it back, and by the time you realize that they have not accepted your payment, it might be too late.
Once the auction sale is over, the only way to get the house back would be to buy it back from the mortgage company, or whoever bought it at auction (which will usually be one of the mortgage holders.) Even if they made a mistake in the foreclosure process, such as not properly notifying you by certified mail, in Tennessee it is practically impossible to undo a foreclosure. The only real exception would be if you could prove that someone committed fraud. Even then, you might not get the house back. Your best hope could be to sue the person who defrauded you. The moral of this story is to not wait until the last minute to try to do something about it.
Anyone with a lien on your real estate can foreclose. It could be the first mortgage, or the second or third, or it could be someone who took a judgment against you. The IRS and other state and local taxing agencies can also sell property, but in my experience, they only do that in the most extreme situations, after all else has failed. Usually, the oldest liens are first in line, and the next oldest is second, and so on. If there is a first mortgage, it will be first in line, even if that mortgage was sold to someone else after another lien was created.
As a practical matter, the person who forecloses will usually be whoever is first in line. If the first mortgage has not been paid off, they will be first in line, and they are most likely to be the ones who are foreclosing. The reason for that is that the first mortgage has to be paid in full before any money goes to the second, and the second has to be paid in full before anything goes to the third, etc. There is no guarantee that the second and third will get anything at all. If they want to protect themselves, they have to show up at the foreclosure sale and be ready to pay off everyone in front of them in full, on the spot. If the property is not worth that much, they are not going to do that. However, there are situations where the value of the property is much greater than the balance of the first mortgage, and that’s when the second mortgage is more likely to foreclose.
Note: Junior mortgage holders (second mortgage, third mortgage, etc.) do not have to foreclose, and they do have other options. They can sue you on the debt, and use that judgment as a basis for garnishing paychecks, attaching bank accounts, etc. So if the value of your property makes it unlikely that the holder of a junior mortgage will foreclose, please don’t assume that you are protected by that fact.
Bankruptcy will stop a foreclosure cold. As long as the petition is filed before the auction sale is finalized, the foreclosure stops. Even if the auctioneer never hears about the bankruptcy filing and goes through with the auction, the sale is still void; as though it never happened. Also, in certain situations, bankruptcy can actually eliminate junior mortgages and other liens on real estate.
What Happens After the Foreclosure
The things that happen after a foreclosure are very much like what happens after a repossession. As far as you are concerned, the property is gone. But there is one important legal difference, and one or two practical differences.
Before the economic crisis of 2007 and the following years, it was unusual for a first mortgage to be upside down (balance of a mortgage is less than the value of the property), and/or for a junior mortgage to be completely “underwater” (i.e., the first mortgage is upside down, so there is no equity that attaches to the junior mortgage). In the past, most of the time the foreclosure sale would bring enough money to pay off the first mortgage, and usually, the junior mortgage holders would at least get something. Just as with any other debt, once it has been paid in full (including all fees and costs) then that should be the end of that. All they care about is the money, and once they have that they have no reason to bother you. It will still show up as a foreclosure on your credit record, which will be bad if you try to buy a house within the next couple of years, but that should be the only lingering negative.
It is extremely unusual for the foreclosure sale to bring more than what is owed, but if that does happen, then they have to give the extra money back to you. In all my years of doing this, I have seen that happen one time, and it was totally unexpected then.
But in today’s world, not only is it likely that the house won’t sell for enough to pay off the first mortgage, it is also likely that junior mortgage holders will not get any money out of the sale. If that happens you still owe them money. They have the right to sue you or to turn it over to a debt collector who can use any number of methods to collect the debt. They can also issue a 1099 for the imputed income. Again, this is too complicated to discuss here, but it is becoming increasingly common for creditors to send a 1099 when they can’t collect the debt, and in most cases, you have to count that as income for tax purposes that year. That can be huge in the case of a foreclosed home. There are sometimes ways to deal with a 1099 in this situation, but you have to act quickly. Also, filing a bankruptcy before the foreclosure happens prevents the 1099 problem completely.
Whether a creditor will do anything at all, and exactly what they will do, is entirely up to them. It depends on who the creditor is, how much money is owed, and what the nature of the lien is. Sometimes they won’t do anything, and sometimes they will come after you when you least expect it. Again, even after the foreclosure happens a bankruptcy can discharge a lingering debt, and if the bankruptcy is filed before they issue the 1099, then that problem is eliminated as well. The problem is that you have no way of knowing if or when they will issue the 1099 until after it has happened.
The other concern that most people have when their home is being foreclosed has to do with the eviction process. You do not have to leave on the day of the foreclosure. Once the foreclosure sale is complete the mortgage company or the buyer may send you a letter demanding that you leave the house immediately. But its a bluff. Since that is your home, you still have a constitutional property right to live there, and they can’t make you leave without a court order.
If you don’t leave voluntarily, they have to go to state court and file an eviction lawsuit (called a “F.E.D.” for Forcible Entry and Detainer). They have to serve you with the lawsuit papers. If they cannot serve you personally, they can post the notice on your door. But if they don’t serve you personally, they can only get a court order for possession of the property. They can’t win a money judgment against you as part of that lawsuit without having actually put that piece of paper into the hands of a responsible adult on the premises.
Ten days after the judgment is entered they can bring the sheriff out and put you and your belongings out on the street. Don’t wait for that to happen. The whole process takes at least a month, but that month will go by faster than you can imagine.
There is much more that could be said about foreclosure and repossession, and this section will be updated regularly. If your question has not been answered, send me an email by clicking on the following link: Attorney@MemphisBankruptcyLawyer.com. I do my best to answer every question.