If you fall behind on your mortgage payments, the bank or mortgage company that holds the mortgage on your house can bring a legal action in court, called foreclosure, in which it seeks to take your house or sell your house in order to satisfy all or a portion of your debt. As a result of the foreclosure, you will lose whatever rights you have in your house and you can be ejected from your house. This article will explain the foreclosure process and your options, including filing bankruptcy to stop foreclosure. This article assumes that your foreclosure action is being brought by a mortgage lender. Other parties may also bring foreclosure actions.
Behind the Scenes
Before the mortgage lender starts the foreclosure action against you, it will order a title search of your house. A search of the records in the recording office where your house is located will reveal any other liens (second mortgages, tax liens, mechanics’ liens, judgment liens, etc.) recorded against your house, either before or after your mortgage, which have not been released. Identifying other holders of liens against your house is important because those lien holders will have rights in your foreclosure proceeding.
Summons and Complaint
The mortgage lender (the plaintiff) starts a foreclosure lawsuit by having a state marshal serve a Summons and Complaint on you and other defendants (other junior lien holders and sometimes tenants). The foreclosure complaint does not have to be served by hand. At the same time, the mortgage lender will typically record a lis pendens in the recording office to provide the public with notice that your house is being foreclosed.
The Complaint will state the mortgage lender’s position in the case, usually that you are delinquent on the debt and the mortgage lender wants to foreclose to satisfy your obligation. Because your mortgage may have been sold or transferred from the original mortgage lender, the Complaint will identify the chain of assignments from the original mortgage lender to the plaintiff, which establishes the plaintiff’s right to foreclose. The Complaint will also identify any other liens on your property.
Attached to the Complaint is a Notice of the Availability of Foreclosure Mediation. Mediation is a process by which an impartial state mediator assists you and the mortgage lender in negotiating a mortgage modification that keeps you in your house. Generally, there is no downside to applying for mediation. The mediation process can slow foreclosure down for seven months or longer.
The Complaint will also contain a notice that you may be eligible for emergency mortgage assistance payments under the provisions of the Emergency Mortgage Assistance Program (EMAP) which is administered by The Connecticut Housing Finance Authority. If you qualify, there is no downside to applying for assistance.
You also have the right to apply for protection if you are unemployed or underemployed. You must apply to the court within 25 days of the return date if you think you qualify for protection (see below for more details).
In the upper right hand corner of the Summons is the Return Date. The return date is not a hearing date. You do not have to go to court on that date. It is a reference point for deadlines by which papers must be filed with the court. The Summons and Complaint must be served upon you and each other defendant twelve days before the return date. After service, the Summons and Complaint must be filed with the court at least six days before the return date. The return date is determined by the plaintiff and must be a Tuesday.
Filing an Appearance
You should file an Appearance no later than two days after the return date on the Complaint. You can file an Appearance on your own behalf (called a pro se appearance) or through an attorney. Your Appearance tells the court that you are not ignoring the foreclosure. Once you file the Appearance, you will get notice of whatever is happening in court. You have an opportunity to appear in Court and express your position to the Court whenever a hearing is scheduled. You can get an Appearance form on the Connecticut judicial website: http://www.jud.ct.gov/webforms/forms/cl012.pdf. If you do not file an Appearance, you may not be able to contest the foreclosure. If you are representing yourself and file a Mediation Certificate within 15 days of the return date, you can also file an Appearance at that time.
Filing a Mediation Certificate
The Foreclosure Mediation Certificate will be delivered to you with the packet containing the Summons and Complaint. Or, you can get a Foreclosure Mediation Certificate form on the Connecticut judicial website: http://www.jud.ct.gov/webforms/forms/CV108.pdf. There are five questions that must be answered “yes” for you to be eligible for mediation, primarily that you are the borrower, that the house is your primary residence (up to three other families may also live in the house) and that the house is located in Connecticut. The Foreclosure Mediation Certificate must be filed with the court within 15 days of the return date, but if you miss that deadline, you may still be eligible for mediation by filing another form explaining why. You can get the other form on the Connecticut judicial website:http://www.jud.ct.gov/webforms/forms/CV096.pdf. Filing for mediation “stays” or postpones all of the pleadings and proceedings described below. Generally, there is no downside to applying for mediation. See below for more information about Mediation.
Filing an Answer
You have 15 days after the Return Date to file an Answer to the complaint. After reading every paragraph of the Complaint carefully, you answer the Complaint by stating whether you agree, disagree or do not know whether you agree or disagree with each paragraph in the Complaint. For example, if the Complaint states you are six months behind on your mortgage, but you are only four months behind, you should state in your Answer that you disagree with that paragraph of the Complaint. Most people do not have a defense to non-payment of their mortgage. If you have a defense to the foreclosure (e.g., fraud, duress, invalidity), write that you have a defense and briefly explain it. You can get an Answer form on the Connecticut judicial website: http://www.jud.ct.gov/webforms/forms/CV106.pdf.
You must sign and file the Answer at the Court Clerk’s office. A copy of the Answer must be sent to everyone who has also filed an Appearance in the case. A separate certification of service must also be filed. If you do not file an Answer within 15 days of the Return Date, the Court may enter a default against you and you will not be able to present a defense to the foreclosure.
In order for the mortgage lender to obtain a foreclosure judgment, you and each other defendant to the foreclosure action must be defaulted, or if you have a defense and the case is contested, either a trial must be concluded, or a motion for summary judgment must be granted to establish your liability to pay the debt owed to the mortgage lender.
Assuming you have no defense, the mortgage lender may begin to file default motions against you and each other defendant two days following the Return Date. Default motions may be filed and granted for any of the following reasons:
Default for Failure to Appear – meaning you failed to file an Appearance. It does not mean that you failed to attend a Court hearing.
Default for Failure to Plead – meaning you failed to file with the Court a valid defense after filing an Appearance.
Demand to Disclose Defense – meaning the mortgage lender is seeking to determine whether you have any defenses to the foreclosure action.
Default for Failure to Disclose Defense – meaning you or your Attorney (on your behalf) filed an Appearance but then failed to disclose a valid defense within five days following the filing of the Demand to Disclose Defense by the mortgage lender.
Frivolous answers or denials are met with Motions for Summary Judgment by the mortgage lender.
Motion for Judgment
When all defaults are entered or summary judgment is granted, the foreclosure case is ready to move to judgment. The mortgage lender typically will file a Motion for Judgment of Strict Foreclosure. The Court will require the mortgage lender to obtain and attach to the motion a current real estate appraisal prepared by an appraiser licensed or certified by the State of Connecticut in order to determine the fair market value of your house.
The Court will also require an Affidavit of Debt regarding the total amount of the mortgage obligation being foreclosed, the original promissory note, the original mortgage and all assignments. If the original promissory note cannot be located, a lost note affidavit might be accepted. If the original mortgage and assignments cannot be located, certified copies from the recording office might be accepted.
A copy of the Motion for Judgment of Strict Foreclosure and attachments will be mailed to you and all other defendants who have filed a notice of Appearance. The Court will schedule a hearing on the Motion for Judgment of Strict Foreclosure approximately two weeks after receipt. Foreclosure hearings generally are scheduled on Mondays in the Superior Court.
The Judgment Hearing
At the hearing on the Motion for Judgment, the Court will establish (1) the fair market value of your house based upon the appraisal submitted by the mortgage lender or based upon an appraisal submitted by you; (2) the amount of the debt you owe the mortgage lender; and (3) allowable attorney fees and costs for the title search and appraisal.
The Court will issue a decision to dismiss or allow foreclosure. If the Court finds that there should be a foreclosure, depending upon the value of your house and the amount of your debt, the Court will order either strict foreclosure or foreclosure by sale and set the appropriate dates. The Court’s judgment does not end your rights in the house. It is the law day or confirmed sale of the house that cuts off your rights in the house.
Strict foreclosure will be ordered by the Court when it finds that there would be little or no value to be realized by you if your house were sold, because the total amount of the mortgage debt, other liens and foreclosure fees equals or exceeds the appraised fair market value of your house. Rather than go through the time and expense of auctioning off the house, the Court will establish a deadline, called a Law Day, by which you must pay off the mortgage debt and related fees in full or you lose ownership of your house. If you fail to come up with the money prior to your Law Day, then you will be barred from claiming an interest in the house.
Note that even if you have no equity in your house, federal law requires a sale in the event of an IRS lien or any other lien held by the United States.
In a strict foreclosure, the Court will set a series of Law Days for you and each other person listed as a defendant in the foreclosure action. Law Days give each owner of an interest in the property, in inverse order of priority, an opportunity to come forward and pay the entire debt due the mortgage lender. If the holder of an interest in the property does not pay the entire debt on its Law Day, it forfeits all rights to the property, and the next prior creditor has the opportunity to acquire legal title to the property by paying the mortgage lender in full on its Law Day. Each defendant may take title to the property free and clear of those defendants whose Law Days have already passed, but would take subject to the interests of any defendants whose Law Days have not yet run (as well as any interests senior in priority to the foreclosing mortgage lender). This process continues until the mortgage lender is paid in full or, absent payment, the mortgage lender takes legal title to the property by filing a certificate of foreclosure on the land records.
The assignment of Law Days is at the Court’s discretion, but cannot be sooner than 21 days from the date of the judgment hearing due to a 20-day appeal period. In most instances, the Law Days are set between 30-60 days from the date of the judgment hearing. You as the borrower and owner of the house are assigned the first Law Day. The Court may be willing to set a longer Law Day if you can show that there is a very good chance you will be able to sell or refinance your house or if you need extra time to move because you have children who need to finish the school year or because you have a disabled family member.
Because there is no chance for you to realize any equity (the difference between what the property is worth and how much you owe) in your house in a strict foreclosure, if you believe that you do have significant equity in your house, you or your attorney should object to strict foreclosure and file a Motion for Foreclosure by Sale.
Foreclosure By Sale
In a foreclosure by sale, the Court will set a sale date, approximately 60 to 90 days from the date of the judgment hearing. Typically, foreclosure sales are held on Saturdays at the location of the property. The Court will assign a local licensed attorney (called the “Committee of Sale”) to coordinate the sale and will empower the Committee to post a sign on the property, schedule advertising and legal notice in a local newspaper, obtain liability insurance for the date of sale, coordinate an updated appraisal and title search of the property and conduct the auction on the date of the sale. Committees can charge upwards of $2,000 in expenses and $3,000 in fees for conducting the sale.
On the sale date, the Committee will auction off the property to the highest bidder. Usually a deposit of 10% of the property value is required from the successful bidder unless the successful bidder is the foreclosing mortgage lender. The proceeds of the auction first go to pay the costs of the auction, then to the mortgage lender and then to pay off any other liens on the property. If any money is left over, it goes to you.
After the foreclosure auction is concluded, the Committee will file its Motion for Approval of the Sale, Deed, Fees and Expenses. The Court will schedule a hearing on these Motions and issue its ruling thereon. You have an opportunity up until the date the Court approves the sale to payoff the judgment with accruing interest, attorney fees, court costs and Committee fees and expenses.
If the mortgage lender is the successful bidder at the auction, which is most frequently the case because it credit bids the amount of debt it is owed, and the Court approves the sale, then the mortgage lender must pay the Committee fees and expenses in order to obtain the Committee’s Deed. Once payment is received, a Deed will be provided by the Committee and recorded on the land records in which the foreclosed property is located. This will essentially conclude the foreclosure action and the mortgage lender will now be the record title holder of the property.
If a party other than the mortgage lender is the high bidder at the auction and the Court approves the sale, then the Committee will forward the successful bidder’s 10% deposit to the Clerk of the Superior Court. The successful bidder must pay the balance of its winning auction bid within 30 days of the approval of the sale by the Court. The deposit and remaining balance of the winning bid are collectively referred to as the sales proceeds. Once the Committee receives the balance of the sale proceeds, the successful bidder will be provided with a Deed by the Committee and will become the record title holder of the property. The successful bidder takes the property subject to outstanding property tax liens and other liens with a higher priority than the foreclosing mortgage lender’s lien. Failure to pay the balance of the sales proceeds usually results in forfeiture of the deposit.
The Committee will then forward the balance of the sales proceeds to the Clerk of the Superior Court. In order to obtain its share of the sales proceeds, the mortgage lender must file a Motion for Supplemental Judgment. Upon receipt of the Motion, the Court will schedule a hearing. Upon approval and following a 20-day appeal period, the Clerk of the Court will issue a check to the mortgage lender. Should there be any additional sales proceeds left, you and each other defendant must file a Motion for Further Supplemental Judgment. The Court will determine the amounts to which you and each other defendant are entitled.
Because the costs of the auction, additional attorneys’ fees and appraisal costs will come out of the foreclosure sale, if you have little or no equity in your property, you should NOT seek foreclosure by sale.
It is recommended that you vacate your house prior to the Law Date or Sale Date. If you do not, the person who acquires title to the property can change the lock to your house making further entry difficult. That person also may ask the Court for an order of Ejectment. An Ejectment will allow that person to get a state marshal to throw you out and remove all of your possessions from the property. The notice of Ejectment can give you as little as 24 hours to vacate the premises and remove your possessions. On the day and time in the notice of Ejectment, the state marshal will arrive with movers who will remove your possessions and place them in storage. The town has the right to auction off your possessions if you do not claim them within 15 days. Storage fees are likely to apply.
When a lender forecloses on a mortgage, whether by strict foreclosure or by sale, if the appraised value or sale price of your home is less than the total debt you owe the mortgage lender (including principal, interest, legal and other allowed fees), the balance owed is called a Deficiency.
Example: If the total debt you owed was $200,000, but your house only sold for $150,000 at the foreclosure sale, your deficiency would be $50,000.
In the case of a strict foreclosure, the mortgage lender may seek a deficiency judgment against you within 30 days after your Law Day. The Court would determine the amount of the deficiency based upon the appraised value of the house and the total amount you owe to the mortgage lender. You have a right to argue against the proposed amount of the deficiency at the deficiency judgment hearing by presenting your own appraisal to counter the mortgage lender’s appraisal. You can also testify about the value of your house.
In the case of a foreclosure by sale, if the auction brings in less money than your total debt to the mortgage lender, then the Court will also enter a deficiency judgment. However, if your house sold for less than its appraised value, the mortgage lender will have to credit you with one-half the difference between the sale price and the appraised value.
Example: Assuming the total debt you owed was $200,000, but your house only sold for $150,000 at the foreclosure sale, your deficiency would be $50,000. If the appraised value of your house was $180,000, you would be credited with one-half the difference between the sale price ($150,000) and the appraised value ($180,000), or one half of $30,000, which is $15,000. Your deficiency would be $50,000 less the $15,000 credit, or $35,000.
Please note that if you sell your house through a short sale or transfer the deed to the mortgage lender via a deed in lieu of foreclosure, the value of the short sales proceeds or the house may be less than the total amount owed the mortgage lender. A deficiency would still exist under these circumstances and the mortgage lender could pursue a deficiency judgment against you in court. Typically, however, all or most of the deficiency is explicitly forgiven by the mortgage lender upon completion of the short sale or deed in lieu.
Foreclosure Eliminates Liens, Not Debts
Following a first mortgage foreclosure, assuming no defendant paid off the mortgage debt, all junior liens (including a second mortgage and any junior judgment liens) would be extinguished. The recorded liens would be removed from the property records. Notwithstanding the elimination of the liens, the second mortgage debt and creditor’s judgments survive. You still owe those debts even though those creditors no longer have a security interest in your house. If a creditor had been paid with part of the proceeds of an auction sale of your house, you would remain liable for the debt to the extent that the sale proceeds did not cover the full amount of the lien.
The holder of the first mortgage lender’s deficiency judgment, the holder of the second mortgage promissory note and the judgment creditor can all still pursue you for payment following the foreclosure of your house by garnishing your wages, levying your bank accounts or by placing liens on your other assets.
Mediation is a process by which an impartial state mediator assists you and the mortgage lender in negotiating a mortgage modification that keeps you in your house. The mediation period lasts for seven months following the return date, but it can be extended. You get to remain in your house during this period. During the “pre-mediation” portion, the mortgage lender is required to disclose information to you and the mediator about your mortgage and what it requires from you to obtain a mortgage modification. In the first meeting with the mediator, which both homeowners must attend, the mediator will explore whether a mortgage modification is possible for you based upon the mortgage lender’s requirements. Following that meeting, you will be required to submit a mortgage modification application to the mediator and the mortgage lender.
Following your submission of the mortgage modification application, “real mediation” begins. Both homeowners are required to attend the first session of “real mediation” as is counsel for the mortgage lender and a representative of the mortgage lender via telephone. During this and subsequent mediation sessions, the mediator will seek to resolve issues with your application, understand reasons why your historical financial information may not represent an accurate picture of your future financial capability and otherwise seek to determine whether you have the financial capability to afford a modified mortgage. There are a number of ways a mortgage may be modified including extending the amortization period to reduce monthly payments, capitalizing unpaid interest and principal arrearages and taking the excess of the current mortgage over the fair market value of the property and creating a new second mortgage in that amount that would be due at the end of the first mortgage.
At the conclusion of each mediation, the mediator will issue a report summarizing what occurred in the mediation. If the mediator is successful in modifying the mortgage, the foreclose case will end. If the mediator is unsuccessful, the foreclosure case will continue.
Special Protection for Unemployed or Underemployed Homeowners
If you were unable to make mortgage payments on a first mortgage because of involuntary unemployment or underemployment, you can apply to the Court for a postponement of the foreclosure for a maximum of 6 months. To be eligible for this protection, you must have lived in your house as your principal residence for at least two years, and not had a foreclosure action commenced against you in the past seven years. In addition, you must be unemployed or underemployed. You will be considered underemployed if the aggregate earned income of all the homeowners during the 12 months preceding the foreclosure was under $50,000 and less that 75 percent of the average aggregate annual income during the two years immediately preceding the 12 month period.
The Court will decide whether you are eligible for special protection after considering whether you will be able to make timely payments on a restructured mortgage when the postponement period ends and whether the mortgage lender or a subordinate lien holder will be substantially prejudiced by the restructuring of the mortgage debt. If the Court determines that you are eligible for special protection, postponed mortgage payments and interest on those missed payments will be added to the principal balance of the loan, subject to certain limitations.
The mortgage lender is required by law to inform you in the foreclosure Complaint of your right to these protections. If you believe that you are eligible for protection from foreclosure because of unemployment or underemployment, you must file an application with the Court within 25 days of the return date. Note that if you want to assert a defense to the foreclosure action, you may do so only after the application for protection is denied. If your application is approved, you will not need to file any defenses.
If you are involuntarily unemployed and want financial advice, you can contact the State of Connecticut toll free hot line at 877-472-8313, a HUD Approved Housing Counseling Agency at 800-569-4287 or Homeowner’s HOPE, a service of the nonprofit Homeownership Preservation Foundation at 888-995-4673.
Emergency Mortgage Assistance Payment Program
If you have suffered a financial hardship due to circumstances beyond your control you may apply for emergency mortgage assistance payments through the Connecticut Housing Finance Authority (CHFA) to help you get caught up on missed mortgage payments. Among the factors CHFA will look at is whether there is a reasonable likelihood that you will be able to resume full mortgage payments in the future. If you think you might be eligible, contact CHFA at www.chfa.org
Homeowners Association Foreclosures
If you live in a town house or condominium that is part of a common interest community, you probably pay monthly dues and assessments to a homeowners’ association (HOA). If you fall behind in paying those fees, a lien may automatically attach to your property that could lead to foreclosure. If you are delinquent on your HOA fees and assessments by at least two months, the HOA can foreclose even though you are current on your mortgage payments. An HOA’s lien is entitled to super priority over a mortgage lender’s lien in an amount equal to six months worth of HOA fees and assessments, plus the HOA’s costs and attorney’s fees in enforcing its lien.
Debt Forgiveness and Taxation
If a lender forgives all or a portion of any deficiency or other debt, the amount of the forgiven debt will be taxable income to you, unless a specific exception applies.
How Bankruptcy Can Help
Filing for bankruptcy protection in Chapter 13 or Chapter 11 can stop a foreclosure and provide time for you to develop a strategy to keep your home. If you propose a repayment plan in Chapter 13 or Chapter 11 that demonstrates that you will have enough future income to make up the missed mortgage payments over the life of the plan (usually five years), while staying current on your regular monthly payments, you generally will be able to keep your house.
Although filing for bankruptcy protection in Chapter 7 will invoke the automatic stay and provide a brief respite from the foreclosure proceeding, unless the mortgage lender is voluntarily willing to modify your mortgage, nothing prevents the mortgage lender from going to Bankruptcy Court to lift the automatic stay to resume the foreclosure proceedings in state Court.
If you are unable to afford the missed mortgage payments and cannot negotiate a short sale or give your mortgage lender the deed in lieu of foreclosure, you may prefer to surrender your house to the mortgage lender and walk away from the problem. You may still be in debt to your lender following surrender and foreclosure if the total mortgage debt exceeds the value of the property. The way to eliminate this deficiency is through filing for bankruptcy protection in Chapter 7.
In addition, should forgiveness of mortgage or other debt result in your realizing taxable income and no other exception applies, filing for bankruptcy protection may eliminate the taxable income.
How Balbus Law Firm Can Help
Balbus Law Firm is committed to informing homeowners facing foreclosure about their options and assisting them in eliminating or reducing their unmanageable debts.
When you work with Balbus Law Firm, you work with a firm that has the comprehensive knowledge and flexibility to file your bankruptcy case in the most advantageous bankruptcy chapter, whether it is Chapter 7, 11, or 13.
To discuss bankruptcy in a free initial consultation call 203-286-4121 or e-mail us.