In Pennsylvania, the term “mortgage foreclosure defense” covers a wide range of actions that a homeowner may take to stop or slow down a foreclosure action. Although it is not appropriate in every case, foreclosure defense is sometimes preferable to Chapter 7 or Chapter 13 bankruptcy. Foreclosure defense can buy you time to bring your loan current, sell your home, or make other plans. In many cases, foreclosure defense can lead to a mortgage modification, cash settlement, or both.
Foreclosure defense includes raising legal defenses in answer to a foreclosure action, negotiations with the bank, and more aggressive actions, such as suing the bank. Homeowners may raise any legitimate defense to compel the lender to prove that it has a right to foreclose on their home. Mortgage defense is about using those defenses to force banks to follow the rules and live up to their end of the bargain.
Unfortunately, it is not at all unusual for lenders to foreclose on homeowners prematurely, in error, or without following the proper procedures. Many bank errors are not just technical mistakes but serious violations of the homeowner’s legal rights. In fact, such errors are present in a large percentage of cases. Therefore, homeowners should never just assume that they have no defense to a foreclosure action.
Quick Note: In some mortgage defense cases, the mortgage company may end up paying the homeowner. A foreclosure defense attorney can often negotiate a resolution to a foreclosure case that includes a cash settlement, waiving of a deficiency judgment, mortgage modification, deed-in-lieu of foreclosure, or a combination of some of these items.
In addition to mistakes and shortcuts in the foreclosure process, too many lenders engage in predatory practices in offering loans or make flagrant errors in setting up mortgage loans. Some common bank practices include “robosigning,” losing paperwork, providing inadequate disclosures in violation of the Federal Truth in Lending Act ("TILA"), and even forging documents.
These problems have been compounded by the use of loan servicing companies who have no direct stake in the mortgage and little incentive to work with homeowners. (Many of the homeowners I represent in my Philadelphia area bankruptcy practice tell horror stories about dealing with loan servicers.) Moreover, mortgage loans are often “securitized,” meaning the original bank has sold the loan as part of a bundle to investors. As a result, it can sometimes be a challenge to determine who owns the loan. All of these bank practices lend support to powerful foreclosure defenses.
Quick Note: If you are served with foreclosure documents (a foreclosure complaint, notice of intent to foreclose, etc.), you should speak to a bankruptcy attorney or mortgage defense attorney right away. However, if you did not, do not panic. It may not be too late, even if a sheriff’s sale is pending. In many cases, a default judgment may be overturned. A sheriff’s sale can be reversed in the right case if you act before the deed is filed.
Foreclosure defense is sometimes a better option than Chapter 13 in Pennsylvania, though not always. In part, it depends upon your financial situation and your goals. Foreclosure defense may allow you to stay in your home longer if you are unable to make the regular loan payments for a substantial length of time. This can be particularly useful if you are trying to sell your house for fair-market value or arrange a short sale.
Foreclosure defense may also provide you with a longer period to work out a settlement or even a modification with the bank. In some cases, by defending the action, you can induce the bank to settle on more favorable terms, sometimes even paying you to leave the house before the foreclosure process is complete or offering money that you can use toward a mortgage modification or refinancing.
Chapter 13 bankruptcy is appropriate when you can make the current mortgage payments, but you have to catch up on missed payments. By filing under Chapter 13, you can place the arrearage on your loan into your Chapter 13 plan and pay it over 36 to 60 months. If you have a second (or third, fourth, etc.) mortgage, but the equity in your home is too low to secure the second mortgage, Chapter 13 will allow you to strip that mortgage holder’s lien. In other words, the second mortgage would be paid the same percentage as an unsecured debt, which may be cents on the dollar. However, to get rid of a second mortgage lien in Chapter 13, no part of the lien may be covered by equity.
Quick Note: The importance of the ability to strip off a second mortgage lien in Chapter 13 cannot be understated in this real estate market. Many homeowners find that their homes are tens of thousands of dollars underwater. In such circumstances, it is worth checking to see if the second mortgage can be removed.
It is possible to engage in foreclosure defense after a Chapter 7 bankruptcy, or, in some cases, while the Chapter 7 is pending. Moreover, if you have limited equity in your home, a Chapter 7 bankruptcy before or after a successful mortgage defense may allow you to discharge your other debts while keeping your home.
Although it is not always a better option than bankruptcy, foreclosure defense has helped many Pennsylvania homeowners stay in their homes. However, whether it is foreclosure defense, bankruptcy, short sale, or mortgage modification, it is essential to know that you have options when facing foreclosure. A good bankruptcy attorney will be able to explain when foreclosure defense is a better option than bankruptcy.