Is Bankruptcy Really the Key to Stopping Foreclosure?

by Jason Ostendorf on Jul. 06, 2012

Bankruptcy & Debt Bankruptcy Real Estate  Foreclosure 

Summary: Contrary to popular belief, bankruptcy is not the key to stopping foreclosure for good. One should consult with an actual foreclosure lawyer to investigate whether mortgage fraud occurred, whether the homeowner is entitled to a loan modification, etc.

Given that homeowners facing foreclosure are in a state of financial hardship, many bankruptcy lawyers feel comfortable advising such clients.  Unfortunately, many of these attorneys have no idea how much of a niche practice foreclosure defense has become in recent years.  Given the long-term negative impact a bankruptcy has on a person's credit score, it is important to ask whether bankruptcy is really the key to avoiding foreclosure.

In fairness to bankruptcy attorneys, it is true that filing for bankruptcy will put an immediate stop to foreclosure proceedings.  However, the stop is only temporary.  Homeowners are not looking for a temporary fix, they are looking for a permanent solution.

Seasoned foreclosure lawyers know that in recent years, financial institutions have engaged in wide-spread unethical foreclosure practices.  These practices include filing sham affidavits in foreclosure proceedings, and failing to offer loan modifications when legally obligated to do so.  What these unethical practices have in common is that, increasingly, states are developing case law that allows complete dismissal of the foreclosure proceedings.

Think about it.  A foreclosure, in every state, requires a "default" on the monthly mortgage payments.  A loan modification, however, by its nature negates a default by making the homeowner current.  If a person lives in a state that has recognized through its case law (or where the issue is an open question), and if the person hires an attorney who knows how to properly plead the allegations in foreclosure objections (judicial states), a complaint for injunction (non-judicial states), or an outright lawsuit against the mortgage company and/or its substitute trustees (all states), then the person should be able to not only dismiss the foreclosure, but put a permanent stop to future proceedings (a) if the bank continues to decline modification requests or (b) the homeowner stays current on the modified payments once the modification is granted.

As to false affidavits and other fraud, most states have consumer protection statutes that apply where a mortgage company makes an intentional or unintentional false representation in the collection of a debt.  A sham foreclosure affidavit is a false statement in the collection of a debt.  Once the homeowner files suit and demands a jury, the court should put the foreclosure on hold pending the jury trial -- jury trials are a constitutional right, and the Constitution trumps all.

The legal reasoning behind this tactic is simple.  There are legal doctrines called res judicata and collateral estoppel.  Basically, if a court finds a fact in one proceeding, it cannot be relitigated by the same parties in a later proceeding.  A foreclosure acts as a finding that there is a foreclosure-triggering default.  Foreclosure proceedings do not involve juries, but rather a judge or court makes the decision.  So, if a foreclosure goes through, it deprives a person of their constitutional right to a jury finding (if they file a lawsuit and demand a jury before the foreclosure proceedings end).

Since the Constitution is not a mere joke to be abused by judges, courts must stop the foreclosure pending the outcome of the jury trial (which may take years).  However, most civil lawsuits settle, and consumer protection actions against a bank are no different.  During this time, most homeowners should be able to negotiate a loan modification (and perhaps a significant lump sum payout), which, again, will stop the foreclosure for good.

In sum, many homeowners do not need to endure the negative consequences of a bankruptcy.  Homeowners facing foreclosure should consult with an experienced foreclosure lawyer.

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