Is it Possible to Reverse a Foreclosure?

          The short answer: Maybe.  If the foreclosure was conducted improperly then there are limited remedies, but only in a few rare situations can a reversal be granted. And those remedies are not statutory based.  Our office has successfully reversed a foreclosure.  In that instance the homeowner received a letter from her servicer stating that they would not foreclose on her property within the next 20 days because she was in a modification trial period.  The letter also stated that if foreclosure proceedings had begun (which they had) they would be ceased.  Well our client relied on this letter and decided not to file a bankruptcy, which would’ve ceased the foreclosure.  After the foreclosure the bank tried to evict her but we showed up to court with that letter and the bank agreed to reverse the foreclosure. 

           There is also another way in which a foreclosure can be reversed, but this is more of a technicality.  For any real estate to change owners, the sale must occur in writing.  It is not possible to transfer real property without a writing.  Thus a foreclosure is effectuated in writing through a Trustee’s Deed.  Well, in Tennessee, foreclosures occur as an auction at the court house steps.  The problem is that just because a winner was selected at the highest bid and the gavel struck does not make the property sold.  It must be conveyed through a Trustees Deed.  Many foreclosures result in the lending bank buying the property themselves for the amount of the loan.  When that is the case there is usually no hurry to prepare a Deed and it may take them 7 days, 10 days, or 2 weeks to sign a Trustee’s Deed.  If that is the case and a bankruptcy is filed before the Trustee’s Deed has been signed, then the sale never actually occurred.  So while technically the foreclosure was not reversed, it was still prevented after a winner was selected and “sold” during an auction.

What is the Automatic Stay?

The Automatic stay is one of the primary reasons that people file for bankruptcy. The automatic stay is a legal protection that is given to a debtor when he files bankruptcy. No court order is needed to create the stay, hence the term “automatic.” The instant a petition is filed, federal law makes it illegal for creditors to attempt to collect the debts of a debtor. If a creditor knowingly takes action against the debtor then the creditor will be liable to the debtor for any damages, attorney fees, and costs incurred against the debtor, plus possible punitive damages if the violation is egregious.

Therefore, the automatic stay stops all foreclosures, repossessions, law suits, levies, harassing calls, letters, etc. Furthermore, if a car has been repossessed filing bankruptcy within 10 days can actually allow a debtor to get the car back.

Now some restrictions may apply depending on the debtor's individual circumstances, but the automatic stay is a great benefit to filing bankruptcy.

The Automatic Stay and Creditor Harassment on Surrendered Property

       One of the most important and influential aspects of Bankruptcy is the Automatic Stay.  The Automatic Stay is just that, automatic.  As soon as the bankruptcy petition is filed, all of a debtor’s creditors are stayed (prohibited) from making any attempts whatsoever to take any property, money, income, etc., from the debtor.  This means that all lawsuits, phone calls, repossessions, foreclosure proceedings, EVERYTHING must immediately stop otherwise the debtor can receive money damages from the creditor for a stay violation. 

        Now just focusing only on Chapter 13 cases, a creditor does have the right to ask the court for permission to be relieved from the stay (Motion for Relief from Stay), for instance, in order to repossess a car that the debtor is not paying for or is uninsured.  Furthermore, many times in a bankruptcy a debtor will voluntarily surrender a car or home to the creditor. When this happens, the creditor usually does not need permission from the court to recover the collateral, as such permission is typically included in a confirmation order.  Here is an example from an actual order:  “The plan surrenders the debtors interest in collateral to the creditors listed below. The automatic stay has been lifted to allow these creditors to repossess the collateral upon which they have liens.”  Well when the stay is lifted, does that mean the creditor can begin harassing the debtor again?  As counsel for debtors, we say no; however, there are creditors who say yes!  While in my research I have yet to find a case that addresses this particular issue, I found many cases that are analogous. 

       For example, a reaffirmation agreement is a voluntary agreement between a debtor and creditor that allows a debt to be exempt from discharge and remain in effect after the bankruptcy (This is done for debtors who wish to keep cars or houses).  It has been held by many bankruptcy courts that a creditor can contact debtors about such an agreement since both parties have this right. However, litigation soon followed because the creditor was trying to harass the debtor into such an agreement.  Courts have held that while a creditor is allowed to contact the debtor for this purpose, the creditor cannot do so through harassment, threats, or coercion, as this defeats the purpose of the Bankruptcy Code protections.

       Usually, when property is being surrendered, the discourse between the creditor and debtor is tranquil and they arrange a time for the surrendered car to be picked up or a time limit for the debtor to move out of a house.  There is currently a case going on right now where the debtors moved out of their house, which was surrendered, two years prior but are still getting harassing and threatening phone calls about transferring the property.  Though the stay had been lifted, the debtors are contending that like reaffirmation agreements, surrenders cannot be coercive.  It will be interesting to see how the case turns out.

Pitfalls of Bank's Pilot Mortgage Forgiveness Program

       Recently a large national bank has announced that it is launching a pilot program that will allow some homeowners facing foreclosure stay in their homes. The program would allow homeowners, who are behind in their mortgage, deed the property back to the bank and then have their mortgage debt forgiven. At this point the former homeowner would then lease the property from the bank at a lower rent than the monthly mortgage payment. The tenant would also not be responsible for the property taxes or insurance.

       This program benefits the bank for a few reasons. The bank saves the expenses it costs them to do a foreclosure (The average foreclosure takes nearly two years to complete, according to Florida-based Lender Processing Services, and costs nearly $78,000, according to a Congressional estimate.). However, the bank will face some additional costs/ responsibilities. The bank will bear the costs of property taxes, insurance, maintenance, land scaping, repairs, security, waste disposal, and other property management requirements. Furthermore, the bank would need to employ an attorney to oversee any evictions that would occur.

       For the property owner this may seem like a good way to remain in his home, however there would be some negative consequences. For instance, forgiveness on a debt is considered by the IRS as taxable income, so the homeowner could be left with a very large tax bill after a $150,000 mortgage is forgiven. Moreover, the former homeowner could be removed from the property a lot faster than if he owned the home. If the property were being foreclosed, the procedure could a couple of months and the homeowner has the protection of the Bankruptcy Code, where filing bankruptcy would cease the foreclosure and allow the debtor to make up any missed payments. However, with the former homeowner now renting his house, he can be evicted from the house in about two to three weeks if he were to miss a rent payment. Also, the Bankruptcy Code is very favorable to landlords. Remaining in the house during a bankruptcy does not alleviate the tenant's responsibilities from paying rent, while a homeowner can remain in the home a lot longer without making a mortgage payment; the post-petition rent that comes due during the bankruptcy will also not be discharged, and the tenant can later be sued for it, unlike a homeowner.

       Though it seems like this program could help the bank and homeowner, it may also be just substituting one problem with another.

Prepetition Attorney Fees Collected Post Petition Violate Automatic Stay

       There is a common practice that has long taken place in the Chapter 7 bankruptcy realm which attorneys and debtors need to be aware of has some problems.  The practice is the acceptance of attorney fees after the debtor's bankruptcy petition has been filed and case commenced.  A majority of courts, including the 6^th Circuit, have held that the requiring payment of attorney fees post petition is a violation of the automatic stay in section 362 of the Code.  Despite the 2009 Tennessee decision, I still see this practice continuing.  Maybe its because more young attorneys are entering the bankruptcy field and are unaware of this 2009 case, or local attorneys just did hear of it (The Nevin Law Firm is based in the Middle District of Tennessee in Nashville while the decision was in the Eastern District of Tennessee of Knoxville.)  No matter the reason, this practice openly continues despite the Bankruptcy Court's obvious using one law group as an example.

       The far reaching consequences of this decision, and the rich analysis of the Bankruptcy Code, make the case worthy of a law review article; however, tempted as I am to write a full-blown review of this decision, I will keep this article brief.

       The United States Bankruptcy Court of the Eastern District of Tennessee held that an agreement to pay attorney fees for the bankruptcy case, entered into prepetition, is a prepetition debt and is therefore dischargeable.  They also held that where an attorney makes the arrangement not to be paid in full upfront before filing the case creates a conflict of interest because the attorney then becomes a creditor of their own debtor-client once the case has been filed.  Moreover, any attempt to collect the unpaid balance from the debtor, the court held, would violate the automatic stay of section 362 and be cause for the debtor's own attorney to be issued sanctions by the court which would include a disgorgement of the fees already paid prepetition. 

       The court had multiple problems with the law group in this specific case including:  (1) the fact that the attorneys did not disclose to the client that such an agreement could at least potentially be dischargeable (since this was a case of first impression);  (2) the attorneys' disclosure to the court was that they had been paid in full prepetition, when in fact that was not true;  (3) after post-dated checks from the debtors had been returned, they made collection phone calls and sent collection letters. 

       However, the court did note that there are acceptable ways to receive proper compensation for attorney fees, for both post and prepetition payments.  The following are such options, which have been employed by other courts, and appear to fall within the scope of potential and allowable solutions: “(1) requiring Chapter 7 debtors to pay flat attorney’s fees in full prior to filing; (2) revising retainer agreements and expressly designating pre-petition services, which are paid pre-petition, and post-petition services, which shall be paid post-petition; or (3) accepting payment by third parties.”

       Therefore, if you are a debtor and your attorney is asking for post-petition payment, you might have found a way to have free legal service.  Attorneys! Make sure you get paid up front in full before filing the case! If, however, a debtor is in a bind and needs a case filed ASAP, then take either of the two following actions.  First either have a family member or friend of the debtor sign the fee agreement as a surety, since they would not fall under the protection of the Bankruptcy Code for your debtor's case.   

       Or, second, write two separate contracts.  The first contract should specifically delineate prepetition services, duties, and disclosures with fees scheduled next to each.  State specifically that any prepetition payments are for only the delineated services and that this contract does not bind the attorney to perform any post petition work on the case.  After filing the case, sign a second contract with the debtor which is for postpetition services.  Specifically delineate what those services are and how much you charge.  Also make full disclosure to the bankruptcy court of your fee arrangement on Form 7 Statement of Financial Affairs and the Compensation Statement of Attorney for Debtor. You must also disclose to your client the reason for the separate contracts, explaining to your client the automatic stay implications and the attorney fees. 

To read the case in full please see In re Waldo, 417 B.R. 854.

For more information, visit www.TheNevinLawFirm.com