This memo written by foreclosure defense attorney Nye Lavalle is making waves around the internet, as it’s been re-posted by foreclosure defense colleagues such as Matt Weidner and Ice Legal. The basic point of the memo is that homeowners shouldn’t rush into bankruptcy court, that they should fight their foreclosure case first (then file bankruptcy as a last resort). I respect Nye, Ice, and Matt a lot, but I respectfully disagree with their take on this issue (hence the title of this blog – Bankruptcy in the Beginning - A Dissent from my Colleagues).
First off, I absolutely agree with the concept of homeowners fighting their foreclosure lawsuit with a bright foreclosure defense attorney. At this point, with all of the foreclosure fraud and the legitimate arguments about a bank’s lack of standing, there should be no excuse for any homeowner not to retain a foreclosure defense lawyer, especially with the low rates being charged nowadays.
My point, simply, is this. In my view, contrary to what the memo indicates, it is eminently reasonable, if not better, for many homeowners, to file bankruptcy FIRST, then defend their foreclosure case afterwards.
Unfortunately, many homeowners, and even some lawyers, incorrectly believe if they file bankruptcy then they automatically and contemporaneously lose their home. Generally, it doesn’t work that way.
Part of the confusion lies in the term “surrender.” When homeowners file Chapter 7 bankruptcy, they often “surrender” the home, which, in layman’s terms, means they’re giving up the home as part of the bankruptcy. The bankruptcy trustee, at that point, has the discretion to do with the home what he/she wants. For instance, the trustee can sell the home to a third party. However, when the home is underwater, as many homes are when homeowners file bankruptcy, the trustees often don’t sell the home – not because they can’t or don’t want to, but because there simply aren’t any buyers. After all, who wants to buy a home when there is a mortgage on the home that exceeds the home’s value? Hence, what often happens is that title to the home remains vested in the homeowner, even after the bankruptcy is concluded. In other words, the homeowner typically still owns the home (subject to the mortgage) even after the bankruptcy is over.
What does that mean? Simple. The homeowner can fight the foreclosure lawsuit in state court, with an experienced foreclosure defense attorney, even after the bankruptcy is over. If that sounds off to you, think of it this way – the homeowner still owns the home, even after the bankruptcy, so the bank has to win a foreclosure judgment against the homeowner to divest the homeowner of title.
Now for the important part.
Why would anyone choose to file bankruptcy first, rather than wait to file bankruptcy at the end of the foreclosure process, as Nye (and others) suggest? Simple. Suppose you file bankruptcy in the beginning of the foreclosure process, your bankruptcy has concluded, and you’re still living in your home, defending the foreclosure lawsuit against you in state court. If you’re able to save money while that case is pending (since you’re not making monthly mortgage payments), then you are entitled to keep that money. It’s yours. By way of example, if you save $500/month for 24 months after the bankruptcy is over while the foreclosure case is pending, that $12,000 is yours to keep. There’s no risk of having to turn over that money to the bank or any other creditors – you’ve already eliminated those debts via the bankruptcy.
Conversely, suppose you fight the foreclosure in state court, don’t file bankruptcy right away, and save money while the foreclosure lawsuit is pending. The same 24 months pass, you save the same $500/month, and then you file bankruptcy. In that scenario, you generally don’t get to keep that $12,000 – it’s an asset which must be turned over to the bankruptcy trustee. (Alternatively, if you don’t file bankruptcy, lose the foreclosure, and a deficiency is entered, you’ll likely lose the $12,000 to the bank.)
In these two scenarios, the conduct was the same – bankruptcy, foreclosure defense, and saving $500/month for 24 months - but by filing the bankruptcy at the beginning of the process, you come out of it with $12,000, whereas by filing at the end, you likely lose that entire $12,000.
By no means does this mean that everyone should file bankruptcy in the beginning of the foreclosure process. For some clients, bankruptcy doesn’t make sense. For others, it’s better to wait and see what happens. However, for many clients, it absolutely makes sense to file bankruptcy at the beginning of the process.
How do you know if you fit into this boat? Generally, I’d say if your income is $50,000 or less, you have little in the way of assets, your house is underwater, you have significant debts (credit cards, deficiency), and you think you can save money while the foreclosure lawsuit is pending, then it makes sense to file bankruptcy early on. Otherwise, you may find that you’ve fought your foreclosure lawsuit and saved money, but lost your foreclosure case, had to file bankruptcy, and had to give up the money you saved (or, if you don’t file bankruptcy, that you’ll lose the money you saved to the bank or other creditors).
I realized, some time ago, that bankruptcy goes hand-in-hand with foreclosure defense. That’s why Stopa Law Firm handles foreclosure defense and bankruptcy. By handling both, I think we give homeowners the best of both worlds, using the tools of foreclosure defense and bankruptcy to best fit homeowners’ needs. Often, the two work hand-in-hand, and I hope these examples illustrate that.