Mortgage & Lien Enforcement or Defense

What is a foreclosure and how does it happen?

A person or  business buys real estate,  a building or other property and obtains a loan from a bank or other person to help finance the purchase. The bank or lender will receive a mortgage on the real estate as collateral for repayment of the loan.

The bank, as a secured creditor,  requires a mortgage or security interest in the property, in case the borrower fails to pay. The purchase agreement contains a clause that allows the creditor to take back the property if the borrower defaults. In some cases, an acceleration clause is included in the agreement, which means the borrower may owe the entire amount if the loan is in default.

If there is a default for non payment, the creditor sends notice of default to the debtor, who is given a period of time,  to cure the default. The owner/debtor can make cure the default by making payment on the loan to bring the loan current, including penalties and interest or the owner/debtor can try to negotiate a voluntary work out arrangements with the creditor. An alternative is for the owner/ debtor to file for bankruptcy protection by formally declaring bankruptcy. If the debtor is not able to cure the default within this time period, the property is seized and sold, with the proceeds going first to the primary lien holder and to others who hold liens on the property, with any remaining balance, if any, going back to the borrower.

 

Some states allow the creditor to place a personal judgment on the debtor for the balance owed after the sale.

What Are the types of foreclosure?

The most common type of foreclosure is judicial foreclosure, in which the sale of the property is placed under the jurisdiction of the court. Some states may allow foreclosure by power of sale, which allows the mortgage holder to sell the property without court supervision.

What is a deed in lieu of foreclosure?

In some circumstances, the creditor may agree to take the deed (ownership) of the property back. The transfer of ownership and the fair market value of the property must be agreed to by both parties and negotiated.

Is it possible to prevent foreclosure?

There may be some ways to delay or prevent foreclosure. It each case, it is best to contact a bankruptcy attorney or financial adviser who is familiar with business bankruptcy. Here are some suggestions:

  • Refinance. You may be able to get the loan refinanced, either at the same lender or a different one.
  • Find other financing, possibly from friends, relatives, or investors.
  • Personally guarantee the loan, if you haven't already done so. This puts your personal assets at risk, but it might help if you feel the situation is temporary and it might allow for the possibility of refinancing later and taking off the personal guarantee.
  • File a restraining order, which may temporarily stop the foreclosure (depending on the terms of the purchase agreement).
  • Declare bankruptcy. As stated above, bankruptcy halts the foreclosure temporarily while the court works through the bankruptcy proceedings.

How does foreclosure relate to business bankruptcy?

A foreclosure on business property can occur without bankruptcy if the business owner cannot make the payments on a building or other property. It is common, however, for a business to be in trouble and to declare bankruptcy because it cannot pay any of its bills. Chapter 11 reorganization bankruptcy temporarily halts the foreclosure until the reorganization plan is approved by the court. Chapter 7 liquidation bankruptcy includes the foreclosed property in the list of assets to be liquidated. But bankruptcy does not mean that the debtor can walk away from the property under foreclosure; the property may be sold to pay the debts of the business.

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