Consumer debt is at an all-time high. What’s more, record numbers of consumers are filing for bankruptcy. Sometimes when money is borrowed, lenders will require that loans be secured. Subsequently, from time to time even with the best of intentions, the financial responsibility for payment on a secured loan cannot be met on time. When this happens, foreclosure or repossession could become a necessary option in order for lenders to recoup their investment.

This means that if the loan is defaulted or the borrowers stop repaying the loan, according to the Credit (Repossession) Act of 1997, the lender can foreclose on the loan or repossess the property placed as security against the loan and sell the property to recover the debt.

These secured loans include hire purchase deals (the security for the loan is the property that was bought with the loan) or personal loans secured by a possession that is already owned by the borrower.

Foreclosure is one of the most serious credit issues that lenders fear. Creditors treat this worse than tax liens, late child support payments, automobile repossessions, or in some cases, even bankruptcies.

Foreclosure

When lenders foreclose, it means that lenders have terminated mortgage contracts (usually real estate mortgages) because borrowers have defaulted on contracted repayments or in some way have breached the mortgage contracts.

This results in property that had been placed as security against loans becoming the possession of the lenders—repossession—allowing the lenders to sell the properties in order to recover the money they originally loaned.

A breach exists when borrowers fail to make repayments of principal and interest when such repayments are due; when mandatory insurance, taxes, or assessments are delinquent; if the balance of a note is due, failure to make the principal payment plus interest by the maturity date; or transferring the property without the lender’s approval.

Because a foreclosure will stay on borrowers’ credit files for a minimum of seven years and perhaps as long as 10 years, if borrowers fall behind on mortgage payments, they should make every effort to sell the house even if it has to be sold at a loss.

If the loan is an FHA-guaranteed mortgage, the borrower can call the local or regional U.S. Department of Housing and Urban Development (HUD) and ask for a list of HUD-approved counseling agencies in the area.

Borrowers should then contact the lender and tell them that they are under the counsel of a HUD-approved counselor. This may avert impending foreclosure proceedings. However, as of April 26, 1996, HUD can no longer provide any direct assistance to homeowners who fall behind on their FHA mortgage payments.

If the loan is a standard Fannie Mae/Freddie Mac loan, lenders must notify borrowers of their intent to foreclose 30 days prior to filing a Notice of Default. FHA-guaranteed and V.A.-insured loans are allowed slightly more time. Within 10 business days after notifying the borrower of its intent, the lender should record the Notice of Default.

Within 10 days after the Notice of Default is recorded, notification must be mailed by certified/registered mail to the borrower or current owner and those who have recorded a request for a copy of the Notice of Default, informing them that the Notice of Default has been recorded.

After the certified/registered letter has been sent, informing the recipients that the Notice of Default has been recorded, there is a mandatory 30 day to three-month waiting period, depending on the regulations of the state and county where the property is located, before the foreclosure trustee can publish a notice of sale of the defaulted property.

After the waiting period has expired, a sale date is set and is advertised (in the state of Georgia the sale date notice must be advertised four times for four consecutive weeks in a local paper—the first ad must run at least 20 days before the scheduled sale date) giving the time, date, and exact location of the foreclosure sale.

Prospective bidders are unable to view the inside of the property unless the property owner consents. Generally the sale of the property will take place four to six weeks after the publication period has ended. In addition, some counties require that a notice of sale be posted on the property and a public place at least 20 days prior to the sale.

If the IRS has recorded a federal tax lien at least 30 days before the scheduled sale, they must be notified at least 25 days before the sale.If the loan is FHA-guaranteed or V.A.-insured, the sale date must be set to allow time enough for them to provide bid instructions.

So, generally from the time the notice of intent is sent by the lender to the owner until the close of the sale, it will take approximately four to five months, during which time the owner usually has the right to satisfy the lender’s requirements (which will most likely also include foreclosure fees and attorney’s fees), thus nullifying mortgage foreclosure and repossession of the property.

However, before borrowers allow secured property to go into foreclosure, they need to exhaust all alternatives. Two such alternatives to which lenders must agree before these options can be pursued are a Pre-Foreclosure Sale or a Deed-in-Lieu of Foreclosure.

Pre-Foreclosure Sale

This involves the sale of a property in which the lender accepts proceeds that are less than the amount owed on a defaulted mortgage and agrees to issue a satisfaction of mortgage.

Deed-in-Lieu of Foreclosure

This involves the borrower transferring the deed to the property to the lender in lieu of foreclosure. This enables the borrower to avoid adverse consequences associated with foreclosure. The major disadvantage to taking a Deed-in-Lieu of Foreclosure is that any other mortgages, such as home equity loans or second mortgages, will not be satisfied.

Although it certainly is not recommended as a first alternative, another option that will immediately stop foreclosure proceedings is for the borrower, a tenant who has a recorded lease, or the beneficiary of a second mortgage deed of trust to file a petition of bankruptcy.

Repossessions

If people have borrowed for specific assets and the assets are security for loans, creditors have the right to repossess the assets according to the terms of loan agreements. Repossessions, while severe, are not as detrimental to borrowers’ ability to buy or refinance a home as a foreclosure. However, repossessions will severely damage borrowers who are seeking second mortgages or equity lines of credit. These lenders view repossessions as the equivalent to foreclosures.

With rare exception, agreements that use specific assets as security give creditors the right to repossess, without written notice, if loan payments are delinquent. Most states, however, require a written notice of intent by lenders, stating that they are taking the borrower to court for collection of delinquent payments, and a waiting period of at least 30 days. Although in most states lenders have the right to send a notice of intent to repossess on the second day of delinquency, most lenders will wait for at least 30 days.

If after the waiting period, borrowers have not notified their lenders to make payment arrangements or if they do not appear in court, the judgment award will be automatic and repossession can be immediate without further notification. In order to redeem property after it has been repossessed, the creditor can demand payment in full. If the debtor does not pay, the creditor may choose to sell the property and apply the proceeds against the outstanding debt.

The difference between the loan balance and the sale proceeds is the deficiency, and the creditor has the right to bill the debtor for that amount, plus all costs associated with the repossession and sale, or sue the debtor for the amount.

Conclusion

Although foreclosure and repossession are serious problems, if one of those happens, it does not mean that God has forsaken the borrower. As a result of losing property, borrowers will learn a costly, but valuable, lesson on the dangers of surety.

Although borrowers may be able to find loopholes that legally negate their responsibility of having to pay the difference between the amount of the loan and the price the lender received from the sale of the property, they are morally responsible to pay the difference.

When borrowers enter into contracts, they are bound by their word to fulfill its intent. As Psalm 37:21 says, “The wicked borrows and does not pay back, but the righteous is gracious and gives.”

Therefore, once a foreclosure has been finalized, borrowers need to work out a repayment plan for the difference between the amount of the loan and the price the lender receives from the sale of the property.

Borrowers need to be sure the payment plan will fit into their adjusted budgets.

Originally posted 8/5/2011.