Of all the many remedies available to a distressed homeowner in a mortgage foreclosure case bankruptcy is one of the most often tried tactics used to try to stop a foreclosure, but it doesn’t always work. More often than not, when a homeowner files for bankruptcy they find that this remedy is only temporary and simply serves to prolong the inevitable.
When a homeowner files for bankruptcy they do so thinking that they can ‘write off’ the underlying debt, and though this is possible if done right many do not know how to do it and neither do the mass majority of bankruptcy attorneys. Since there is a mortgage/deed or trust signed by the alleged debtor and filed into the public land records most homeowners and bankruptcy attorneys fall to the default assumption that this alleged debt is secured by the mortgage/deed of trust. Under such an assumption when the paperwork is filled out they declare the property as “secured” on the scheduling and by doing so place the property on the chopping block for disposal, and this is usually done without further thought or question.
Filing bankruptcy places a “stay” on all attempts to collect on the alleged indebtedness. For the purpose applicable to this article, the term ‘stay’ means to pause, or to put a hold on the collection of the mortgage debt. In order to continue with their collection attempts, the attorneys claiming to represent an alleged secured party creditor (bank) will usually file a “motion to lift stay”, and these motions are usually granted on the presentment of “color of title”. Color of title is not legal title, or marketable title, but the presumption that there is a right held by an alleged secured creditor to collect under the terms of the mortgage/deed of trust.
Bankruptcy schedules are the portion of the documentation submitted to the court that tells the court the disposition of assets including but not limited to cars, credit cards, furniture, a mortgage, etc.
For the purpose of clarification, in bankruptcy unsecured debt such as credit card debt, revolving accounts, etc., can be written of as uncollectible, as where secured debt such as an auto loan, or a mortgage, where the property associated with the alleged debt is put up as collateral the property is then subsequently conveyed back to a secured party creditor.
In Chapter 7 bankruptcy for example on schedule f, the mortgage is usually listed as secured due to the nature of a ‘security instrument’ which means the bank gets the house.
However, by declaring the mortgage as “unsecured” on schedule f, forces the alleged secured party creditor to prove up the adverse claim that the alleged debt is secured. This is usually done by presenting the security instrument to the court as proof of claim. This presentment opens the door for challenge.
Keep in mind that the onus probandi (burden of proof) rests on the shoulders of the claimant. If the homeowner claims that the alleged debt is unsecured, he has to prove his claim, and likewise, when the bank claims the alleged debt is secured by the property he has to prove his claim as well. This begs the question, how does a homeowner prove that the alleged debt is unsecured?
In all states, the public record is the only officially recognized place one can turn to in order to discover who has a right to claim an interest in real property. If a party’s claim of having a right to possess the property is not supported by documentation properly recorded in the public record that party is going to have a hard time proving their claim. This can only be proven by the perfection of a lien.
The burden of the homeowner in this case would be to prove that the documentation is fraudulent or not properly recorded and recorded in a timely manner. In other words, the homeowner would have to prove that the alleged lien was not perfected.
In real property matters, when a mortgage is signed there is a 20 day “temporary” perfection of lien, but if not perfected by the timely (20 days or less form the time of closing) recording of proper instruments, the alleged debt is considered unsecured. See section 9-312 (Secured Transactions) of the Uniform Commercial Code or your state’s equivalent for more details.
If or when a homeowner presents this challenge in regard to their property rights in bankruptcy, the homeowner places a roadblock in front of an alleged creditor that is impossible for the alleged creditor to navigate. If he cannot prove his claim that the property is properly secured to the alleged indebtedness he looses, and the homeowner can then move the court in a separate action to quiet the title in the homeowner. Game over.
That addresses the mortgage/deed of trust, but what of the note? If a homeowner can prove that the note is void as to the holder again, game over. For more information on the note see my article, When is a Negotiable Instrument no longer eligible for negotiation?
There is remedy in bankruptcy if one knows how to walk through this minefield and get to the other side unscathed.