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Foreclosure and Bankruptcy in Utah

The thing that drives many people to consider bankruptcy is the threat of loss of their home and the search for how to save their home or at least buy time. In order to understand how bankruptcy affects foreclosure, you need to understand how foreclosure works outside of bankruptcy. Since nearly all home loan foreclosures in Utah follow the non-judicial foreclosure process, I can almost guarantee that this is the process you will be facing with your Utah home, so this article will assume that is the process your bank or other creditor intends to follow. If your bank is following another type of foreclosure process, you can call or e-mail and I will discuss the timelines and procedures and how bankruptcy affects them.

The Foreclosure timeline in Utah

The ultimate purpose of foreclosure is for the bank to be able to sell the property that was put up as collateral for their loan so they can collect. Every non-judicial foreclosure must begin with a Notice of Default (sometimes entitled using the words "Notice of Default and Election to Sell" or similar words). Banks usually do not send out the Notice of Default until you are three or more months behind on your mortgage, for insurance reasons, but nothing prevents them from sending it out earlier or later. It is common practice for the bank to send you a copy of the Notice of Default, but the law requires only that the Notice of Default be recorded against the property at the County Recorder's office.

Once the Notice of Default has been filed, you have a 90 day grace period by law before the bank can notice the property for sale, and then about a month between the notice of sale and the actual sale. The law is quite clear that the creditor cannot do anything to shorten or get rid of this 90 day period. During the 90 day grace period, you have the right to force the creditor to re-instate your mortgage by paying current all of the missed payments, fees, and penalties that the bank has the right to charge under your documents. Under Utah law, once you have cured your default during the 90 day period, the bank must "de-accelerate" the process as though you were never behind.

If you do not cure your default, the bank must issue and publish a Notice of Sale. They must give a copy to you and anyone else on the records of the County Recorder who claims ownership or lien on the property after the date they gave you the loan. They must publish the sale in the newspaper as well, and the whole process takes about a month (usually a little more than a month) to complete. On the day of the sale, in the majority of foreclosures the bank is the only bidder and gets the property. In some cases, an investor bids and gets the property instead of the bank.

How a Chapter 13 bankruptcy can save your home

If you can make your monthly mortgage payments but you have gotten so far behind that you cannot make up your arrears in time to stop the foreclosure sale, Chapter 13 bankruptcy can save your home. The chapter 13 plan stretches your deadline out between 3 and 5 years -- a much better time frame than the 4 months or so provided by state law.

How Chapter 7 bankruptcy affects the foreclosure timeline

A chapter 7 bankruptcy takes about 3 to 4 months from filing to discharge. As soon as a bankruptcy petition is filed, an automatic stay goes into effect that brings the world to a grinding halt while the bankruptcy court finishes its process. If a debtor needs to buy time to stop foreclosure proceedings, there is a usefulness to filing the bankruptcy at any stage of the foreclosure. However, if the bankruptcy is a chapter 7 bankruptcy, the bank will usually file a motion asking the bankruptcy court for permission to continue foreclosing, and in most cases the bank will get that permission in about a month, but they have to re-start at the point in the foreclosure process where they were before filing. This can be useful if, for example, the debtor needs to "reset" a foreclosure sale in order to facilitate negotiations on a foreclosure alternative or buy a small amount of time to cure the default.

How short sale, modification, and other alternative processes affect the timeline

Banks are usually willing to consider several foreclosure alternatives, depending on the value of the property, the amount of the loan, and other factors. Common examples include (1) short sale, the preferred option for most banks, in which the debtor helps the bank by getting a buyer for the property, so everyone can cut out the middleman and skip the foreclosure process; (2) loan modification, in which the bank works with the debtor to make the payments affordable, keeping the debtor on the loan, and (3) deed in lieu of foreclosure, the most classic and simple option, where the debtor simply signs the property over to the bank and skips the foreclosure process that way. Banks are interested in these processes to save costs and/or to convert the property into cash more quickly and effectively, and for no other reason. Debtors have several reasons to be interested. First and most prominent for most debtors, if the bank begins seriously considering a short sale or loan modification offer, it usually puts the foreclosure process on hold, buying the debtor time. Second, the bank may offer the debtor a deal, such as giving up or reducing its right to collect a deficiency after a short sale or deed in lieu, which can be very valuable to the debtor. Third, even if the bank does not offer to get rid of or reduce its right to collect a deficiency, getting the process done faster reduces the attorney's fees and collection costs associated with a foreclosure, all of which the bank passes on to the debtor.

What happens after foreclosure

There are some not-so-obvious things about the process after foreclosure that you may wish to know. They have to do with (1) possession and (2) deficiency collection.

First, possession. Ultimately, if the foreclosure process completes, the property is sold, in most cases to the bank, and in some cases to an investor. However, if the prior owner is still living in the property, the bank or investor still must go through an eviction process to remove the prior owner legally. They cannot simply barge in and throw you out. In many cases, a bank, after completing a foreclosure sale, does not have any interest in spending the money necessary to evict the prior owner for quite some time, because they do not have a buyer lined up to buy the property. In some cases, they actually want the buyer to pay for the eviction, and so the owner may very well continue to live in the property for months or in some cases years. Bankruptcy can slow down such an eviction, but not for quite as long as it can slow down a foreclosure.

Second, deficiency collection. If the property's value was not enough to satisfy the bank's loan, the bank has the right to sue the debtor for the rest. There are two important protections in Utah law for debtors that owe deficiencies. First, the bank must sue the debtor within three months after the foreclosure sale completes, or it loses its right to collect the deficiency. Second, the court, not just the bank, can determine whether the fair market value of the property was enough to satisfy the loan, and if not, how much is left. The debtor has every right to contest the bank's opinion on what the value is (usually by the debtor getting his or her own appraisal). Ultimately, if the debtor is facing the prospect of a large deficiency judgment, the debtor may have to turn to bankruptcy to wipe it clean or force it into affordable payments.

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