Foreclosure is the process by which mortgaged property is sold upon default to satisfy mortgage debt. In Texas, most real estate is financed by you, the purchaser, giving a promissory note and a mortgage (called a "deed of trust" in Texas) to a lender, in return for the money to purchase the real estate. The Deed of Trust names someone, usually an attorney hired by the lender, as Trustee. The trustee technically holds the legal title to your property in trust for the lender. If you fail to make payments, the lender orders the Trustee to sell your property at a foreclosure sale.
Lenders must strictly comply with the deed of trust in conducting a foreclosure. There are also state laws that set out how to properly foreclose on someone. For example, if the property is your principal residence, lenders in Texas must give at least 20 days' notice of their intent to "accelerate" a mortgage, that is, call the entire amount of the promissory note due.
If the lender doesn't comply with the foreclosure requirements, and conducts the sale anyway, they may be liable to you for money damages for wrongful foreclosure. Also, it can affect the marketability of their title, if they do wrongfully foreclose. Therefore, if they've done something that's arguably wrong in the foreclosure process, sometimes they will agree to "reinstate" the loan and let you catch it up in a way that's favorable to you. In certain circumstances, you can file a lawsuit in state court and have a judge order that the foreclosure stop. In certain circumstances, you may be entitled to money damages and attorney's fees.
The Foreclosure Sale
Following the notices required by law, the Trustee then conducts a foreclosure sale on the first Tuesday of a month. It is an auction; people may come and bid for your house. However, usually there are few if any bidders because, most properties that are in foreclosure are in foreclosure because they are worth less than what's owed-- that is, there is no "equity" in the property. They can't be sold for more than the total of the mortgage and the costs of sale, such as closing cost, real estate brokers, fees and the like.
The trustee may also bid on your property, on behalf of your mortgage company. If no bidders appear and bid at least the amount of your mortgage, the trustee will "bid the property in" by bidding a credit against what you owe. The Trustee may bid the entire amount of the debt at the foreclosure sale. If he or she does that, then you owe the lender nothing. Unfortunately, if they bid less than what you owe, you may be sued for the difference, the "deficiency."
Deed in Lieu of Foreclosure
If you don't want to keep the property, perhaps your lender would consider accepting a "deed in lieu of foreclosure", whereby you deed the property to the lender, and the debt is forgiven. In this way, the delay and expense of the foreclosure sale is avoided. However, this procedure is just not all that common in Texas. It's relatively quick and easy for lenders to foreclose in Texas, only taking about 2 months. The fact that your homestead is exempt from seizure by your general creditors does not keep it from being foreclosed upon for non-payment of your mortgage, loans for home improvements, and taxes.
In some other states, a lender wanting to foreclose must file a lawsuit and get a judgment of foreclosure, and there are minimum waiting periods of up to a year prior to a foreclosure actually occurring. Not so in Texas. So, the deed in lieu of foreclosure is not that common in Texas. Warning: if you do consider doing a deed in lieu, review the tax consequences carefully.
Walking Away From the Property
Simply walking away from the property is probably a poor choice. Many people did so without adverse consequences in the 1980's, but lenders, government guarantee agencies and private mortgage insurance companies may choose to pursue "walk aways" today. And, there can be tax consequences to consider.
Filing Chapter 7 Bankruptcy
Another option is to file a Chapter 7 bankruptcy, if you qualify. The "automatic stay" that goes into effect immediately upon filing the Chapter 7 case will temporarily stop the foreclosure. In order to foreclose, the mortgage company must file a motion with the Bankruptcy Court, which takes a minimum of 20-30 days, and can take 2-4 months. Then the mortgage company must re-post the foreclosure sale, which will take another month or so. You own the house until the foreclosure sale, and can of course occupy the house in the meanwhile.
During this time, you may be able to catch the mortgage up, or if you have decided to surrender it, you stop payments and the balance due on the home is discharged or cancelled. This can be an opportunity to gather funds for moving expenses. In fact, many lenders prefer to have you in the property until the actual foreclosure sale, even if you're not making the payments. That's so that there's less likelihood of vandalism, fire and the like.
Keeping the Property
If you want to keep the property, of course an option is to catch up the payments somehow, perhaps through loans from friends or relatives, or extensions of unsecured credit on credit cards. Sometimes the lender will agree to a reinstatement, whether or not there's been an error in the foreclosure process, if you'll make a reasonable offer to reinstate. Believe it or not, the lender doesn't want your house; they want their money, and they want it in the manner in which you agreed to pay it. It's very costly to them to continually have to monitor late payments, partial payments, etc. If you're interested in trying to work with your lender, call their "loss mitigation" or "loss prevention" department, and ask for a forebearance agreement (short term agreement if you can catch up quickly), or a Loan Modification (if you need the entire loan rewritten, possibly with a lower interest rate, longer term, or principal reduction). You may want to use a free, HUD certified housing counselor.
Now, if you can't catch it up, and you can't propose an acceptable reinstatement agreement or loan modification, the preferred alternative for many people is to file a Chapter 13 case under the U.S. Bankruptcy Code. Immediately upon filing, an "automatic stay" order goes into effect, which stops the foreclosure.
By promptly proposing a Chapter 13 plan to catch up the mortgage over a 3 to 5 year period, and resuming the regular monthly payments beginning with the next one due, a Chapter 13 case can allow you to save your home from foreclosure. A Chapter 13 can also help you deal with all of your other debts, including past due homeowner's association dues, income taxes, property taxes, auto finance companies, credit cards, hospital and doctor bills, and the like.
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