LIENS are claims against real or personal property, which legally attach to property. A lien may be created voluntarily or involuntarily. An example of a voluntary lien is a security agreement when you purchase a car where you give the car as collateral for the car loan. An example of an involuntary lien is one that emanates from a judgment. The winning party in a lawsuit can use the judgment to obtain a lien that attaches to all of the losing party’s properties anywhere in the United States. For this discussion, we will focus on mortgages or trust deeds on real estate such as a house.
Client’s residence has 3 mortgages. The first mortgage is owed to Washington Mutual, now Chase, for $400,000. The second mortgage is owed also to Chase for $100,000. Client bought this property with zero down, 80/20, four years ago for $500,000. When the value increased to $600,000 three years ago, she managed to get a home equity line as a third mortgage. The Heloc line was used to make improvements on the house, to build a pool, and finish landscaping. Thus, she owed $600,000 of mortgages on her residence. Last year, the fair market value of her residence dropped to $300,000, her income was reduced by 10% due to less hours worked, and her husband lost his job, and could not get another one up to now. They tried to modify the first mortgage and did obtain a reduction of $700 from the mortgage payment. However, because the household income suffered a significant reduction, even the reduced mortgage payment did not provide sufficient relief, and client has defaulted on the all-3 mortgages for the last 4 months. Last week, client received a Notice of default with intent to foreclose. What will happen next?
Eventually, client will lose her residence to foreclosure. From the recording date of the default, client has 90 days to cure the default. She may cure the default by paying up the entire default during the 90 days cure period, or she can make payment arrangements with Chase to pay up the default over an extended period of time. If she does not cure the entire default or make payment arrangements during the 90 days cure period, Chase will set a foreclosure sale date after the lapse of the 90 days cure period. The foreclosure sale date is at least 21 days after the expiration of the cure period. During the 21 days, foreclosure sale can be stopped by a bankruptcy. If no bankruptcy is filed during that time, client will lose ownership over her residence on the foreclosure sale date.
Let’s pretend that you bought client’s house for $300,000 at foreclosure. Who gets the $300,000? The entire $300,000 goes to the first mortgage of Chase. Client will not owe Chase the difference of $100,000 for the deficiency on the first mortgage because the foreclosure process that was used was extrajudicial. If the process used was judicial, Chase can still collect the deficiency of $100,000 on the first mortgage, under normal times. But for a foreclosure happening this year up to next year, no deficiency can be had on the first mortgage. What happens to the second mortgage owed to Chase of $100,000? The foreclosure sale did not produce enough money to pay that off, so client still owes Chase the entire $100,000 for the second mortgage. What about the Heloc of $100,000? It also becomes an unsecured debt of $100,000 still collectible. Thus, after losing her house to foreclosure, client will still owe $200,000 of unsecured debt. If the security was lost due to sale or destruction, the security agreement or mortgage is rendered worthless because the collateral is gone, but the promissory note for the loan remains valid.
How does bankruptcy provide relief to client? Chapter 7 wipes out the entire $200,000 unsecured debt to enable client to have a fresh start.
Contact my office if you need debt relief. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published on August 29, 2009 in Asian Journal Los Angeles p. C4 )
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