So, when you have been doing Bankruptcy law for 27 years you have had a chance to see a lot of ups and downs in the economy.  Whenever there is economic upheaval, we see a natural increase in the number of home foreclosures.

Normally foreclosures are done in a very up-front way.  I have been on the opposing side of foreclosure companies and banks my entire career, but for the most part, the things we fight about are how much money my client owes, or technical rules about the mortgage.  I have rarely seen a foreclosing company try to “sneak” a foreclosure past the homeowner, so when somebody comes into the office saying that they didn't know about a foreclosure, I get very skeptical.

But recently I've had some folks come and see me with a very strange story.  Their homes were either being, or have been foreclosed on and they were completely unaware that this was happening.  After my initial skepticism, I found out what happened and it is a cautionary tale for anyone who is behind on their home mortgage.

Generally speaking, there are two ways of performing a foreclosure:  a judicial foreclosure (also called a “Sheriff's sale”) and a non-judicial foreclosure (sometimes called a “Trustee's sale”).  The traditional method of foreclosure was the “judicial foreclosure”, which starts out as a lawsuit in the county in which your property is located.  At the conclusion of the lawsuit, the Judge signs an order directing the Sheriff to sell your house at an auction.  There were some problems for the bank with this method of foreclosure.  First, it was expensive because it involved attorneys.  Second, it had a built-in safety feature called a “right of redemption” which basically meant that you could buy your property back from the high bidder at the auction for the same amount that they paid (plus interest).  This was designed to prevent the Sheriff from conducting the sale at 1 a.m. on a Tuesday morning and selling your home to his brother-in-law for $1 because he was the only person that knew about the auction.  You would have six months to pay $1 to the brother-in-law and you'd have your house back.

So, for those reasons about 60 years ago, non-judicial foreclosures became popular.  In this method the bank runs the foreclosure through a (supposedly) neutral third party called a Trustee.  As long as the Trustee followed the statute to the letter, they could sell your house at a public auction.  It was generally cheaper and had no pesky right of redemption to discourage buyers at the auction.  For the most part, Sheriff's sales became disfavored.

Recently, however, Sheriff's sales have become more popular.  The advantage of a Sheriff's Sale over a Trustee's sale is that if the home sells for less than what you owed to the bank, then the bank could come after you for the deficiency, which was something that generally does not occur in a Trustee's sale.

OK, that's the setup, so here is the problem on how the loophole works.  In recent years, many people have gone to government agencies to help them buy their home, usually with some interest rate reductions, down payment assistance, or other incentives to make it easier to qualify for the home.  In some cases, those government agencies (such as DSHS, HUD, VA, & others) have their names attached to the home for purposes of making sure that the homeowner follows through with their requirements for that government program.

Since a Sheriff's sale starts off as a lawsuit (i.e. Bank v. You), in these cases, the government agency is also listed as a co-defendant to the lawsuit.  What has happened in some of these cases is that the attorney running the foreclosure only serves the lawsuit on the government agency in Washington D.C., and does NOT serve the home owner.  Technically, you can get a judgment when only one of the defendants in a lawsuit is served.  The lawyer then takes that judgment and tells the Sheriff to auction the property, and you (the homeowner) never know that it is happening (or in the case of the gentleman that I spoke to today…already happened).

Most people who fall behind on their home mortgage depend on the bank to tell them their options in correspondence, but there is no requirement for them to do so, or to respond effectively to you after receiving that correspondence.  In worst case scenarios, people can file a Chapter 13 Bankruptcy case to stop the foreclosure, and assuming that their financial situation can support it, re-organize their mortgage arrears in a way that allows them to keep their home.

But in this case, if your home was already foreclosed on based upon a State court action that went against you, a Bankruptcy case cannot operate as a de facto appeal to that action, so a Chapter 13 Bankruptcy is useless.  You would have to hire an attorney, go back to State court, and battle the case out there.  This isn't a scenario where most attorneys will take on such a case on a contingency fee basis hoping to get paid later.  Most people will have a hard time finding an attorney who would even take on such a case, and as I stated earlier, as much as a Bankruptcy attorney would want to help, the Bankruptcy Court will not help you out in this situation.

So, what should you do?  If you are a homeowner and you have fallen behind on your home mortgage payments, you need to be pro-active and constantly contact your lending bank to find out what the status is on the loan.  Don't be afraid to call them.  Call them weekly if you can.  Who cares if they say uncomfortable things about the loan being in default?  You need to know if they have given this matter over to an attorney to pursue a foreclosure, and if so, who is that attorney and where are they in the process.

This is your home.  You can't depend on outside people to help you out.  Don't wait for months on a real estate agent or an alleged “foreclosure specialist” to go over your options.  Often times these are investors who are hoping your home goes into foreclosure so they can bid on it. 

If you need help, seek out a professional and experienced attorney early in the process that specializes in mortgage mediation, foreclosure defense, or Bankruptcy law before it is too late.