Chapter 13 Bankruptcy and the North Carolina Foreclosure Process
One common use of chapter 13 bankruptcy is prevent foreclosure of a home. Chapter 13 allows the owner/borrower to bring the loan current over a period of years and keep his or her house. When does one invoke the power of chapter 13 to prevent foreclosure?
Legally speaking, one could file chapter 13 bankruptcy to resolve a mortgage default as early as day of the first default or as late as the 10th day after the foreclosure sale (in the NC-specific 10 day upset bid window). Practically speaking most people would find sometime in the middle the optimal time for chapter 13 assistance.
NC Residential Foreclosure Process
Non-judicial foreclosures rules the day in the North Carolina residential mortgage arena. As part of the mortgage transaction, the borrower executed an instrument known as a deed of trust, which conveys to a trustee certain property rights, including the power to sell the property to satisfy the debt in event of default. While a legal proceeding is required to foreclose, it is a special proceeding instead of a full lawsuit in front of a judge.
A lender's representatives commence a foreclosure under a deed of trust by filing with the clerk of court a notice of hearing. For a primary residence, NC law (NCGS 45‑102) requires a 45 day notice to be given to the borrower before filing the notice of hearing. This document, which would itemize amounts due and note some foreclosure alternatives, is an important indicator that the lender is serious about moving into foreclosure.
Notice of Hearing
A notice of hearing begins the foreclosure process, and is filed with the clerk of court and served the borrower(s) and owner(s). The notice of hearing would set out a date for a hearing before the clerk of court.
A foreclosure hearing on a deed of trust is conducted as a special proceeding before the Clerk of Court, who is a judicial officer for such purposes. A limited number of facts must be shown to the Clerk, who would then authorize the foreclosure sale to proceed.
Once the lender's representatives have obtained approval to sell the property via the foreclosure hearing, they will advertise and then conduct the foreclosure sale. The sale will be scheduled for a particular day and time at the county courthouse. At the foreclosure sale, it is common that the lender will credit-bid to buy the property, with the intent to later resell it (e.g. as bank-owned real estate). Sometimes, a third-party might bid at or even win the foreclosure sale. Bidding at foreclosure sales is risky business and not as common as one might think.
Upset Bid Period
North Carolina law provides a 10 day period for upset bids after the foreclosure sale. An actual upset bid has to meet certain requirements and triggers a process for determining a final winning bidder. From the borrower's perspective, an important aspect of the upset bid period is that the foreclosing party must wait before finalizing the sale and conveying the property to the purchaser. After the sale is finalized, the new owner could evict anyone in the property through legal process if necessary.
How does Chapter 13 Bankruptcy fit in?
As I stated earlier, chapter 13 bankruptcy can stop the foreclosure process at any point from pre-foreclosure up to the close of the upset bid period. When is the optimal time is a fact-question for any given borrower. A few general observations can be made.
Most mortgage promissory notes allow the lender to recover its foreclosure costs from the borrower or the property. In the context of chapter 13 bankruptcy, this generally means that each time the lender spends money on the foreclosure, the size of the cure payment that will be required in chapter 13 will increase. At each point along the process outlined above, there are costs incurred by the lender--legal fees, filing fees, service costs, and advertising expenses, among others. Filing bankruptcy earlier can remove the need of the lender to spend this money.
If payments aren't being made to the lender (and many times lenders won't take payments in the ordinary course when foreclosure is proceeding), the arrearage amount that must be cured in the chapter 13 bankruptcy is increasing monthly. Even if the borrower can set aside the payment amount each month, there is the matter of interest accruing on the loan as well as the possibility that the accumulation of cash could complicate the calculation of a chapter 13 plan.
Certainty and Peace of Mind
The foreclosure process is nerve-wracking for a homeowner who wants to keep his or her house. In the spectrum of legal options, chapter 13 provides a high degree of assurance that the foreclosure will stop and the borrower will get a chance to catch up the mortgage over as long as five years. In the normal case, whether or not the homeowner can afford the chapter 13 plan payment is the main issue on whether or not chapter 13 will work. Of course, the chapter 13 process is complex, and some cases will have to wrestle with more unusual factual or legal questions on the path toward bankruptcy relief. Generally, a bankruptcy attorney would be able to identify those issues in advance. In any event, chapter 13 bankruptcy allows the borrower to take control of the process and get a chance to fix the mortgage issues.
There's not much change in risk as the foreclosure process proceeds until the end of the process. The close of the upset bid deadline is a firm deadline, and a chapter 13 bankruptcy filed a minute late will be ineffective to provide an opportunity to undo the foreclosure and cure the mortgage default. If a borrower waits to the last minute to retain counsel to file a chapter 13, the bankruptcy process itself might be more expensive or difficult to get started.
The bottom-line is while it isn't necessary to start chapter 13 early in the foreclosure process, starting earlier gives you more flexibility, certainty, and might save you money.
Please note that this post discusses North Carolina specific law. The foreclosure process in each state is somewhat different.