With many people struggling to make ends meet in today’s uncertain economy, mortgage payments are becoming increasingly difficult to manage. As a result, many individuals face the prospect of having to give up their home. Oftentimes, the immediate reaction of someone who can no longer afford their home is, “I need to file bankruptcy.”Although bankruptcy may ultimately turn out to be necessary, if giving up your Kentucky home is the only reason for the bankruptcy filing, you may be jumping the gun.
In order to understand why bankruptcy may not be immediately necessary in order to get out from under a mortgage, one needs to understand how the foreclosure process works. In most states, including Kentucky and Indiana, creditors are required to utilize a process called judicial foreclosure. The way it works is this. Once there has been a default, the creditor initiates the foreclosure process by filing a Complaint in the Circuit Court of the county where the property is located. The creditor must then obtain service of the Complaint on the debtor in a manner permitted by law. Once service has been obtained, the debtor then has 20 days to answer the Complaint. The purpose of this is to allow the debtor to assert any defenses that he may have. If the debtor fails to file an Answer to the Complaint, then the creditor gets a default judgment.
After obtaining a default judgment against the debtor, the creditor may then proceed to obtain a sale date. Normally it takes at least 4 months or longer from the time of service of the Complaint until the sale date. On the sale date, the property is auctioned off at the courthouse to the highest bidder. The proceeds of the sale are then credited to the loan, and what is left over, referred to as the deficiency balance, is what the debtor owes the creditor.
If the property sells for enough to cover the balance of the loan, then there is no debt that is owed by the debtor. So until such time that the property actually sells at foreclosure, it is impossible to know for sure how much the debtor will actually get stuck with. So if you owe $150,000 on your mortgage, this does not mean that you personally are on the hook for that amount. If the house sells for $140,000, then you only owe the $10,000 difference.
So before you decide that you need to file bankruptcy solely because your home is going into foreclosure, you may want to wait and see what the outcome is from the foreclosure sale. You may owe less than you think. Now if you have other reasons for filing bankruptcy, such as credit card or medical debt that you can’t pay, then it makes sense to go ahead with the filing. But if it is all about your mortgage, you may want to wait and see what the damages are before pulling the trigger on a bankruptcy filing.