Portland Bankruptcy Law Group

The Problem: As the number of foreclosures has skyrocketed in the last two or three years, more and more renters living in the houses or apartment buildings being foreclosed have become victims of the legal dispute between their landlord and the landlord’s bank.  Renters have become the collateral damage of the foreclosure epidemic.

Foreclosure law carefully lays out the rights and responsibilities of the mortgage lender and the home or apartment building owner, but pays virtually no attention to the renters who occupy many of those homes or apartments.  So:

• Renters often have no idea that their landlord had fallen behind on mortgage payments and that their home is being foreclosed.  Many times they find out after the foreclosure sale has occurred and the bank or the new owner serves them with eviction papers.
• Not knowing about the foreclosure, renters pay rent to the landlord after the foreclosure when the landlord no longer has any right to the rent.  Getting the money back from the former landlord is usually difficult if not impossible, and the it is often difficult to recover pre-paid security deposits.
• Landlords sign leases with new renters when the landlords know about an upcoming foreclosure, but do not disclose it to the renter.  The term of the lease can extend beyond the anticipated foreclosure date, when the landlord knows he or she cannot perform under the lease after that time.

Some Solutions:

Both Congress and the Oregon legislature reacted to this problem relatively quickly, with both passing legislation in 2009 to provide the following protections for tenants:

The Federal Response: The Protecting Tenants at Foreclosure Act of 2009

• Gives a minimum of 90 days notice before most tenants would be required to move out, that 90 days starting no sooner than the date of the foreclosure sale.
• Tenants who have leases of a specific length of term are permitted to finish out the term; the exception is if the person who purchased the home at the foreclosure sale intends to live in the home as that person’s primary residence, in which case the tenant is entitled to the same 90 day notice above, instead of to the end of the term.
• To receive these rights the tenant cannot be the same person who has lost the property to foreclosure, or a member of that person’s family.
• Unless extended, this law will expire after Dec. 31, 2012; a bill introduced in the last session of Congress to remove this “sunset clause” did not pass.

The Oregon Response:  2009 Senate Bill 952 and House Bill 3004:

• Written notice of a pending foreclosure now needs to be sent to anyone living in a rental, that is, the notice must be “addressed clearly to any person who occupies the property and who is or might be a tenant.”
• If the tenant has a “fixed-term lease,” he or she must contact the foreclosing “trustee” and provide “written evidence of your rental agreement,” at least 30 days before the proposed foreclosure sale to get the remaining benefits of the new law.  If the tenant has no “fixed-term lease,” and can’t come up with a written rental agreement, the tenant can give other indirect written evidence of a rental agreement, such as rent receipts or cancelled checks.
• Assuming this evidence of a tenant relationship has been established, if the tenant has a “fixed-term lease,” the new owner has to give the tenant 60-days notice to vacate the property.  If the tenant does NOT have a “fixed-term lease,” the new owner has to give the tenant only 30-days notice to vacate.
• Once the tenant has learned about the upcoming foreclosure, the tenant can apply any pre-paid security deposits or “last month’s rent’ to the present rent as it becomes due to the landlord.  But the tenant must notify the landlord in writing of this intention at or before the time the next rent payment is due.
• Landlords of all one-to-four unit properties being foreclosed upon must notify any NEW tenants of the pending foreclosure when they sign the rental agreement.  Or else the tenant can sue the landlord for twice the amount of any actual damages or the monthly rent, whichever is larger, plus recovery of any prepaid rent.

Note that these federal and Oregon laws overlap in some respects.  In many other areas of law where there is a conflict, federal law controls.  But here the federal law specifically provides that any state statutes which give tenants more protection in foreclosure are controlling over the parallel parts of the federal statute.  Also, since the federal law expires at the end of 2012 (unless it is extended), only the Oregon law will be in force after that.

It’s not a great idea to decide to make a major decision in life because “everyone’s doing it.” But that may be a good reason to look more closely at what “everyone” is doing and then decide whether doing it makes sense for you.  This is true even about something as personal as filing bankruptcy.

In 2010, more than 1.5 million bankruptcies were filed in the U.S.  That’s 9% more than in 2009. That means about 1 in every 150 people filed a bankruptcy last year.

Oregon saw an even higher increase:  about 10.2% more people filed bankruptcy in 2010 than in the previous year.

Of the states with the highest increases from the previous year, ALL of the top 6 were in western states, including whopping increases of nearly 30% in Hawaii, and close to 25% in California, Utah and Arizona.

The nationwide increase of 9% is significantly lower than the 30% annual increases for each of the previous three years.  But it still means that the total number of people filing bankruptcy is continuing to climb, although at a slower pace.

The decision whether or not to file a bankruptcy is an intensely personal choice.  It’s personal in two different ways:

• Just as every human being is different, everybody’s financial situation is a little different. Deciding whether to take a step as filing bankruptcy involves looking at your entire financial picture, and at your goals, and deciding the best way to reach your goals in your unique situation.
• Bankruptcy is personal because it is inevitably tied into feelings and ego.  These include feelings of fear, disappointment, exhaustion;  as well as those of relief, hopefulness, and appreciation.

You may well be up against many of the same forces that are encouraging or forcing so many of your neighbors to file bankruptcy.  If you are dealing with those same forces, the wise thing to do is to find out all your options, so that you can make an informed and empowered choice.

In our last blog two weeks ago we talked about major mistakes that many of the mortgage lenders made in the past few years in documenting mortgage loans and foreclosures.  These lenders cut corners and likely broke the law—sometimes in more than one way.  In some cases you may be able to leverage those mistakes into getting your home mortgage lender to give you better terms on your mortgage.  Today’s blog shows how some of the tools of bankruptcy can help you do this.

Changing the terms of a mortgage has traditionally been extremely difficult to do—in bankruptcy court or anywhere else.  Make no mistake, it still is, for a whole bunch of reasons. By way of example, even with many millions of dollars of governmental support, a series of mortgage modification programs have been duds, helping vastly less homeowners than intended.  Because of an intricate web of law and finance, mortgages have generally been a take-it-or-leave-it proposition:  either live with your mortgage terms and hang on to your home, or fail to do so and lose it.

It has taken earth-shattering events in the housing market to change this, even a little bit. Although bankruptcy is still usually not going to be a magic bullet, if used correctly, and in the right case, it may provide just enough help to save your home.  Here are some of the ways it could do so:

1. Bankruptcy buys time. Exactly how much time depends on each situation.  It stops a foreclosure, sometimes only for a few weeks, sometimes for many months or even years.  Your bankruptcy filing can buy time to finish processing a mortgage modification, which usually takes several months to complete.  And it can give you more time to sue or negotiate with your lender for better repayment terms.

2. Bankruptcy immediately eases financial pressure on you. If you need to accumulate funds to pay for an attorney to fight your mortgage lender, writing off much of your debt may be the best way to do so

3. Bankruptcy may be able to get rid of your 2^nd or 3^rd mortgage so that you can finish fighting and negotiating with your 1^st mortgage. The complications of junior mortgages often get in the way of reasonable settlements with your 1^st mortgage.  In the right circumstances a Chapter 13 case can “void” a junior mortgage, often leaving you in a much better position for suing and/or settling with your first mortgage.

4. Bankruptcy often provides a better place to fight your mortgage holder. It is a court specially designed to deal with disputes between creditors and debtors.  The bankruptcy court was early to see some of the abuses by mortgage lenders and has been in the forefront in addressing them.

5. Even if your mortgage holder was not involved in legal shenanigans, the regular bankruptcy laws give you some major advantages, even if you do not need to or decide not to sue the mortgage holder.