A few weeks ago, I wrote on this blog a post entitled “More Homeowners Facing Foreclosure Turn to Chapter 7 Instead of Chapter 13.” In this post, I argued that you should think carefully about whether you want to save a home from foreclosure, especially if the value of that home is less than the debt, or if paying the mortgage and associated costs of home ownership are straining your budget.
Just a few days after publishing this post, the Georgia Supreme Court issued a decision that provides yet another reason to consider Chapter 7 when you are facing a mortgage delinquency. Specifically, the Georgia Supreme Court (and the Georgia Court of Appeals in a prior decision) have ruled that lenders do not necessarily have to go through a court hearing to pursue a deficiency claim when the fair market value of a home is less than the outstanding mortgage balance.
This ruling is bad news for Georgia homeowners for many reasons.
First, you should note that Georgia law provides for “non-judicial” foreclosures. This means that your lender does not have to go to court prior to selling your home on the courthouse steps. In our state the lender need only follow specific notice procedures – such as sending you a letter advising you of the pending foreclosure, and advertising the pending sale date in the official county newspaper where the property is located.
In judicial foreclosure states like Florida, the average foreclosure will take 9 months to a year, start to finish. In Georgia, the foreclosure process can take as little as 37 days.
Because Georgia foreclosure is non-judicial and because the process is so fast, the legislature (so we thought) built in a layer of protection for Georgia homeowners. Georgia Code Section 44-14-161 provides that before a lender can pursue a deficiency claim against a homeowner, that lender must file a special kind of lawsuit called a “Confirmation” demand and appear before a Superior Court judge to present evidence that the foreclosure sale price was the highest possible price and convince the judge to issue a judgment for any foreclosure deficiency.
A deficiency represents the difference between the outstanding mortgage balance and the sale price.
Until the last few years, homeowners rarely had to deal with deficiency issues because home prices in Georgia generally went up year to year, meaning that the fair market value of most homes was at least equal to the outstanding mortgage balance.
Within the last two to three years, however, home values have gone down and it is not uncommon at all to see a foreclosure case where the fair market value of the home is tens of thousands of dollars less than the outstanding mortgage balance. As a result, Confirmation suits have become slightly more common, although they are still rare.
The recent Georgia Supreme Court and Court of Appeals decisions in the River Farm, LLC vs. Suntrust case, however, changes the conventional wisdom. In this case, the Georgia courts held that the lender (in this case, Suntrust) could sue the property owner on the promissory note prior to any foreclosure to get a judgment on the entire outstanding balance. By not foreclosing first, the lender is able to bypass the Confirmation hearing requirement. The lender could then buy the property at foreclosure to get the property back at whatever price it chose (no one but the lender would buy a property at foreclosure that is encumbered by a debt exceeding the value) and then pursue the former owner for a deficiency based on the judgment obtained earlier.
The River Farm case involved commercial property but the principle applies to individual homeowners. We may begin to see instances where mortgage companies file collection lawsuits based on promissory notes first, then foreclose later.
I have previously advised my clients that they may not need to file bankruptcy if their only significant problem is a pending foreclosure because of the unlikelihood that the lender would pursue a Confirmation judgment. Now, I will warn my clients that aggressive lenders may force the issue, and force struggling homeowners into Chapter 7.