When you stop paying your mortgage for one reason or another, the normal procedure involves the bank filing a foreclosure lawsuit against you and taking possession of the home. However, a strange phenomenon has been occurring where a bank will begin the foreclosure process but never complete it. This is problematic because, as the listed owner, you are still legally responsible for the property. If you're stuck with a "zombie property," it may be possible to use chapter 7 bankruptcy to encourage the bank to complete the foreclosure action.
Why Banks Become Slow to Foreclose
It may seem counter-intuitive for a bank to abruptly stop pursuing a foreclosure, but it happens more often than you would think. The primary reason a bank may be slow to take control of a property is because the lender would become legally responsible for the home until it is sold. This means the bank will be required by law to keep the home and land in good order, pay property taxes, and deal with all the same issues that plague homeowners.
To many banks, this represents financial loss, since they may be unlikely to recoup that money when they finally sell the repossessed home. Additionally, if the market where the home is located is slow, it may take a long time before the bank can make a sale, resulting in further losses. By avoiding taking possession of the foreclosed home, the bank steers clear of all of these issues while still retaining the ability to snatch the home from the owner when it becomes profitable to do so.
Unfortunately, this causes homeowners to fall into a sort of limbo where they can be kicked out of the home at any moment yet are still responsible for paying all the expenses related to ownership.
Making the Bank Foreclose
If it appears the bank is trying to dodge officially foreclosing on your home, you can try contacting a bank representative and inquire about the issue. Unfortunately, if the bank continues to drag its feet, you'll have to file for bankruptcy.
In chapter 7 bankruptcy, you'll need to add your home to the list of secured creditors. The paperwork will ask what you intend to do with the secured debt: will you reaffirm and continue paying on the debt or will you surrender the property to the creditor? If you choose to surrender the property, the matter will go before the trustee who will determine if there is adequate equity in the home to contribute to your debts. If there is, then the trustee will sell the home to recoup that money. If not, then the debt will be discharged which will absolve you of liability for the mortgage. Once the bank receives notice you are no longer responsible for the bank note, and thus cannot pursue you for any money related to the loan, it may finally complete the foreclosure so it can recoup its losses in other ways.
Unfortunately, there is no law on the books as yet to compel banks to complete the foreclosure process. If you are still in the home, it may be a good idea to continue living in it until the sheriff evicts you. You can also rent the home to others and earn some cash until the bank decides it want to finally take possession of the property. If the home is in a particularly bad area, the bank may not want the home at all and it may be possible to get the property free and clear. It's best to discuss your options for dealing with a zombie home with an attorney like Wade Bettis, J.D., Ph.D., PC to determine the best course of action for your situation.
