Most of us associate buying a home with one of the most significant and special times in life – especially when we’re talking about our first- home! When we first sign the papers for our newly purchased real estate, we’re often overwhelmed by a feeling of accomplishment, sophistication, and stability. These are all great feelings.  But problems happen even in Louisville and you have to consider what are you going to do if a foreclosure is filed.  This is how a Kentucky foreclosure works.

Owning a home comes at a constant monthly cost and sometimes it has unexpected expenses.  It is extremely easy to risk losing your newly bought house. This can be due to several factors such as lack of financial planning, organization, divorce, disability, death or loss of your job. In this article, we explain the foreclosure process for judicial states like Kentucky and examine in detail how it works. We will start by defining foreclosure, look at the types of foreclosure, and dive deeper into the process itself.

By the end of this read, you will be familiar with the stages of foreclosure, how it is processed, and its potential consequences. In other words, prepare to take on a journey that will equip you with enough information to fully understand the foreclosure process. After all, information is a valuable asset and can save you a ton of issues in the future. Remember that you can also download our bankruptcy manual if you want to go really deep on the topic.

Foreclosure defined

Foreclosure seems complex and difficult.  It is, especially if you dig deep into all of the intricacies and segments which can work like a spider’s web. However, foreclosure can be easily understood from a practical point of view.

If we go for the extremely short and straightforward answer, we can say foreclosure is simply a home that once belonged to a homeowner but is now in the process of being sold by the court.  There are rules which require the bank to go through steps to foreclose.  If we look at Investopedia’s definition, we uncover foreclosure is professionally defined as:

“the legal process by which the court or lender takes control of a property, evicts the homeowner and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage, as stipulated in the mortgage contract.”

Kentucky is a judicial foreclosure state.  In Kentucky, it is the court which takes control and sells the property.  As we mentioned earlier, there are several reasons that a home can go into foreclosure. Some of the most common reasons for foreclosure include:

  • The homeowner could have lost their job and is no longer be able to pay off the house mortgage.
  • The homeowner can no longer work due to medical conditions.
  • A job transfer to another state occurs as a result of career development or reorganization.
  • The homeowner is unable to financially cover significant maintenance costs.
  • The homeowner has too much debt or other financial obligations.
  • Potential divorce or disputes with another co-owner of the house.

Who can file a foreclosure.

It isn’t just your mortgage company who can file a foreclosure.  It can be sold for not paying the property taxes or sold by a judgment creditor who attaches the home and sells it.  A judgment creditor may sell it years after attaching the home.  Going into foreclosure is rarely a matter of choice.  The servicer cannot file a foreclosure.  It can only be filed by the person who owns a note.  There are about 130 different defenses such as the statute of limitations.  Believe it or not one lender took 16 years to file a foreclosure.

Homeowners explore every possible way to avoid foreclosure or bankruptcy.  But often a bankruptcy has to be filed to save a home.  You cant trust the bank or the bank’s attorney.  Employees work for the bank, not you.

Not all states use the same foreclosure process. Let’s take a look at the process and the different types of foreclosure.

What is the foreclosure process?

The foreclosure process varies based on location. Every state has its own unique laws related to the process. The notices the lender is required to give vary.  And homeowners have different alternatives when it comes to preventing foreclosure.  The timelines and steps are different for each option such as a short sale, modification, deed in lieu, or Chapter 13.  Each alternative has different benefits, costs and timelines are extremely different.

If you, as a homeowner, fail to make a two months’ mortgage payments, you are risking the start of the foreclosure process. It is advisable to look for help before you become 60 days overdue.  After that point, the mortgage company will refuse payments and it may be too late to do any pre-foreclosure option. If you believe that you may be facing difficulty with your mortgage, speak to a professional to see what can be done.  You may want to delay the length of time it takes to foreclose or you may want to simply catch a foreclosure up by filing a Chapter 13.

The mortgage company or the servicing company may look at this as an opportunity to earn additional fees.  Servicers often collect 40% or more of any late charges and will even delay posting a payment to increase the penalties it collects 40% on.

Types of foreclosure

Foreclosure types vary across different regions of the United States.  Two separate types of foreclosure are interesting to observe.

Judicial Foreclosure the early stage

Kentucky uses the judicial foreclosure system.  The full process is taken care of by the court. This type of foreclosure is legal in all states and takes place when the lender files a lawsuit to sell the property to satisfy the debt.  The mortgage company is also often seeking a judgment against the homeowner.  If the property sells for less than the amount owed the lender files a 1099 and takes a tax deduction and the homeowner gets a tax debt from the 1099 unless he has filed bankruptcy or is otherwise not liable for the debt.  Judicial foreclosure consists of foreclosure by sale and is often called a strict foreclosure.

In a judicial foreclosure, a complaint is filed.  If no answer is filed the lender normally wins by default.  Even if an answer is filed the lender normally eventually wins by summary judgment.   The home is then auctioned, and the highest bidder wins. After the sale it is too late in Kentucky to file a Chapter 13 and just catch up the debt.  After the auction the debtor no longer has any rights to the home other than a right of redemption to buy back the property from the new owner.

Judicial Foreclosure the final stages

There is a right to purchase the property back if the property sells for less than 66% of its value. In a Kentucky foreclosure, the lender normally bids up to 66% of the price of the home to cut off this right of redemption. The owner is provided with a final date issued by the court on which the sale will occur.  Some lenders may allow you to catch up the mortgage and they will stop the sale.  However, technically the lender can require you to completely pay off the bank.  If the owner is unable to meet this requirement, the home is sold to the highest bidder.

To start a judicial foreclosure, the lender files a lawsuit along with a lis pendens or notice of the pending lawsuit. This document aims to inform potential buyers and lenders of the pending foreclosure lawsuit. When the court has announced the auction time and bid amount, a Notice of Foreclosure Sale or NFS is published in the paper twice before the sale.  In Kentucky, a commissioner must advertise the sale for two weeks and then the property is sold.

Non-judicial foreclosure

The non-judicial form of foreclosure allows the lender to transfer or sell with no necessary involvement by the court. However, the steps are provided by the state and are carefully monitored. You can find the non-judicial type of foreclosure also referred to as Deed of Trust  Foreclosure.  States like Mississippi and California use this process which may involve a deed of trust.

For this type of foreclosure to take place, the borrower must have provided his consent at the time of receiving the loan. This is made possible due to a power of sale clause, which is part of the deed of trust. This clause gives a third-party trustee authorization to sell the property in case the borrower is no longer able to complete their payments.

To start a non-judicial foreclosure, a Notice of Default is filed with the County Recorder’s office. The homeowner is put on notice.  The homeowner can then file a lawsuit to prevent the Trustee from selling or transferring the property to the bank.   A Notice of Trustee Sale is normally filed between 30 and 120 days after the Notice of Default.  Every state has a different time frame, but a notice announces the date and time of an auction or transfer.

The stages of foreclosure

Early stages of foreclosure

Until now, we have discussed foreclosure from the viewpoint of the homeowner. Let’s turn things around and observe the process from the point of the lender or an investor who is purchasing the property at the sale.  There are three stages of foreclosure lenders and investors become involved in worth familiarizing yourself with:

  1. Pre-foreclosure – this is the best stage for lenders and investors to intervene. During this stage, the homeowner’s credit rating can still be saved before the worst damage is done.  The property can be sold before the lender files a foreclosure, you can attempt a work out agreement, short sale and multiple alternatives to having a foreclosure filed.
  2. Foreclosure stage – at this stage the mortgage company has filed a lawsuit at the County Clerk’s office.  Investors attempt to purchase a home at a bargain at this stage.  They learn of your foreclosure by researching the courthouse records or signing up for advance notices of pending defaults and foreclosures.

Planning your foreclosure

When you are served with the foreclosure, you must decide to either defend the foreclosure in state court or catch the mortgage up in Chapter 13.  There are other options you can take such as a short sale or mortgage modification.  If you no longer want the home, you may want to delay the foreclosure process by litigating it in state court. Often fighting the foreclosure in state court will delay the foreclosure 1-3 years or longer.  The longest we have ever delayed a foreclosure was when we defended part of a foreclosure which lasted over 15 years.

  1. Post-foreclosure – after the sale, the investor or bank who purchases the property becomes the owner of the property. Either an investor or the bank can purchase the property.  It is often the lender’s Real Estate Owned department that buys the property.   After the sale, it is too late to file bankruptcy, or do most of the alternatives to keep the home.  You no longer have rights to a home after the sale.

What happens if a property doesn’t sell at a foreclosure auction?

So far, so good, but how do we know that the property will raise enough interest in investors that it will be bought at a foreclosure auction? What happens if there is no interest in it whatsoever?

If a home is not purchased at a foreclosure auction, lenders or banks in most scenarios gain ownership. Once the property is bank owned, it can be included in a portfolio along with other foreclosed properties. Foreclosed properties can be viewed on banks’ websites and are often sold to investors who buy to make a profit.

The discounts made on foreclosed properties are not beneficial for the lender. It is also interesting to point out that the borrower’s credit reports can show a foreclosure for as long as seven years. You can normally buy a home after making payments on time in Chapter 13 for 1 year.  You can buy a home 2 years after a Chapter 7 discharge.  But you must wait 3 to 7 years to purchase a home after a foreclosure.

Foreclosure has a much more severe impact on a borrower’s FICO score than bankruptcy.   It leads to a range of different much more negative consequences.

Why is understanding foreclosure important?

We’ve covered a lot of details around the foreclosure process, and if you haven’t had experience with this type of process, you may be wondering why you should inform yourself in the first place. However, the more information you have, the better you will be prepared to face foreclosure, if necessary. You can find even more information about Foreclosure on our YouTube channel where we publish regularly.

There are several risk factors that are worth exploring to make stable plans for your financial future. Furthermore, understanding the process of foreclosure gives you an orientation of what may be ahead if you do happen to face foreclosure at some point.

It is important to choose wisely a professional partner that can assist you through every step and provide expert guidance along the way. If you are in search of an experienced and reliable foreclosure lawyer, call us!

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Nick C. Thompson

Nick used to work for the banks before he went to law school.He was married to the president of the Mortgage Bankers Association and worked in the state tax department as a prosecutor.He was also the assistant county attorney in Bullitt County.
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