Kentucky Foreclosure Law process step by step
Foreclosures in Kentucky are court ordered sales conducted by the circuit court master commissioner. Consensual liens like a mortgage voluntarily gives the lien holder an interest in the property. Non-consensual liens include tax, mechanic and judicial liens. Either way a foreclosure is started by suing to foreclose in the county where the property is located.
The Lis Pendens Notice
Normally a mortgage company will file a lis pendens which is a notice of a pending litigation. This prevents the owner from transferring the property. A Lis Pendens merely warns potential buyers the property is involved in a lawsuit. If the lien holder does not file the Lis Pendens a good faith purchaser may take the property free of a mechanic, trustee or judgment lien. If someone purchases the property after a Lis Pendens is filed the buyer had notice of the pending litigation and the foreclosure continues.
The Foreclosure Complaint
Filing the foreclosure complaint with the circuit court only starts the foreclosure. The Plaintiff must include all parties that may have an interest in the property. This includes the county sheriff for the interest in any property taxes, spouse, mortgage or judgment lien. Normally a Plaintiff will perform a title search to find any party that may have an interest in the property. Failing to properly sell the home may put the Commissioner at risk of a lawsuit. The Commissioner is normally very careful to follow proper procedures.
The Plaintiff must plead in the complaint that the homeowner is in default. This includes the basis for the foreclosure such as non payment. The note and mortgage normally state the rights and responsibilities of the lien holder and homeowner. In the foreclosure complaint, the lien holder must explain or claim:
- The interest the Plaintiff has in the property,
- that the owner is in default,
- an accurate legal description of the property
- and a request for judgment against the owner and sale of the property.
Making the decision to keep the home or let it go back
When the foreclosure is filed the homeowner should first sit down and look at the home objectively. If the home has equity, the home fits the needs of the homeowner, and the mortgage is at a good rate the homeowner normally wants to keep the home. You can file a Chapter 13 bankruptcy to catch up the mortgage and stop the foreclosure. The homeowner can work on a mortgage modification or workout with the bank while the home is in a Chapter 13. Filing an answer and discovery also allows the homeowner time to pursue alternatives.
If the home is not a good deal then the home owner normally wants to give himself time in the home so the family can make a smooth transition to a new home. It is also important to avoid damage to your credit, a deficiency and a tax debt. If the home must go back the homeowner normally wants to file an answer to this lawsuit. This is then followed up by discovery and finally a Chapter 7 bankruptcy is filed to avoid the deficiency and income tax debt.
Filing an Answer and discovery
Over 64 different basic defenses can be pled and the mere filing of an answer may delay the foreclosure process for years. Asking for discovery or a jury trial may delay the matter for much longer. Normally just filing an answer will delay the sale for about 6 months. Filing discovery will often delay the foreclosure another 6 months, But discovery should be filed within 2 months after the answer. Together should delay the sale for a least a year.
When a Kentucky property owner is served with a summons and complaint, the property owner only has 20 days to file the answer. A Default judgment happens when the Defendant fails to file an answer. You may be allowed to be a couple of days late with an answer by showing a reason for the delay but a judge does not have to allow additional time. Most homeowners call the mortgage company, fail to file an answer and then the mortgage company obtains a default judgment and sale. By failing to file the answer and dispute the complaint the Defendant admits the facts.
Homeowners may also attempt to file an answer with the court. Due to their lack of knowledge they will often admit they owe the debt fail to raise defenses and the property is often quickly sold. Attorneys for the mortgage company will quickly move for summary judgment and then sell the property. The Summary Judgment motion is a tool for a quick judgment when an answer admits enough facts to avoid a trial. Both the Default and Summary judgments are tools to quickly take the property and sell it. These motions are filed with supporting affidavits and evidence such as a payment history, note and mortgage.
Default and Summary Foreclosure Judgments
Obtaining a default judgment can happen within 30 days. A sale can happen in less than 90 days if an answer is not filed. Mortgage companies will often talk about your right to save the home with a mortgage modification. While they talk, they are selling the home. By failing to file an answer the homeowner gives up several rights. If an answer fails to raise issues and claims the mortgage company will file a motion for summary judgment. The home will then sell in about 90 days.
A Summary judgment is where there was an answer but there are no facts in dispute left to be decided. If facts are clear and not in dispute, the judge can decide the case from the complaint and answer. If the Defendant fails to properly raise issues and simply admits the debt is owed the Plaintiff immediately wins. To delay the foreclosure there must be issues to decide.
Commercial Foreclosures and Receivership
In Commercial foreclosures the court will often appoint a receiver. Receivers take over and operate a business or property until the sale. The motion for a receiver is just like a summary judgment motion. If the lender can prove the lenders right to the real property. KRS 425.600 allows the court to appoint a receiver. The Receiver is appointed to prevent the property or profits from being striped, stolen, wasted or destroyed injured. Commercial loans often allow receivers which report to the court while they sell or manage assets. The sales are normally worse than a bankruptcy leaving the debtor less property, control over the sale and less rights.
The Commissioners Foreclosure Recommendations and sale.
Circuit Courts will often send the case to the Commissioner who will make recommendations on issues to the Court. Default and Summary judgments are normally decided by the commissioner. The court only has to agree with the commissioner’s recommendations to enter a judgment. The case is then sent back to the Commissioner for sale. The Commissioner advertises the sale in an area newspaper once a week for three weeks and at the courthouse.
When property is sent to the commissioner for sale and the property will be appraised by 2 disinterested parties. This appraisal determines the value and redemption amount of the property. The property owner cannot redeem the property if it sells for more than the redemption value. Offering any bid over the redemption value extinguishes the property owner’s right of redemption.
Stopping the sale Timing is everything.
The homeowner can file a Chapter 7 or Chapter 13 bankruptcy up to the sale date but after the sale date the owner loses any interest or rights to the property. Failing to file a Chapter 7 or 13 prior to the sale triggers the IRS debt. The homeowner will owe for any 1099-c that will be filed after the sale and transfer. Filing a Chapter 7 or 13 prior to the sale will not only avoid the tax debt and any deficiency it will also delay the foreclosure sale from coming back up for about 6 months. During a bankruptcy the homeowner can again try a mortgage modification or workout.
The purchaser will make a deposit and then the commissioner will file a report with the judge normally asking for the sale to be approved. The Defendant continues to possess the home until the sale is complete and the master commissioner issues a deed. After the sale, the master commissioner will pay his own fees, the property taxes and the remaining funds will go the creditors in the rank of their priority. Funds normally go to the Mortgages and then judgment liens and finally if anything is left the homeowner may get any remaining funds.
If the proceeds from the sale do not pay off the mortgage the lien holder is required by Internal Revenue Service regulations to file a 1099-c creating a tax debt. The lien holder can obtain a deficiency judgment against the defendant and collect the amount owed after the sale. It is becoming more and more common to see debt buyers purchasing these debts and suing for the deficiency with interest and attorney fees. This judgment is good in Kentucky up to 20 years and can be renewed after 20 years and collected upon for up to 20 years later.