Kentucky Foreclosure Law the real process of foreclosure
Foreclosures in Kentucky are court ordered sales conducted by the circuit court master commissioner. Normally a mortgage company will file a lis pendens which is a notice of a pending sale at the start of the case to prevent the owner from transferring the property. If someone purchases the property after a Lis Pendens is filed the buyer has notice of the pending sale and cannot complain that he didn’t know about the foreclosure. Very few people want to pay good money to get involved in litigation.
Liens can be a consensual lien such as a mortgage where the owner voluntarily gives the lien holder an interest in the property or it may be a non-consensual lien such as a tax, mechanic or judicial lien. Either way the foreclosure is started by suing to foreclose in the county where the property is located or stating the debt was not paid.
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 which includes the county sheriff for the interest in any property taxes, any spouse that may have an interest in the property, any other mortgage holder or judgment lien creditor. 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 so the Commissioner is normally very careful to follow proper procedures.
The Plaintiff (normally the mortgage company) must plead in the complaint that the homeowner (Defendant) is in default and any basis for the foreclosure such as the note and mortgage that normally state the rights and responsibilities of the lien holder and homeowner. In the foreclosure complaint, the lien holder must also 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.
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 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. If the home is not a good deal then the home owner normally wants to give himself time in the home so that 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, followed up by discovery and finally a Chapter 7 bankruptcy is normally filed to avoid the deficiency and income tax debt.
The Lis Pendens Notice
A lis pendens notice does not have to be filed to foreclose on the property just as you do not have to wear a helmet to ride a motorcycle. But the lender that fails to file the Lis Pendens places himself at risk if a lis pendens is not filed. A Lis Pendens merely warns potential buyers that 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 the lien held by a mechanic, trustee or judgment creditor.
Default and Summary Foreclosure Judgments
Obtaining a default judgment can happen within 30 days and 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 are selling the home. By failing to file an answer the homeowner gives up several rights. Even if an answer is filed a motion for a summary judgment can be filed and obtained in a little over 90 days if the answer fails to make any real issues and claims against the plaintiff or the plaintiff’s right to sue.
Over 64 different basic defenses can be pled and the mere filing of a reasonable 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 the discovery should be filed within 2 months after the answer. Together should delay the sale for a least a year.
The Homeowner is required to file an answer within 20 days. A Default judgment happens when the Defendant fails to file an answer within that 90 days. 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 you 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.
A Summary judgment is where there was an answer filed but there are no facts in dispute left to be decided. If the facts are not in dispute and they are clear, the judge can decide the case from just the complaint and answer without a trial. If the Defendant fails to properly raise issues and the Defendant simply admits the debt is owed and the mortgage is valid the lien or mortgage holder immediately moves for summary judgment and wins.
Homeowners often will attempt to file an answer with the court. Due to their lack of knowledge they will admit they owe the debt fail to raise defenses and the property is often quickly sold. Attorneys for the mortgage company rarely have a problem in quickly moving for summary judgment and setting the property for sale when the homeowner is unrepresented. When a Kentucky property owner is served with a summons and complaint, the property owner only has 20 days to file the answer. The Summary Judgment motion is just a similar tool to the default judgment when an answer was filed but the 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.
In Commercial properties 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 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. If the court agrees with the commissioner’s recommendations and enters its findings of fact, conclusions of law, and judgment for the lien holder a foreclosure will be sent back to the Commissioner for sale.
When property is sent to the commissioner for sale and the property will be appraised by 2 disinterested parties. This appraisal determines the redemption value of the property. If the property sells for more than the redemption value the homeowner cannot later redeem the home from anyone that buys the property at auction.
The homeowner can file a Chapter 7 or Chapter 13 bankruptcy up to the sale date but at 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 that time the homeowner can again try a mortgage modification or workout.
Offering any bid over the redemption value extinguishes the property owner’s right of redemption. The Commissioner advertises the sale. In an area newspaper once a week for three weeks and publishes the sale at the courthouse. 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.
We are teaching the 2015 Kentucky Foreclosure Bootcamp for Lawyers in December for NBI. See you there!