Glossary of Foreclosure Terms
Definitions of common and not-so-common terminology in the foreclosure process.
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Acceleration. Requiring a borrower to immediately pay off the balance of a loan. Under a provision commonly found in promissory notes, if the borrower misses some payments, the lender can demand that the total balance of the loan be paid immediately. The loan must be accelerated before the lender can foreclose. In many states, the borrower gets a chance to reinstate the loan (and cancel the acceleration) by paying the arrears, plus costs and interest.
Adjustable-rate mortgage (ARM). A mortgage or deed of trust providing that the interest rate on the underlying promissory note can be adjusted up or down at specified intervals tracking the movement of a federal interest rate or other index.
Administrative expenses. In a Chapter 13 bankruptcy repayment plan, the trustee’s fee, the debtor’s attorney fee, and other costs that a debtor must pay in full. Administrative costs are typically 10% of total payments under the plan.
Amortization. Paying off a loan with regular payments over a set period. Part of each payment is applied to principal and to interest.
Amount financed. The amount of money you are getting in a loan, calculated under rules required by the federal law. This is the amount of money you are borrowing after certain financing costs and fees are deducted. The amount financed is far less than the total amount you pay back, because the total amount of the loan includes the interest on the amount financed.
Annual percentage rate (APR). The interest rate on a loan expressed under rules required by federal law. To determine the true cost of a loan, it is more accurate to look at the APR than the stated interest rate.
Appraisal. An expert’s evaluation of what a particular item of property is worth in the marketplace. Colloquially, the term is used to describe any opinion about the value of property. For instance, real estate agents and brokers often informally appraise property, even though they aren’t expert appraisers.
Arrears. Overdue payments on a loan. With a mortgage, this may include any missed payments, interest on the missed payments, and the costs incurred by the lender in trying to collect the debt.
Assignee liability. Liability of an assignee (an entity that has been assigned ownership of a mortgage or deed of trust) for unlawful or abusive acts of the original lender or mortgage originator. Assignee liability can be important in lawsuits against a foreclosing party for violations of federal or state laws prohibiting predatory lending practices. In most cases, assignees are off the hook for those practices if they conducted a reasonable investigation into the history of the loan.
Assignment. A document showing that ownership of a mortgage or deed of trust (and the underlying promissory note) has been transferred (assigned) from the original owner to a new owner (assignee). In recent times, mortgages have been the subject of many assignments as they have been “securitized” and sold as investments worldwide. In some cases, the assignments have been made electronically, without anything on paper. When it comes time to enforce the mortgage or deed of trust in a foreclosure, the absence of documentation can sometimes defeat the foreclosure, because there is no documentary proof of current ownership.
Attachment. A legal process that allows a creditor to attach a lien to property that you own because of a contract you signed (a car note, for example), a money judgment you owe, or a special statute that authorizes the lien, as in the case of a tax lien. If the lien is on your house, it can be enforced by foreclosure.
Automatic stay. An injunction automatically issued by the bankruptcy court when someone files for bankruptcy. The automatic stay prohibits most creditor collection activities, such as filing or continuing lawsuits, making written requests for payment, or notifying credit reporting bureaus of an unpaid debt.
Balloon payment. A large lump-sum payment due as the last payment on a loan. For instance, if you borrow $10,000, your note might require you to pay $5,000 of the loan over a three-year period, plus one balloon payment for the rest at the end of that period.
Bankruptcy code. The federal law that governs the operation of the bankruptcy courts and establishes bankruptcy procedures. It’s in Title 11 of the United States Code.
Bankruptcy petition preparer. Any nonlawyer who helps someone with bankruptcy. Bankruptcy petition preparers (BPPs) are regulated by the U.S. Trustee. Because they are not lawyers, BPPs can’t represent anyone in bankruptcy court or provide legal advice.
Capitalization. Treating items owed on a loan as part of a new principal balance. For example, when missed payments on a mortgage are added to the mortgage principal, to be paid off over time, they are capitalized. If missed payments are capitalized and the loan is reamortized, the lender will recalculate the monthly payment using the existing interest rate and new principal balance.
Chapter 7 bankruptcy. A liquidation bankruptcy, in which the trustee sells the debtor’s nonexempt property and distributes the proceeds to the debtor’s creditors. At the end of the case, the debtor receives a discharge of all remaining debts, except those that cannot legally be discharged.
Chapter 12 bankruptcy. A type of bankruptcy designed to help small farmers reorganize their debts.
Chapter 13 bankruptcy. A type of consumer bankruptcy designed to help individuals reorganize their debts and pay all or a portion of them over three to five years.
Chapter 13 plan. A document filed in a Chapter 13 bankruptcy that shows how all of the debtor’s projected disposable income will be used over a three- to five-year period to pay all mandatory debts—for example, back child support, taxes, and mortgage arrearages—as well as a percentage of unsecured, nonpriority debts, such as medical and credit card bills.
Closed-end loan. Any loan that must be paid off within a certain period of time. The federal Home Ownership and Equity Protection Act (HOEPA) applies only to closed-end loans. Loans that don’t have to be paid off within any particular time—for example, credit card debt—are open-ended.
Collateral. Property pledged by a borrower as security for a loan. If a creditor accepts property as collateral for a loan under a security agreement, and the agreement is properly recorded, the creditor has a lien on the collateral and can repossess it if the conditions of the security agreement (typically, making monthly payments on the loan) aren’t met.
Complaint. A formal document that initiates a lawsuit.
Confirmation hearing. A court hearing conducted by a bankruptcy judge at which the judge decides whether or not a debtor’s proposed Chapter 13 plan is feasible and meets all legal requirements.
Conforming loan. A mortgage loan that is small enough to be bought by Fannie Mae or guaranteed by the Federal Housing Administration. Currently, a conforming loan is any loan for less than $417,000, except in designated areas with a high cost of living, where the limit is $625,500. See “Jumbo loan.”
Conventional loan. A mortgage loan issued to a borrower with an excellent or very good credit rating. Conventional loans do not include those insured by the federal government or subprime loans.
Cramdown. In a Chapter 13 bankruptcy, the act of reducing a secured debt to the replacement value of the collateral securing the debt.
Credit and debt counseling. Counseling that explores the possibility of repaying debts outside of bankruptcy and covers credit, budgeting, and financial management. Consumers must go through credit counseling with an approved provider before filing for bankruptcy.
Credit bureau. Another name for a consumer reporting or credit reporting agency. These companies sell information about a consumer’s credit history to certain categories of people. Individuals are entitled to one free credit report per year, not including the person’s credit score.
Credit report. Also called a consumer report or a credit record, this is a report documenting the credit history and current status of a borrower’s monthly payment obligations and containing public information such as bankruptcies, court judgments, and tax liens. Chapter 7 bankruptcies remain on a credit report for 10 years, Chapter 13 bankruptcies and other negative information for seven years.
Credit score. Also called a FICO score, this is a number that supposedly summarizes your credit history. The score is based on a number of factors, including your debt payment history, how much debt you currently have, how long you’ve had credit, and how recently your major credit transactions occurred. There are several rating agencies, all of which use their own secret formulas, which means that you never know just how a particular score was arrived at. Lenders use credit scores to decide whether to grant a loan and at what interest rate. Scores range from about 350 to 900; a score of 660 or more generally gets you the best loans at the best rates.
Creditor. A person or institution to whom money is owed.
Creditors’ meeting. A meeting that someone filing for bankruptcy must attend, at which the trustee and creditors may question the debtor about property, court documents, and debts.
Curing a default. See “Reinstating a mortgage.”
Current market value. What property could be sold for.
Current monthly income. As defined by bankruptcy law, a bankruptcy filer’s total gross income (whether taxable or not), averaged over the six-month period immediately preceding the month in which the bankruptcy is filed. The current monthly income is used to determine whether or not the debtor can file for Chapter 7 bankruptcy, among other things.
Debt consolidation. Refinancing debt into a new loan. Homeowners sometimes convert relatively short-term unsecured debt into debt secured by the home—putting the house at greater risk if there is a default in payments on the consolidated debt.
Debtor. Someone who owes money to another person or business. Also, the generic term used to refer to anyone who files for bankruptcy.
Declaration of homestead. See “Homestead declaration.”
Deed in lieu of foreclosure. An arrangement under which homeowners can get out from under a mortgage and prevent a foreclosure, by signing the deed to their home over to the lender in exchange for the lender’s agreement to not hold the homeowner liable for the remaining amount of the mortgage.
Deed of trust. In about half the states, a loan that is secured by real estate is termed a deed of trust. Deeds of trust are like mortgages (which also are loans secured by real estate). However, unlike mortgages, deeds of trust typically have a power of sale clause that lets the lender have the property sold at a public auction if the homeowner defaults on the payments. Foreclosures under deeds of trust are typically referred to as nonjudicial foreclosures because they take place without court supervision.
Default rate. An interest rate that replaces a contractual interest rate if a borrower defaults on a loan. If the default rate is set out in the mortgage loan agreement, it will typically be considerably higher than is the contract rate.
Default. Failing to meet the requirements of an agreement. Defaults that lead to foreclosure typically involve the failure to make mortgage payments, but other types of defaults are possible, such as the failure to maintain necessary insurance or to keep the property in proper condition.
Deficiency. The amount a homeowner owes the lender after a house is sold at a foreclosure sale for less than the actual debt. In most states, the lender can file a separate lawsuit to recover a deficiency owed by the borrower. However, state laws typically require that the deficiency be measured by the difference between the property’s fair market value and the amount of the loan rather than by the sale amount. For example, if a home sells for $300,000 at a foreclosure auction, the fair market value of the home is actually $400,000 and the borrower owes $500,000, the deficiency in most states will be $100,000, not $200,000.
Discharge. A court order, issued at the conclusion of a Chapter 7 or Chapter 13 bankruptcy case, which legally relieves the debtor of personal liability for debts that can be discharged in that type of bankruptcy.
Dischargeable debt. A debt that is wiped out at the conclusion of a bankruptcy case, unless the judge decides that it should not be.
Disposable income. In a Chapter 13 bankruptcy, the difference between a debtor’s current monthly income and allowable expenses. This is the amount that the bankruptcy law deems available for a repayment plan.
Equity stripping. The practice of giving high-cost second mortgages to homeowners, reducing the borrower’s equity. Some of these loans violate federal or state truth-in-lending laws, and homeowners may be able to cancel (rescind) the loans later or sue the lender. See “Home Ownership and Equity Protection Act” (HOEPA).
Equity. The amount of cash you would pocket if you sold your house and paid off all the liens (for example, mortgages, property taxes, money judgments, mechanic’s liens, and tax liens). For example, if you owe $300,000 on your house on a first and second mortgage, the IRS has a tax lien on the house for $50,000, you sell your home for $390,000, and costs of sale are $20,000, you will pocket $20,000. That’s your equity.
Exempt property. Property described by state and federal laws (exemptions) that a debtor is entitled to keep in a Chapter 7 bankruptcy. Exempt property cannot be taken and sold by the trustee for the benefit of the debtor’s unsecured creditors.
Exemptions. State and federal laws specifying the types of property creditors are not entitled to take to satisfy a debt, and the bankruptcy trustee is not entitled to take and sell for the benefit of the debtor’s unsecured creditors.
Fannie Mae (Federal National Mortgage Association). A government-chartered corporation set up to buy mortgages from original lenders and repackage them for private investors. Congress authorized Fannie Mae to stimulate the growth of the housing market by making capital available for new loans. Investors and lenders that deal with Fannie Mae must follow various guidelines regarding mortgage servicing and foreclosure practices.
Federal exemptions. A list of exempt property in the federal Bankruptcy Code. Some states give debtors the option of using the federal rather than the state exemptions.
Federal Home Mortgage Corporation. See “Freddie Mac.”
Federal Housing Administration (FHA). A federal agency that insures first mortgage lenders against loss when a loan is made following FHA regulations. The FHA does not lend money; it only insures the loan. The FHA also certifies nonprofit housing counselors.
Federal National Mortgage Association. See “Fannie Mae.”
Filing date. The date a bankruptcy petition in a particular case is filed. With few exceptions, debts incurred after the filing date are not discharged.
Forbearance. A lender’s willingness to let you skip all or a portion of your monthly payments for a brief period, usually three to six months. You’ll have to catch up later, probably with increases in monthly payments. But the lender might be willing to extend the loan so that missed payments can be added to the end of the loan rather than be paid off on top of the regular monthly payment.
Foreclosure “rescue” scams. Scams on people who are facing foreclosure. The scam artist learns about impending foreclosures from public filings, advertisements, and postings and contacts homeowners with promises of help that typically result in losing the house and any remaining equity.
Foreclosure. The legal process by which a creditor with a claim (lien) on real estate forces a sale of the property in order to collect on the lien. Foreclosure typically occurs when a homeowner defaults on a mortgage. See “Judicial foreclosure” and “Nonjudicial foreclosure.”
Forgiven debt. Debt that is written off as uncollectable by the creditor. In the foreclosure context, a mortgage owner forgives debt when a foreclosure occurs and the property is sold for less than is owed on the mortgage. Forgiven debt—the amount you don’t have to pay back—is taxable as income, and the creditor is required to send you (and the IRS) a form 1099C stating the amount. Two major exceptions: You won’t have to pay tax if you are insolvent when the debt is written off or if the debt is discharged in bankruptcy.
Freddie Mac (Federal Home Mortgage Corporation). Like Fannie Mae, a government-chartered company set up to buy mortgages from original lenders and repackage (securitize) them for private investors.
Ginnie Mae (Government National Mortgage Corporation). A quasi-governmental agency that guarantees pools of FHA- and VA-insured loans that have been packaged into securities for investment purposes.
Good faith. In a Chapter 13 bankruptcy case, when a debtor files with the sincere purpose of paying off debts over the period of time required by law rather than for manipulative purposes—such as to prevent a foreclosure that by all rights should be allowed to proceed.
Government mortgage guarantors. Special government programs that provide mortgage insurance or guarantees to lenders who make purchase-money mortgage loans to certain homebuyers. These programs are offered through the federal government (the Federal Housing Administration, the Rural Housing Service, and the Veterans Administration), or by a state housing finance agency. In addition to being insured, these loans come with rules regarding transactions with homeowners, including a requirement that the lender cooperate with homeowners who are attempting to cure defaults (reinstate mortgages).
Home equity loan. A loan made to a homeowner on the basis of the equity in the house and secured by the house in the same manner as a first mortgage.
Home Ownership and Equity Protection Act (HOEPA). A federal law that provides special protection to homeowners who obtain home mortgage loans at high interest rates or with exceptionally high fees. The protection includes fines and penalties recoverable in a lawsuit against the lender and sometimes a defense to foreclosure in state or federal court.
Homestead declaration. A form filed with the county recorder’s office to put on record your right to a homestead exemption. Only a few states require recording. In most states, the homestead exemption is automatic—you are not required to record a homestead declaration in order to claim the homestead exemption.
Homestead. In bankruptcy, a state or federal exemption applicable to property where the debtor lives—usually including boats and mobile homes.
Injunction. A court order prohibiting a person or entity from taking specified actions—for example, bankruptcy’s automatic stay (in reality an automatic injunction), which prevents most creditors from trying to collect their debts.
Interest. The cost of borrowing money over time. Interest on a loan is always described as percentage of the loan payable over a period of time, as in 7% per year. In agreements for the purchase of homes and cars, the interest is pre-computed and amortized over the period of the loan, which makes the amount owed on the secured debt a lot higher than the base loan itself. For instance, if you buy a car for $20,000 and borrow the money over seven years, the amount payable on the note is $20,000 plus the amount of interest that you’ll pay over the seven years.
Interest-only loan. A type of mortgage loan, made popular during the 2004–2006 housing boom, where the borrower makes payments only on the loan’s interest for a limited period of time. The mortgage payments are much lower than they would be if the payments were applied to the loan as a whole, but the overall amount of the loan increases (negative amortization). When the amount of the loan reaches a certain level (set out in the loan document), the borrower must begin making much higher payments to make up for the increase. It is the sudden increase in required mortgage payments that pushes so many homeowners into foreclosure.
Insolvent. When a person’s or business’s assets are worth less than their debts.
Joint debtors. Married people who file for bankruptcy together and pay a single filing fee.
Judgment-proof. Description of a person whose income and property are such that a creditor can’t (or won’t) seize them to enforce a money judgment—for example, a dwelling protected by a homestead exemption or a bank account containing only a few dollars.
Judicial foreclosure. A type of foreclosure, used in about half the states, in which the foreclosing party files a lawsuit in the county where the property is located, seeking a judgment that the property can be sold in a foreclosure sale because the homeowner has defaulted on mortgage payments. A few states use what are called strict foreclosures, which allow the judge to order title to the property transferred to the foreclosing party without the need for a sale. A few other states have hybrid processes, in which the foreclosure proceeds under a power of sale clause but is subject to some court supervision.
Judicial lien. A lien created by recording a court money judgment against the debtor’s property—usually real estate.
Jumbo loan. A loan for an amount that exceeds the conforming loan limit (the limit at which the loan will be guaranteed by the Federal Housing Administration) and which usually costs a point or two higher in interest rates as a result. See “Conforming loan.”
Lease and buy-back. A scheme in which you deed your home to a third party and then lease it back, paying rent to build up your credit score so you can buy back the loan. Although there might be some legitimate reasons for doing this, most often it’s a scam—the third party pockets your mortgage payments and borrows against the property, and the house ends up in foreclosure.
Lien avoidance. A bankruptcy procedure in which certain types of liens can be removed from certain types of property. Liens that are not avoided survive the bankruptcy even though the underlying debt may be canceled—for instance, a lien remains on a car even if the debt evidenced by the car note is discharged in the bankruptcy.
Lien. A legal claim against property that must be paid before title to the property can be transferred. Liens on real estate can also often be collected through foreclosure, depending on the type of lien. Examples of liens include mortgages, tax liens, and mechanics’ liens.
Lifting the stay. When a bankruptcy court allows a creditor to continue with debt collection or other activities that are otherwise banned by the automatic stay. For instance, the court might allow a landlord to proceed with an eviction or a lender to repossess a car because the debtor has defaulted on the note.
Loan term. The loan term is the period during which the loan is due to be repaid in full. Most mortgage loans have 15- or 30-year terms. Many predatory consumer loans (payday loans, car title loans, and refund anticipation loans) have very short terms, which increases the annual percentage rate charged by the lender. Mortgage foreclosure rescue scams also frequently employ short-term loans with outrageous interest payments.
Market value. The highest price one would pay and the lowest price the seller would accept on a property on the open market. Market value is used to determine the amount of equity a homeowner has in the property, which can determine whether it makes sense to fight foreclosure or to file for bankruptcy. Market value also is often crucial in determining whether a mortgage holder can recover a deficiency after a foreclosure sale. For example, assume a property sells for $250,000, the former homeowner owes $350,000 and a court later determines that the property’s market value was actually $300,000 (which could have been realized if the minimum bid at the foreclosure auction had been set higher). In that event, if the state’s laws use the property’s actual market value to limit deficiency awards, the court will issue a deficiency judgment for $50,000.
Materialmen’s and mechanics’ liens. Liens imposed by statute on real estate when suppliers of materials, labor, and contracting services used to improve the real estate are not properly compensated.
Means test. A formula that uses predefined income and expense categories to determine whether a debtor whose income is more than the state median family income should be allowed to file for Chapter 7 bankruptcy.
Median family income. The figure at which there are as many families with incomes below it as there are above it. The U.S. Census Bureau publishes median family income figures for each state and for different household sizes. In bankruptcy, the median family income is used as a basis for determining whether a debtor must pass the means test to file for Chapter 7 bankruptcy, and whether a debtor filing for Chapter 13 bankruptcy must commit all projected disposable income to a five-year repayment plan.
Meeting of creditors. See “Creditors’ meeting.”
Modification. Altering one or more terms of a mortgage, such as reducing the interest rate, reducing the principal due (sometimes all the way down to the property’s market value), or increasing the term of the loan to account for missed payments. Negotiating a modification is more likely when the borrower can demonstrate a hardship that is likely to last or an error.
Mortgage broker. An individual, usually licensed by the state, who arranges financing for a potential home purchaser by seeking the best mortgage product for that particular person.
Mortgage holder. A person or company who currently has the right, under the terms of the mortgage, to enforce it through foreclosure.
Mortgage servicer. A type of business that large mortgage owners hire to administer their mortgage portfolios. The mortgage servicer typically accepts and records mortgage payments, negotiates a workout in case of a default, and even supervises the foreclosure process if attempts at a workout fail. Mortgage owners usually prefer that their homeowners stay current on their loans and stay out of foreclosure, but servicers often have a conflicting economic incentive because when customers default on their mortgages, the servicers get to keep the fees and costs that typically accompany a mortgage default and foreclosure.
Mortgage. A contract in which a loan to buy real estate is secured by the real estate as collateral. If the borrower defaults on loan payments, the lender can foreclose on the property.
Mortgage-backed security. A type of investment backed by mortgage loans that have been packaged into pools or trusts, with payments on the underlying mortgages generating the return for investors. By selling original mortgages to Fannie Mae and Freddie Mac (and other players in the secondary mortgage market, where the packaging occurs) lenders generate more funds for future lending.
Mortgagee. The mortgagee is the lender or other entity that owns the rights and responsibilities granted in a mortgage by the borrower (mortgagor). Typically, the mortgagee is the party who is authorized by state law to bring a foreclosure action.
Mortgagor. Someone who borrows money and signs a mortgage.
Motion to lift stay. A formal request in which a creditor asks the bankruptcy court for permission to continue a court action or collection activities in spite of the automatic stay.
Negative amortization. Negative amortization occurs when payments do not cover the amount of interest due for a loan period. For example, if you have a $150,000 loan at 9% interest for 15 years and make monthly payments of $1,200, your payments won’t cover the interest that’s accruing each month, and the loan will negatively amortize. At the end of 15 years, even if you make all of your payments, you will still owe more than $50,000. Accordingly, mortgages that have built-in negative amortization terms often require a balloon payment at the end of the loan period. Interest-only mortgages also use negative amortization to keep the initial payments low, and then require a dramatic increase in the payments after several years (rather than a balloon payment) to make up the difference.
Negative equity. Negative equity is when property’s market value is less than the total owed on all the liens recorded against it. The popular term for negative equity is “upside down.” In the bankruptcy context, negative equity can be very helpful in that you can get rid of liens that are no longer secured by equity even though they were secured when you obtained the loans. For example, say you have a first mortgage of $200,000, a second mortgage of $100,000 and a third mortgage of $50,000. Also assume that your home sank from a value of $400,000 to $175,000. In this case you have a negative equity of $175,000 (the difference between your home’s value ($175,000) and the amount of the liens created by all three mortgages, or $350,000). Your first mortgage of $200,000 is partially covered by your home’s value of $175,000, but you have no equity to secure the second and third mortgage. In this situation, Chapter 13 bankruptcy can remove the second and third mortgage liens from your house’s title.
Nonbankruptcy federal exemptions. Federal laws that allow a debtor who has not filed for bankruptcy to keep creditors away from certain property. The debtor can also use these exemptions in bankruptcy if the debtor is using a state exemption system.
Nondischargeable debt. Debt that survives bankruptcy, such as back child support and most student loans.
Nonexempt property. In bankruptcy, property that is unprotected by the exemption system available to the debtor. In a Chapter 7 bankruptcy, the trustee may sell it for the benefit of the debtor’s unsecured creditors. In a Chapter 13 bankruptcy, debtors must propose a plan that pays their unsecured creditors at least the value of their unsecured property.
Nonjudicial foreclosure. A foreclosure that proceeds outside of court under a power of sale clause included in a deed of trust (a type of mortgage).
Nonpriority debt. A type of debt that is not entitled to be paid first in Chapter 7 bankruptcy and does not have to be paid in full in a Chapter 13 bankruptcy.
Non-purchase money security interest. In the foreclosure context, a loan that uses your home as collateral for any purpose other than to buy it—for example, a home equity loan that is used to improve the home or pay for a vacation, college tuition, or medical emergency.
Notice to quit. A formal written notice, given to the occupant of real estate, to leave the premises within a specified period of time or face a judicial proceeding (often called unlawful detainer, or forcible entry and detainer proceedings) in which a judge can order the sheriff to physically evict the occupant. In many states, a homeowner who continues to occupy the home after a foreclosure must be given a notice to quit before eviction proceedings may go forward.
Open-ended loan. A loan without a definite term or end date. Authorized charges on credit cards are open-ended loans. As a general rule, there are no limits on interest rates charged on open-ended loans but some states cap interest rates on closed-end loans.
Origination fee. A fee paid to a lender for processing a loan application. This fee is commonly called points and is charged as a percentage of the loan amount.
Originator. The entity the loan documents identify as the party making the loan, typically a bank or credit union.
Partially secured debt. A debt secured by collateral that is worth less than the debt itself—for instance, when a person owes $15,000 on a car that is worth only $10,000.
Personal financial responsibility counseling. A two-hour class intended to teach good budget management. Every consumer bankruptcy filer must attend such a class in order to get a Chapter 7 or Chapter 13 bankruptcy discharge.
Personal property. All property not classified as real property, including tangible items, such as cars and jewelry, and intangible property, such as stocks and pensions.
Predatory lending. In the foreclosure context, lending money under terms that are likely to cause a default in payments because of the expense of the loan compared to the borrower’s income, or due to hidden fees and costs that are not properly disclosed. Certain categories of predatory loans are prohibited by federal and state law, and homeowners can sometimes use a violation of those laws to defend against a foreclosure or sue for fines and penalties.
Prepetition counseling. Mandatory debt and credit counseling that occurs before the bankruptcy petition is filed. Compare personal financial management counseling, which occurs after the petition is filed.
Priority debt. In Chapter 7 bankruptcy, a type of debt that is paid first if the debtor has any assets available to pay creditors. Priority debts include alimony and child support, fees owed to the trustee and attorneys in the case, and wages owed to employees. With one exception (back child support obligations assigned to government entities), priority claims must be paid in full in a Chapter 13 bankruptcy.
Projected disposable income. In bankruptcy, the amount of income a debtor will have left over each month, after deducting allowable expenses, payments on mandatory debts, and administrative expenses from his or her current monthly income. This is the amount the debtor must pay toward unsecured nonpriority debts in a Chapter 13 plan.
Proof of service. A document signed under penalty of perjury by the person serving a document showing how the service was made, who made it, and when.
Property inspection fee. A charge imposed by a mortgage servicer for a cursory inspection (often just a drive-by) to determine the physical condition or occupancy status of mortgaged property. This fee is often unreasonably high and an unreasonable number of inspections are often made, especially if the homeowner has defaulted on mortgage payments. To get current on a mortgage or propose a Chapter 13 repayment plan, the homeowner must pay these fees as well as the missed payments.
Real Estate Settlement Procedures Act (RESPA). A federal law designed to protect consumers from unnecessarily high settlement charges and certain abusive practices in the residential real estate market. RESPA provides a way for borrowers to challenge a stated loan balance provided by the servicer and to get information about how their loan has been processed. It also requires that certain disclosures be made to borrowers.
Real property. Real estate (land and buildings on the land, usually including mobile homes attached to a foundation).
Reamortization. Recalculating loan payments on different terms. For example, if you have paid for ten years on a 15-year loan, your lender might extend the loan for another ten years at a lower interest rate, lowering your monthly payments. Similarly, lenders sometime add missed payments to the principal loan (that is, capitalize the missed payments). This reamortization may cause the monthly payments to increase because of the increase in the principal and the interest on it.
Redemption right. In foreclosure, the former homeowner’s right to buy back the house after a foreclosure sale by reimbursing the new owner the amount of the purchase price, or, if the property was bought by the lender, paying the lender the full value of the mortgage. In many states, even after a foreclosure sale, the new owner can’t take possession until the redemption period has passed. For example, if the state’s law gives the former owner up to six months to redeem the mortgage, the new owner can’t take possession until that time has passed and no redemption has been made.
Refinance. Using a new loan to pay off the current loan to get a better interest rate and perhaps pull some of your equity out of the house. Refinancing is hard to get if you are more than three payments behind or have troubled credit. But a homeowner who is facing a mortgage interest reset, is still current on the mortgage, and has some equity in the property from a down payment or many years of mortgage payments, might be able to refinance at a more affordable fixed rate.
Reinstating a mortgage. Getting current on your mortgage by making up missed payments and paying the lender interest on the missed payments and reimbursing the lender for various costs and fees incurred during the time you were in default. This is sometimes referred to as curing the default.
Repayment plan. An informal plan to repay creditors most or all of what they are owed outside of bankruptcy. The typical repayment plan provides for amortizing missed payments (and associated interest, costs and fees) over a period of time by increasing the monthly mortgage payment to include the extra payments. Also refers to the plan proposed by a debtor in a Chapter 13 bankruptcy.
Rescission. The act of canceling a loan agreement and asking a court to restore borrower and lender to the positions they were in before it was signed. Federal and state laws allow a borrower to rescind a mortgage loan transaction within three business days after signing the papers. This period can sometimes be extended for years if the lender violated certain federal laws. The right of rescission may sometimes be used as a defense to a foreclosure.
Reverse mortgage. A type of loan designed for people who are 62 or older and have considerable equity in their homes. The reverse mortgage lender essentially buys the home and uses the equity to pay off debts and provide the owners with set monthly payment over their lives based on the amount of the equity in the home. At the owners’ death, the lender will typically sell the house and recoup what they are owed on the loan. Reverse mortgages are heavily regulated by the Federal Trade Commission.
Second mortgage or deed of trust. A mortgage on property that is already mortgaged or subject to a deed of trust. It comes after any prior mortgages in priority of payment.
Secondary market. The process by which original mortgage lenders sell their loans to buyers (often Fannie Mae and Freddie Mac), who in turn package the loans into securities with different risk ratings and resell them to individual and corporate investors with the help of Wall Street brokerages and bond-rating firms.
Secured creditor. The owner of a secured claim.
Secured debt. A debt secured by collateral.
Secured interest. A claim to property used as collateral. For instance, a lender on a car note retains legal title to the car until the loan is paid off.
Secured property. Property that is collateral for a secured debt.
Securitization. The process of converting a mortgage lender’s ownership interest in an original mortgage into an investment vehicle that can be handily sold on Wall Street as another type of security.
Serial bankruptcy filing. The practice of filing and dismissing one bankruptcy after another to obtain the protection of the automatic stay, even though the bankruptcies themselves offer no debt relief—for instance, when a debtor files successive Chapter 13 cases to prevent foreclosure even though there are no debts to repay. Courts will ban the debtor from further filings.
Short sale. A sale of a house threatened with foreclosure, made with the lender’s agreement so that the homeowner can get out from under their mortgage by selling the house, even if the sale won’t produce enough cash to pay off the entire loan.
State exemptions. State laws that specify the types of property creditors are not entitled to take to satisfy a debt, and the bankruptcy trustee is not entitled to take and sell for the benefit of the debtor’s unsecured creditors.
Statutory lien. A lien imposed on property by law, such as tax liens and mechanics’ liens, as opposed to voluntary liens (such as mortgages) and liens arising from court judgments (judicial liens).
Stay. See “Automatic stay.”
Strict foreclosure. A type of judicial foreclosure used in several states in which the court not only orders that the foreclosure take place, but also transfers title to the foreclosing party without requiring the property to be put up for sale at an auction.
Strip down of lien. In a Chapter 13 bankruptcy, when the amount of a lien on collateral is reduced to the collateral’s replacement value. See “Cramdown.”
Subprime mortgage loan. A loan that carries a higher interest rate than a comparable loan, generally because of the borrower’s low credit rating or other factors such as the property’s location (redlining).
Summons and complaint. Legal documents that are served on a homeowner to initiate a lawsuit—for example, a judicial foreclosure or an eviction. The summons tells the homeowner how and when to respond to the lawsuit. The complaint sets out the reasons why the court should issue a foreclosure judgment or evict a former owner after the sale.
Tax lien. A statutory lien imposed on property to secure payment of back taxes—typically income and property taxes.
Trustee. An official appointed by the bankruptcy court to carry out the administrative tasks associated with a bankruptcy and to collect and sell nonexempt property for the benefit of the debtor’s unsecured creditors.
Truth in Lending Act (TILA). A federal law that requires most lenders to give borrowers standard disclosures of the cost and payment terms of the loan. The Home Ownership and Equity Protection Act (HOEPA) is part of the Truth in Lending Act. If the lender violates TILA or HOEPA, the homeowner may be able to stop foreclosure by rescinding the loan, depending on the type of loan and whether it qualifies for protection under these federal laws.
Undersecured debt. A debt secured by collateral that is worth less than the debt.