LLC and Foreclosure

[hvbnh2008]

I helped a relative to buy a property. He has not paid the bank for 5 months, which I am not aware of (How STUPID I am). The property is now facing a foreclosure. He is $15,000 behind on the first mortgage and $5,000 on the second. The bank will foreclose on July 1, 2009. I have several questions:

1. Will the foreclosure automatically stop if I pay them BY July 1? If it will, do I need to pay both?

2. Should I form an LLC after catching up with the late payments? What does LLC do to protect my other assets and credit?

3. If I don't pay and the foreclosure will take place on July 1, am I going to be responsible for the balance of the debts? My name is on the title.

3. What is a short sale?

Thank you very much.

 

[dee_dub]

1. Yes the foreclosure will stop if you get current with payments. The foreclosure could also stop if you can negotiate payment terms with the bank for something less than the outstanding balances and the remainder on some schedule. Whether you need to pay both depends on who's foreclosing.

2. I don't think you need an LLC. In any event, forming an LLC and dumping your other assets in there to protect them from potential creditors probably would not work. It might be a fraudulent transaction, and in any case, you would be the owner of the shares of the LLC, and a creditor could execute against those shares just as they could have executed against the assets directly.

3. What debts are you speaking of? Generally, foreclosing on property means the lender takes the property back in full satisfaction of whatever is owing. You might be liable for outstanding property taxes, utilities (if they are in your name) etc.

4. A short sale is where you and the bank agree to sell the property to a 3rd party and the bank will accept the proceeds in satisfaction of the mortgage balance. It's a good alternative to being foreclosed on, if you can ge the bank to agree.

http://en.wikipedia.org/wiki/Short_sale_(real_estate)

 

[hvbnh2008]

I truly appreciate your responses to my questions.

My other question is that if the bank forecloses the property and sells it for less than the amount that I owe (i.e. I owe $300,000 but they may sell it for $250,000. Thus, they would lose $50,000. Are they going to make me responsible for $50,000 by putting a lien on my other properties?). Would forming an LLC on the property itself (not on others) prevent the bank from going after other properties?

Thanks again.

 

[dee_dub]

What's your involvement with the mortgage? The bank is entitled to seek personal judgment against the mortgagee for any shortfall. Are you the mortgagee, or a guarantor?

I don't know what you mean by "forming an LLC on the property itself" or how you think this might work.

 

[hvbnh2008]

On paper, I own the property, my name is on the title, so I am the mortgagee.

I was thinking of transferring this property to an LLC, of which I am a member, so that if there is anything happen to the property (i.e. a shortfall of money due to the foreclosure), the bank will go after the company not my other properties and assets. In other words, the problem will contain within the property and the bank will not be able to touch the others. Am I thinking it right? Thank you so much.

 

[dee_dub]

Just because your name is on title does not make you the mortgagee. You are the mortgagee if you signed the mortgage papers with the bank. It sounds like you did. Where do you live? Whether the bank can pursue personal judgment against you for any mortgage shortfall depends on the laws of your state.

I doubt you could transfer the property to protect your other assets in the event there is a shortfall. Most likely your mortgage contains an alienation or acceleration clause so that the transfer would trigger immediate repayment of the loan in full.

 

[hvbnh2008]

I live in Oregon but the property in trouble is in California. Would you please let me know what would happen to my properties in Oregon if the one in California is foreclosed? Thank you.

 

[dee_dub]

It is impossible to say.

If the bank does not take personal judgment against you, nothing.

If they do get personal judgment against you, they would have to take steps to execute against your property out-of-state. I don't know what provisions Oregon has for enforcing judgments from California, but I'm sure it can be done. The bank might need to have the California judgment registered with the Oregon courts, then take whatever steps Oregon permits to enforce the judgment as if it were local. That might include putting a lien on your properties.