Legal Venues Against Lenders

Currently, law provides three venues of action against lenders.  Each venue has its limitation and affects in reflection to the legal problem being questioned.  Moreover, the cost and the amount of legal work attached to each venue are different as cases are normally very different from one another. 

First, statutory law presents relief measures for distressed debtors through liquidation of debtor’s assets to repay outstanding creditors’ claims.  This legal process is identified in Article I, section 8, of the U.S. Constitution enabling Congress to establish “uniform Laws on the subject of bankruptcy throughout the United States”.  Governed by Federal statutes, bankruptcy proceedings grants debtors “automatic stay”, or suspension, of any action being taken by lenders against debtors, such as eviction and foreclosure. 

Although not governed by state law, many types of debts are created through state regulations making state law significant regarding the debtor’s case.  This includes judgments, liens and exemptions in addition to setting important guidelines reflecting limitation on income and expenses.  In addition, some states permits deficiency judgment which – deficiency judgment – is sheltered from bankruptcy procedures.  For example, courts may issue deficiency judgment in favor of 2nd mortgage lien holder against a foreclosed owner.

Also, debtors seeking the protection of bankruptcy laws need to undergo credit counseling and earn a certificate of competition.  Depending on statistical studies conducted by the U.S. Census Bureau, debtors can only qualify for a certain chapter within the bankruptcy code.  Commonly, most debtors fall under either Chapter 7 or Chapter 13.  Chapter 7 completely discharges all unsecured debt while Chapter 13 constructs a repayment plan enforced by the federal court.    

Common law provides the other two venues.  The second venue is obtaining a “Judge Order” against lenders.  This is a very complicated process with prolonged trial period.  Based on good faith, debtors can file a lawsuit against lenders in state or federal court.  “Restraining Orders” are the most common and temporary solution.  In addition to repeated trial appearances, debtors can expect to be called on by defending counsel for cross examination and to furnish proofs of harassment.  Debtors will need to pursue and continue trial until the judge issues “Permanent Injunction” in favor of the debtor, which may require a bond. 

And third, debtors can pay off their lenders in exchange of the lenders’ security interest. A “Composition Agreement” can discharge debt upon both parties accepting an agreement of consideration exchange.  Debtors need to be aware for some states consider “Composition Agreement” a ratification of the original security instrument.  This translates into commitment from debtor on all other provisions within the original agreement.  Another method is called “Equity of Redemption” where debtors can stop the foreclosure process by paying off the amount on the note.  Most states allow debtors to redeem their properties until the completion of the foreclosure sale.  Limited number of states offer a “statutory period of redemption” to give debtors more time, after foreclosure sale, to regain their lost properties.