Below is a list of definitions of terms frequently used when discussing real estate, bankruptcy and related issues in the law. It is by no means comprehensive, nor are these definitions to be used or relied on except in an informal conversational context.  This is a cheat sheet more than anything.

“Anti deficiency statute.” A law that prohibits a lender from pursuing a borrower for a “deficiency” after foreclosure or short sale. The primary anti deficiency statutes in California are the “purchase money anti-deficiency rule,” (CCP §580b), the “private sale” (or non-judicial foreclosure) anti deficiency rule (CCP §580d) and the new (as of January, 2011) “short sale” anti deficiency rule. (CCP §580e) These rules apply on in California.

“CCP” is the California Code of Civil Procedure, the body of procedural laws that governs all legal procedure in California state courts.

“COD” or “Cancellation of Debt.” Term usually used in conjunction with an income tax liability for debt that is “cancelled.” A foreclosure may result in COD tax because the bank is taking the property back for less than the amount owed on the loan. This is a very complex area of law with a lot of unresolved questions. If you suspect that you may have a COD problem, make sure you consult with a qualified accountant who understands the issues. (Hint: Most lawyers do not understand these issues so advice from an accountant is better.)

“Chapter 13.” A form of bankruptcy that allows a debtor to make payments to a trustee over a period of time, usually 3 to 5 years, with any unpaid amounts of unsecured debt being discharged when the case is completed. Can provide some opportunity for “lien stripping.” Not available to debtors with more than $1,010,650 in secured debt, or $336,900 in unsecured debt.  For more information, review my blog post “Chapter 13:  What is it and why should you care?”

“Chapter 7.” Sometimes called “straight bankruptcy,” this is the process that allows a debtor to discharge most unsecured debts. Faster and more efficient than Chapter 13, but not everyone is eligible for it, and there are other significant advantages to Chapter 13 that are not available in Chapter 7.

“Deed of Trust.” The document that you signed giving the bank a security interest in your property. This is the source of the bank’s rights to foreclose.

“Deed in lieu.” Short for “deed in lieu of foreclosure.” This is where the borrower deeds the property to the lender as an alternative to formal foreclosure (or short sale). It is not a common occurrence these days, but not impossible. Generally this is not an option if there is more  than one deed of trust against the property because if the holder of the first take title, then it’s obligated to pay the junior encumbrances. Foreclosure wipes the juniors out. Sometimes referred to in slang as “jingle mail,” as in the keys jingle when they’re sent to the lender.

“Deficiency.” The amount by which the loan balance exceeds the amount paid to satisfy the loan. Using the below example of the house that is “under water,” the deficiency would be $50,000.  ($150,000 loan secured by property worth $100,000.)

“Equity.” The amount of fair market value in a property that is not encumbered by a mortgage or lien. If the property is worth $150,000, and all liens against the property total $125,000, then the owner is said to have a $25,000 equity interest in the property.

“Foreclosure.” The process by which the lender enforces its right to take the property back when a borrower defaults.

“Homestead exemption.” The amount of “equity” that a borrower may keep protected from creditors above and beyond most types of consensual liens. The amount varies under California law from the basic amount of $75,000 for a single homeowner, up to a maximum of $175,000 for certain seniors and low income persons.

“Junior deed of trust.” Any deed of trust or security instrument that is “junior” to, or of lower priority than the “First Deed of Trust.”

“Lien.” A recorded security interest in property. A deed of trust creates a lien. Other types of liens are mechanics liens, attachment lien, etc.

“Means test.” The test created by the Bankruptcy Reform Act of 2005 that requires consumer debtors to pass a test of their means in order to determine eligibility for Chapter 7.

“Non-Recourse loan.” A loan where the lender may not pursue the borrower personally for any “deficiency” but can only exercise its rights to the real property collateral. A “purchase money” loan is generally “non-recourse,” whereas credit card debt, refinance debt , is almost always “recourse”

“Notice of Default” or “NOD.” The formal notice that the bank send to the borrower and records with the County Recorder, which starts the foreclosure process. Recordation of this document starts a three month clock ticking during which the Bank cannot complete the foreclosure, and the borrower retain a “right of reinstatement.”

“Personal property.” All property that is not “real property.”

“Promissory Note.” The document that creates the loan and obligation to repay. It is a different document than the Deed of Trust, and is enforceable even if the Deed of Trust is not.

“Purchase money loan.” A loan obtained for, and used for, the purchase of real property that is occupied ion whole or part by the borrower. Subject to “anti-deficiency rule” of CCP 580b.

“Real property.” Real estate, land, house, factory, etc. The law treats “real property” and “personal property” very differently form one another.

“Recourse loan.” A loan which allows a lender to recover a deficiency from a borrower personally.

“Right of Reinstatement.” The right of the borrower to reinstate the loan according to its original terms. The borrower retains this right up to five business days before the scheduled “trustees sale.”

“Secured debt.” A loan that is secured by a lien on property.

“Short sale.” The sale of a property for less than the amounts outstanding on all existing loans. Not possible without bank’s approval because borrower cannot deliver marketable title unless existing liens are released.

“Strategic default.” A term used to describe a situation where a borrower chooses to stop paying a mortgage due, not to financial hardship, but due to a drop in property values. Studies have determined that when a homeowner’s negative equity position exceeds 25% of the loan balance, the occurrence of market wide strategic default increases significantly.

“Trustee’s Sale.” The process of actually selling the property at auction. The final step in the foreclosure process.

“Unsecured debt.” Debt that is not secured by a “lien” on any property of the borrower. Most credit card, personal loans and student loan debt is unsecured.

“Underwater.” This is the term used to describe a situation where the loan balance exceeds the current fair market value of the property. If the loan balance is $150,000, and the property is worth $100,000, the property may described as being “underwater” by $50,000.

 


 


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