While the death of a property owner and the probate of their estate doesn’t stop the foreclosure process, the estate’s personal representative may be able to save the property from foreclosure. The easiest way to stop foreclosure is to use the estate’s liquid assets to pay the outstanding mortgage loan payments.
If there aren’t enough liquid assets to do that, the personal representative can get a temporary injunction from the probate court to halt the foreclosure process. The injunction should provide enough time to either sell the property or sell other illiquid assets to pay the outstanding mortgage loan payments.
How to handle the foreclosure of property in probate
The personal representative of an estate has a fiduciary duty to prudently handle the estate during probate. If the property in question was in foreclosure before the owner died, you’ll be expected to do everything in your power to save the property from foreclosing.
If the property entered foreclosure after the decedent’s passing, it’s even more important to avoid foreclosing as you may be held personally liable if your negligence contributed to the foreclosure. Either way, here’s how you should handle foreclosure during probate:
- Contact the lender
- Review the mortgage documents
- Review the estate’s other assets
- Settle the outstanding loan payments with liquid assets (if possible)
- Request an injunction (if necessary)
- Determine the property’s fair market value
- Sell the property
Contact the lender
When you initially reach out to the lender, it’s important to do so in writing. Send the letter using certified mail with a return receipt request for proof of contact. Include a copy of the owner’s death certificate and your letters of appointment as the estate’s personal representative.
Ask the lender for a statement that shows the remaining balance on the mortgage and what the past-due amount is. It’s also helpful to request a copy of the loan documents, along with documentation of the payment history.
Review the mortgage documents
When you receive your response from the lender, review the documents. Highlight the principle balance, the overdue balance, and the date of the first missed payment. If the loan documents are confusing (as many mortgage agreements are), you may want to review them with an attorney to ensure you understand your rights and the lender’s rights under the terms of the agreement.
Review the estate’s other assets
As you’re reviewing the mortgage documents, take an inventory of the estate’s other assets and lump them into two categories: liquid and illiquid. Liquid assets are usually financial accounts that can be converted to cash (liquidated) within a few days. That includes bank accounts, brokerage accounts, certificates of deposit, stocks, bonds, mutual funds.
Gold and silver coins are also considered liquid assets. Illiquid assets are assets that may take some time to sell and convert to cash, and typically include other properties, vehicles, art, jewelry, collectibles, or other valuable personal possessions.
Settle the outstanding loan payments with liquid assets (if possible)
If the estate has enough liquid assets to settle the overdue balance, you should be able to quickly liquidate the accounts and transfer the proceeds to an estate checking account. When you write a check to the lender, send the payment by certified mail with return receipt requested, and keep a copy of the payment for the estate’s records.
Request that the lender provide you with proof of payment and proof of cancellation of the foreclosure and add those documents to the estate’s records. You’ll need to present those documents to the probate court when you file your final accounting.
Request an injunction (if necessary)
If the estate doesn’t have enough liquid assets but may have enough illiquid assets to settle the overdue balance, request an injunction from the court to stay the foreclosure until you have enough time to liquidate the assets. Depending on the assets that need to be sold, the court may give you anywhere from 30 days to several months.
When you’re able to sell the assets and gather the proceeds in the estate checking account, send the lender a check by certified mail with return receipt requested, request proof of payment, request proof of cancellation of foreclosure, and keep copies of everything for your final accounting report to the court. If the estate doesn’t have enough combined assets to settle the overdue balance, request an injunction from the court to offer enough time to sell the property.
Determine the property’s fair market value
Before you list the property for sale, you’ll want to hire an appraiser to determine the property’s fair market value. If the property is worth less than the principle mortgage balance (i.e. the property is “underwater”), you should consult with an attorney and the estate’s beneficiaries to decide if it’s worth the hassle to save the property from foreclosure.
When making your decision, consider the value of the estate’s other assets, the extent of the estate’s other liabilities (debts, bills, taxes, etc.), and the likelihood that the lender will file a claim against the estate if the foreclosure doesn’t satisfy the principle mortgage value.
Sell the property
If the property isn’t worth much more than the principle loan value, speak with the lender to see if they’ll accept a short sale. With a short sale, the bank may accept less than the loan value and the selling process can be a little quicker.
If the bank isn’t willing to accept a short sale, you’ll need to work with a real estate agent to sell the property. As you do, pay attention to the court’s injunction on the foreclosure—the court may be willing to extend the injunction if the property is difficult to sell for fair market value, but if the injunction lapses the lender may move quickly to foreclose on the property.
How does a foreclosure affect a beneficiary’s inheritance?
If the lender doesn’t make enough money from the property’s sale to satisfy the principle value of the loan, the lender may submit a claim against the estate to recoup the remaining value.
Valid creditor claims take precedence over beneficiaries, so the estate would need to settle all of its liabilities (including the mortgage lender’s claim) before any assets can be distributed to the beneficiary. If the estate is insolvent (meaning there are more liabilities than assets), the beneficiaries listed in the decedent’s will won’t receive the bequeathed assets.
There’s one important exception to that rule. Assets that have a designated beneficiary listed on the account are allowed to transfer to the beneficiary outside of probate and are exempt from creditors’ claims. Even if the estate is insolvent, these assets don’t pass on any liability to the designated beneficiaries. Some of the most common non-probate assets include retirement accounts, life insurance policies, trusts, and joint accounts with rights of survivorship.
Do You Need Help with Probate Matters?
As you can see, AZ probate laws can be complex. It requires a number of steps and without the right approach, it’s easy to get lost in the details.
At JacksonWhite, we can make probate a clear, easy-to-understand process. If you’d like help with probate matters, call the talented team at JacksonWhite Law today.
We can help explain your legal options and direct you to the probate solution that works for you and your loved ones.