Homestead, Probate, Foreclosure
In today’s environment, it is not uncommon for the single most important asset being transferred to the children of a decedent is his or her primary residence. The only problem is that the primary residence may be under water, in foreclosure or will soon be in foreclosure following the owner’s death. When this happens, the children often ask what they should do with their parent’s homestead. Unfortunately, the solutions are not always good ones. This article explores mortgaged real property and the possible consequences following a person’s death.
When a person dies there is often a procedure called probate that occurs. Probate is generally considered the orderly transfer and administration of property from one individual to another. In almost all probate cases there is a personal representative who is appointed by the Court to administer the transfer of a decedent’s property to the beneficiaries. The personal representative has the authority to transfer a decedent’s property based on the terms of a Will or by statute. The personal representative also has the power to not transfer property; provided, such decision is reasonable. For example, does it make sense to transfer encumbered property that is underwater and is valueless? The answer is probably not.
You may be wondering how can a personal representative avoid transferring property when a decedent’s Will directs it or where a statute provides the means to do so? The answer lies in the possibility of exercising the right to abandon property. Florida law gives a personal representative flexibility in making decisions regarding property abandonment. The unique thing about Florida’s statute allowing abandonment of property is that there is no requirement for the Court to approve such abandonment. However, in this author’s experience, failure to get the Court to grant abandonment of valueless property could be dangerous. Dangers can occur if certain procedures are not followed prior to seeking abandonment.
The first procedure that should be initiated is to serve notice to the mortgagee (assuming the property is encumbered) that the person responsible for the secured investment (the mortgagor) is dead and that an estate proceeding is currently underway. This is called giving “notice to creditors” and gives the creditor (mortgagee) the right to file a claim against the estate. Generally, the mortgagee has 30 or 90 days to file their claim depending on when the creditor’s notice was delivered. Alternatively, you could elect not to initiate a probate until 2 years following the death of the decedent, but doing so may give the mortgagee an incentive to file for probate on their own and marshal the estate assets to their benefit.
In the event the mortgagee does not timely file a claim within the lawful creditors period, then any claim filed by the mortgagee (or any creditor who failed to timely file a claim) can be rejected. The creditor could request the court to grant them an extension of time to file a claim in the event they fail to timely file; however, in the author’s experience a grant of an extension of time to file a untimely filed claim is rarely granted by the court. An extension is generally granted only if the personal representative committed fraud upon the creditor or no notice is served.
The consequence of delivering a notice to a mortgagee regarding the estates real property is that it serves as an alarm to the lender that the security of their loan is in jeopardy. If the lender is quick acting they could initiate a foreclosure immediately and file a claim. In the author’s experience this rarely happens because it takes the financial institution more than 3 months to realize that no payments are being made which would justify the initiation of a foreclosure action and thus a claim against the estate.
If the mortgagee is quick to react and does initiate a foreclosure on the property, the estate and personal representative will be named as defendants. When this occurs, the wheels of a probate can come to a screeching halt. The mortgagee can make a claim against the estate for the value of the outstanding principal balance owed on the mortgaged property. Naturally this would be offset if the property is sold in a foreclosure sale or short sale. If you are fortunate enough to have a mortgagee not file a timely claim, then abandonment of the mortgaged property becomes much easier.
To abandon property, it is strongly suggested that you petition the court and request that the property be released as an asset of the estate. As part of the petition, it is also strongly recommended that you serve notice on the lender that the mortgaged property is being abandoned. Failure to serve notice on the mortgagee of such abandonment could give them the right to hold up an estate proceeding and ultimately distribution of assets. Stopping estate proceedings can occur because the creditor was known and was not given an opportunity to object to the abandonment of the secured interest in the property. However, if notice to creditors has been properly served on the mortgagee and they failed to timely file a claim; it is unlikely that the court will grant an extension of time to the creditor to file a claim.
Recently, mortgagee’s have become more aggressive by freezing a mortgagor’s bank accounts. As a result, when a decedent passes and their real property is mortgaged, it is strongly suggested that the personal representative close all of the decedent’s accounts immediately and place the proceeds in an estate account separate from the financial institution that holds or services the mortgage. This will at least give the estate some protection (although not perfect) from being frozen or confiscated by an overly aggressive creditor
As stated in the initial paragraphs of this article, Florida law does not require you to serve notice when abandoning property. But if you do abandon property without serving notice on the mortgagee the personal representative runs the risk of being surcharged for breach of their fiduciary duty. The possible liability is that the personal representative may have to personally pay for the pecuniary loss of the abandoned property if it can be shown that there was value in the property or that abandonment was not reasonable or damage occurred to the property as result of the abandonment. As you can imagine, a financial institution could easily make the claim that the property has value albeit not the full principal balance, but has value or that damages occurred to property.
As you can see, when a person dies and their property is encumbered with a mortgage, it is prudent to serve notice on the mortgagee to file a claim within the creditors period. If they fail to timely respond with a claim against the estate, then seek court approval to abandon the property; provided such property is underwater or basically valueless. If you are not sure about what to do when a loved one dies and you are a beneficiary or the nominated personal representative seek the advice of an attorney to set up a plan on how to handle an estate’s indebtedness prior to jumping into a probate. It could save you and the estate’s beneficiaries thousands of dollars.