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USFN 25th Anniversary

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Why Deceased Borrowers Cause Title Problems in Texas

by Michael W. Zientz
Barrett Burke Wilson Castle Daffin & Frappier, L.L.P. — USFN Member (TX)

Death is as inevitable as taxes, but when someone dies in Texas and still has a debt due on his house, title problems become just as expected. The reason for the title issues is simple, but the solution can become quite complex. In this state, upon death, title to the house immediately passes to the heirs at law of the deceased; however, those heirs are not liable for the remaining debt on the house because they never signed the note or deed of trust. One can now see the title issue beginning to form. The house is now owned, in part or in whole, by someone who is not a party to the deed of trust, which happens to be the document in Texas granting the power of sale.


Overview of Texas Probate Law


For the purposes of this article, we’ll assume that the deceased borrower was single at the time of death and that the deed of trust upon which we are attempting to foreclose was a purchase money transaction rather than a home equity loan or a mechanic’s lien. (Although the same problems occur in these scenarios, the solutions are somewhat different.)


As referenced above, title to property passes to heirs at law. In Texas, an heir at law is a relative who is related to the deceased by blood, meaning that a spouse or in-law is not considered an heir at law. Furthermore, priority of the heirs at law is determined by looking down the family tree to children of the decedent. If there aren’t any children or descendants of the children (i.e., grandchildren, great-grandchildren, etc.) then one looks upward to the parents of the decedent. If the parents are no longer living, the next step is to seek brothers and sisters and their descendants. These are the people who are entitled to the property if the decedent did not have a will or if a will left by the decedent was not offered for probate to the proper court in Texas. It is highly likely that when someone passes away, he has left a will dividing his property. But, in Texas, a will that is not probated is of no legal force and effect, making it is as if the deceased died without leaving one.


If someone passes away and leaves a will that is probated, there will be a court proceeding determining the type of probate administration that will follow. For simplicity, we will proceed under the assumption that the court enters an order granting “Letters Testamentary,” which means that the court appoints an independent executor/executrix to divide the property of the deceased in accordance with the will. In this scenario, while the borrower is deceased, the estate takes on all of the legal responsibilities of the borrower, becomes liable for the borrower’s debts, and takes title to the borrower’s property.


If someone passes away and does not leave a will, or the will is contested among the family members and someone files an application with the court to open a probate proceeding, the court will then grant Letters of Administration and appoint a dependent administrator. This means that the administrator must have court approval to divide the deceased’s property. Like the scenario above, the dependent administration takes on all legal responsibilities of the borrower, becomes liable for the borrower’s debts, and takes title to the borrower’s property.


Finally, if someone passes away and does not leave a will or leaves a will that is not offered to the court to be probated, then that person is said to have passed away intestate. This scenario causes the most title problems and the longest delay in proceeding with Texas foreclosures.


Fixing these Problems


When an independent executor/executrix is appointed, Texas case law supports the position that we may proceed with a nonjudicial foreclosure of the property under the terms of the deed of trust, as long as several new notices are provided to the independent executor/executrix. If the executor/executrix was appointed within the past six months, we are required to wait until at least six full months have passed before proceeding with a foreclosure sale. This six-month period allows the executor/executrix to review the estate, find out whether monies are due the estate, and determine the debts that are owed by the estate. After the six-month period expires, the foreclosure sale may proceed.


When the court appoints a dependent administrator, a claim must be filed with the administrator asking for approval of the claim as a preferred debt and lien against the property only. In this situation, only the property is looked to for satisfaction of the lien and, therefore, will have priority over all other claims relating to the property. Once the claim is accepted, either by the administrator filing a memorandum of allowance with the court or by a lawsuit filed against the administrator to validate the claim, application to the court may be made to allow proceeding with a foreclosure sale in accordance with the terms of the deed of trust. This process can take several months to a year to complete, depending on the size of the estate and whether there is equity in the property that the estate is trying to recapture by selling the property on its own.     


Finally, if there is not a probate proceeding pending, it falls upon the attorneys to locate the heirs at law who took title to the property at the time of the borrower’s death and obtain a court order declaring that a foreclosure sale may proceed. This author’s firm searches the Internet and makes phone calls to possible relatives and former neighbors of the deceased borrower to inquire about who the heirs at law might be and where they can be found. These heirs at law are contacted via a special demand letter informing them of who we are and what we plan on doing to foreclose on the property. As discussed earlier, while these heirs at law are not liable for the debt, Texas law states that they do not get title to the property free and clear of the lien. If the heirs do not respond to the demand letter, a lawsuit is filed against them and, sometimes, against defendants named “the unknown heirs at law of John Doe.” This is to ensure that everyone who might have a title interest in the property is brought into the lawsuit.


Once all of the defendants are served (some personally by a sheriff and some by publishing the citation in the local newspaper) and an attorney has been appointed by the court to represent those served by publication, a final prove up hearing is held in which the court is asked to declare that the defendants are the only heirs at law of the deceased borrower. We also ask the court for an order allowing us to proceed with foreclosure of the property pursuant to the terms of the deed of trust. This process can take at least nine months and sometimes as long as fifteen months to complete and basically turns Texas’s nonjudicial foreclosure into a full-blown judicial foreclosure proceeding that can be the longest from referral to foreclosure in the nation.


Things to Remember


When a borrower dies in Texas, the foreclosure process can come to a halt until it is determined who has been appointed by the court to take on the legal rights and responsibilities of the borrower, or who took title to the property upon the borrower’s death. Then it must be decided if new sets of demands are needed, a claim needs to be filed, or a lawsuit against the heirs at law is necessary. Most importantly, the borrower’s death changes Texas into a judicial foreclosure state, and the time from referral of a loan to foreclosure of that loan needs to change accordingly.


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