(This article is written from the standpoint of the homeowner - but a creditor would gain much from reading it.  There are many pointers that will help both understand the process and anticipate problems.)  NOTE: the law of foreclosure and trustee's sale is unique to Arizona; do not apply this law to any other state.

What is a trustee's sale?
Trustee's sale is recorded
Curing the House Payment Arrears
Reinstatement and Cancellation of Trustee Sales
Getting Information About the Credit Bid
Filing Bankruptcy Before the Trustee's Sale is Completed
How Long Does All This Take?
Summary

Many times people call me for advice on bankruptcy because their home is in the middle of a trustee's sale (sometimes called a "foreclosure").  For some reason many wait until almost too late to ask for any help.  In fact, one couple waited to call until day before the sale; expecting that the process to stop the sale was so simple that anyone could do it in a moments notice.  The Bankruptcy laws became so complex after October 17, 2005 that it is extremely difficult to do all that must be done in just a few hours.  Therefore, I urge you to NEVER wait until just a few days, or even a couple of weeks before a sale is scheduled for your home.  This last minute rush puts everyone in a position of extreme stress and your attorney will not have the time necessary to properly review your situation.  Unless the filing of a bankruptcy is done correctly you may only delay your problems and still lose your home.  It takes time to properly complete, review, sign and file the huge stack of bankruptcy documents.  Those documents must be accurate because you are going to testify, under oath, that they are true and correct to the best of your knowledge.  Also, you are required to take a Credit Counseling class BEFORE filing your bankruptcy documents.

What should you do if you are behind on your mortgage payments?  Once you realize that you cannot pay the regular payments you need to be immediately pro-active.  Contact your mortgage company to determine if they have programs to help you.  Find out from all your lenders the amount that is owed against the house.  Determine the true value of your home.  Talk to neighbors and realtors to determine the true value of your home; make sure to consider all necessary repairs.  Deduct the costs repairs and the costs of selling your home (closing costs and realtor fees) from the value.  After you have these numbers decide whether you can afford to keep this house and whether there is value (equity) over and above the debt(s) owed on the home.  Do not include judgments; but do include IRS or Arizona Department of Tax liens - if they have been recorded.  Options: (1) workout payment arrangements with the lender; (2) sell the house and use the equity to start over; or (3) rent to house for enough to pay the mortgage(s).  If there is no equity and you cannot sell the house for what is owed against it, then you have to consider letting the lender foreclose, or talk to the lender about a "short sale" or Deed in Lieu of Foreclosure.  All of this work must be done before you can make a decision as to the next step - whether or not to file bankruptcy.

Understand that if you wait until after a trustee's sale has been started there will be additional fees and costs for the trustee who is conducting the trustee's sale.  Those fees and costs will be at least $1,500.  You must pay those additional trustee's fees and costs, plus all past due mortgage payments.  In addition, your past due payments will increase if your loan has a default rate of interest and late charges.  The quicker you do something, the less money you will need to pay.  If none of the options above work for you, then you may need to consider bankruptcy.  Bankruptcy is not a long term answer if you cannot afford to pay the regular monthly payments.  There are two types of bankruptcy which are applicable in your situation.  The first is a chapter 7 and second type is a chapter 13 - see Bankruptcy FAQ for more information about the differences. 

What is a trustee's sale?  If you are behind in our mortgage payments the lender has the right to start a judicial foreclosure or trustee's sale of your home.  Ultimately your home will be sold, whether through a trustee or by a sheriff.  Once this happens you will no longer own the property and you must move.  The following is the normal procedure followed by creditors to foreclose on your property.  In Arizona there are two possible procedures (1) a judicial foreclosure, or (2) a trustee's sale.  Most likely your lender will elect to proceed with a trustee's sale.  It is the cheapest and quickest method to protect their interest in your property. This article is not going to discuss the judicial foreclosure process. 

Trustee's Sale is recorded
Before the lender commences a trustee's sale they will normally send you demand letters identifying the default.  It is very important that you respond to these demands.  Ask for an accounting of the loan payments and compare them with your records.  If there is any discrepancy - work diligently and quickly to fix the problem.  Follow through on any requests for information and agreements to pay.  Sometimes it is not possible for you to pay what you owe (the arrears).  The lender will most likely start the trustee's sale.  A Notice of Sale is recorded with the County Recorder and you, along with all those that have interests in your property, will receive a copy of the Notice of Sale and the Statement of Breach.  The Statement of Breach will identify the defaults (e.g. failure to make monthly payments). 

By Arizona State law the trustee's sale auction cannot be completed until at least 90 days after the date that the Notice of Sale was recorded (Arizona Revised Statutes: 33-807 D).  Therefore, once you receive the notice you still have time to try to cure the back payments, sell the property and pay the debt or enter into a workout with the lender. 

Curing the House Payment Arrears
The law is very specific as to the property owner's rights and what the trustee must do with regards to accepting payment to cure all the arrears.  These rights also apply to all junior lienholders (other lenders secured by your home).  There are some very specific steps to follow in order for the lender/servicer to provide the property owner with the exact amount necessary to cure the arrears.  DO NOT WAIT UNTIL THE LAST MINUTE TO REQUEST THIS INFORMATION - IT WILL MOST LIKELY TAKE TWO WEEKS TO GET THE AMOUNTS DUE.

First you must contact the lender/servicer/trustee (best to contact all three) in writing and request a reinstatement through and including a specific date when you are sure you will have the money to pay the arrears.  The trustee is required by law to respond to your request for a reinstatement (cure of the arrears or payoff - Arizona Revised Statues: 33-803.01).  Include a request for them to identify where you should make the payment and what form (e.g. cashier's check). 

If you do not receive a response within 72 hours then send another request.  Keep sending requests every 3 days until you receive a response with the information that you requested.  Keep copies of each demand in case you need them later to prove how difficult the lender/servicer/trustee has been to deal with.  If the lender/servicer/trustee does not respond after four or five demands then immediately hire an attorney.  You can also file a complaint with the Arizona Banking Department.  In addition, go to the Arizona Corporation Commission's web site and find the shareholders for each of these entities.  Send each of the shareholders a certified demand for information, along with the copy of the complaint that you have filed.  If the Trustee is a lawyer than file a complaint with the State Bar of Arizona.  Of course, you can always file a complaint in court to ask a judge to make the lender perform as request.  Beware - none of these action will terminate the trustee's sale.

Once you have received the accounting compare it with your records.  If you have not been keeping copies of payments, then you have no proof that you made any missing payments.  Do not chance losing your home because you are stubborn and will not pay one or more mortgage payments you are sure you paid, but do not have proof.  Immediately make arrangements to pay the full amount.  Remember that the longer you wait to pay the more the late charges and other penalties you incur.  Keep copies of all correspondence, keep diary of the person you talked to, including the date and time of the discussion.  Confirm all verbal communications by sending a letter, fax or e-mail detailing your understanding of the agreement. 

The following is the law governing reinstatement and cancellation of trustee sales as of February 2006.  For updates you can go to the current Arizona Statutes.
33-813. Default in performance of contract secured; reinstatement; cancellation of recorded notice of sale 
A. If, prior to the maturity date fixed by the contract or contracts, all or a portion of a principal sum or interest of the contract or contracts secured by a trust deed becomes due or is declared due by reason of a breach or default in the performance of the contract or contracts or of the trust deed, the trustor or the trustor's successor in interest, any person having a subordinate lien or encumbrance of record thereon or any beneficiary under a subordinate trust deed, before 5:00 p.m. mountain standard time on the last day other than a Saturday or legal holiday before the date of sale or the filing of an action to foreclose the trust deed, may reinstate by paying to the beneficiary, the trustee or the trustee's agent in a form acceptable to the beneficiary or the trustee the entire amount then due under the terms of the contract or contracts or trust deed, other than the portion of the principal as would not then be due had no default occurred, by curing all other defaults and by paying the amounts due under subsection B of this section.

B. The beneficiary shall notify the trustee in writing of the performance and the name of the person who performed the conditions. The proceedings shall be cancelled and the contract or contracts and trust deed shall be deemed reinstated and in force as if no breach or default had occurred upon performance of those of the following which may be applicable:

1. Payment of the entire amount then due.
2. Payment of costs and expenses incurred in enforcing the terms of such contract or trust deed. These costs and expenses may include the following:
(a) Reasonable costs for mailing and photocopying.
(b) Actual expenses incurred for recording, publication, posting of notice of sale, auctioneer's fee, postponement fees and title costs.
(c) Other reasonable costs and expenses.
3. Payment of the recording fee for a cancellation of notice of sale.
4. Payment of the trustee's fees, in an amount not to exceed six hundred dollars or one-half of one per cent of the entire unpaid principal sum secured, whichever is greater.
5. Payment of expenses and reasonable attorney fees that are not otherwise provided for in this section and that are incurred in protecting and preserving the beneficiary's interest in the trust property.

C. On request from the trustor or any person entitled to notice pursuant to section 33-809, subsection B, at any time that the trust deed is subject to reinstatement, the trustee shall provide a good faith estimate of the sums that appear necessary to reinstate the trust deed.

D. On written request from the trustor or any person entitled to notice pursuant to section 33-809, subsection B that is delivered to the trustee after the recording of the notice of trustee's sale, the trustee shall inform the person of the exact amount necessary to reinstate the trust deed, separately specifying costs, fees and any other amounts that are required to be paid as a condition to reinstatement of the trust deed. The trustee shall provide that information within five business days after receipt of the written request. If the written request is received by the trustee during the five business days before the day of the sale, the trustee shall provide the information to the person as soon as practicable. This subsection does not require the extension of the period for reinstatement of the trust deed prescribed in subsection A of this section.

E. If the trust deed is reinstated as provided in subsection B of this section, the trustee shall have a cancellation of the notice of sale recorded in the same county recorder's office where the notice of sale was recorded. A trustee who, for thirty days after reinstatement, fails to have proper notice of the cancellation of the notice of sale recorded is liable to the person who performed the conditions resulting in reinstatement for all actual damages resulting from such failure.

F. If the trust deed is paid in full or if the sale is not held or is not properly postponed pursuant to this chapter, the trustee shall record a cancellation of the notice of sale. The cancellation of the notice of sale shall be recorded in the office of the county recorder in which the notice of sale was recorded.

Getting Information About the Credit Bid: 
Others may be interested in coming to the trustee's sale and purchasing your property.  The amount that the lender is going to bid at sale is called the credit bid.  A.R.S. Section 33-809(E) provides that beginning at 9:00 a.m. and continuing until 5:00 p.m. on the last business day preceding the day of sale and beginning at 9:00 a.m. and continuing until the time of sale on the day of the sale, the trustee shall provide to any person who requests of the actual bid or credit bid the beneficiary is entitled to make at the sale. If the trustee is unable to provide the credit bid during the prescribed time period, the trustee shall postpone the sale until the trustee is able to comply with this subsection.  Again, the trustee has no liability for the accuracy or completeness of the information.

Filing Bankruptcy Before the Trustee's Sale is Completed
IMPORTANT NOTE: After October 17, 2005 this area of law is in flux - anyone who has filed more than one bankruptcy in the last 12 months may find that they cannot get the protection explained below.  You must seek experienced bankruptcy attorney in order to determine your rights.

I have had several clients decide to file bankruptcy at this point because it can be a scary situation when they receive the Notice of Sale, or the investors start calling to "help them out of their situation".  Unfortunately, by waiting until after a trustee's sale has actually been started you may have incurred $2,000 or more in fees and costs which must be paid as part of the arrears.  All arrears can be included in the Chapter 13 bankruptcy plan and paid over a period of time stopping all additional service and late fees.  The law is currently in flux as to exactly how long that period may be – probably 3-5 years.  In order to qualify for a chapter 13 you must have more income than you have basic living expenses (excluding credit cards and other debts that will be discharged in your bankruptcy) and you must keep the new monthly mortgage payments current.

If you are in a situation where you do not qualify for a chapter 13 then you might be able to file a chapter 7.  The chapter 7 will delay the trustee's sale for a short period of time.  The filing of a chapter 7 requires the creditor to file additional paperwork with the Bankruptcy Court called a Motion for Relief from the Automatic Stay.  The Credit must obtain a signed court Order before proceeding with the trustee's sale.  In that you have filed for bankruptcy the lender is not allowed to sue you and obtain money judgment.  This result is that you can get rid of the debt on the house and all the other debts.

How Long Does All This Take?
Because every mortgage company is different and has different collection methods, it could take from 3 to 9 months for everything explained above to occur, your house to be sold at trustee's public auction and the new owner to require you to move out of the home.  While it is not suggested that you live "rent free" in your home until the last minute before the Sheriff sets you out on the street, if you are severely behind in your mortgage payments and cannot afford to keep the house, use that time to save for a down payment on an rental and move as soon as possible.

Summary
Please remember that you still own the house and can sell it up until the day of the trustee's sale, or if a bankruptcy is filed you can sell it as part of the bankruptcy workout process 

I hope this article helps homeowners understand the process of a trustee's sale of their home.  Most people want to keep their homes and will always try to make their payments.  But, if unforeseen circumstances make this impossible, do not cave in to a lender who calls and tells you to move immediately when you are only behind in your payments a couple of months.  Instead, tell them you know they cannot do anything until the Notice of Sale is recorded and the statutory 91 day period expires. Then decide whether you can afford to keep the home or it would be better to surrender it.  Then make plans to follow through with your decision as quickly as possible to avoid more stress in your life.  Remember a house is not worth your health and mental well-being.