1)
Interrelationship
of a Trustee's sale and Bankruptcy. Includes
references to short sales, loan work outs, Homeowner's
association dues.
2) Trustee's Sale
Process, with excepts about Bankruptcy. This article is
written from the viewpoint 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 and Motion for Relief
◙
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 are very
complex and became even more so after October 17, 2005.
Therefore it is extremely
difficult to do a bankruptcy and none should ever be done in just a few hours.
Moral: 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 will 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.
TRUSTEE
SALES (FORECLOSURE) AND BANKRUPTCY
Trustee sales of real property (your home or land) and a
bankruptcy are two separate legal processes. Both trustee
sales and bankruptcy has a set of rules governing timing,
processes and rights for both the lender and the
borrower/debtor. I cannot explain one time line for these
two processes because each has a separate timeline. Also
the lender has their own internal rules and procedures. I
cannot predict what these rules and procedures may be or the
timing they may choose. So I will do my best to explain
these separate processes and how they are intertwined.
Understand the following is very generic and your situation
may be slightly different from the norm.
Trustee’s sales of real property (home or land): the
lender’s goal is to either get paid the money they are owed
or get the property.
If you have more than one loan real property (home or land)
each lender has a contract with you. Each lender can pursue
their rights to get paid. If they are not paid each lender
can process a foreclosure, trustee’s sale, sue you on the
Promissory Note, or do a workout with you. No lender is
forced to follow the lead of another lender. So your
primary lender may agree to work with you, but the second
lender on your home refuses. That is their right.
The trustee’s sale process:
1) Once there is a default the lender has the right to
file a trustee’s sale and auction the property for sale.
2)
Starts with a notice of trustee’s sale which is recorded
with the County Recorder’s office.
3) The
property owner receives a copy of the notice of sale by
certified mail. The notice of sale is posted on the front
door and published in a newspaper.
4)
You still own the house until the sale (auction) is
completed. You can rent the property and use the money as
you need. You can remove items that belong to you. Do not
remove any items that are fixed to the walls or will cause
damage to the property.
5) The sale date is at least 90 days from the date
that the notice of sale is recorded.
6)
The lender has the right to postpone the sale to a date
later than the original schedule sale date. The lender may
elect to postpone for any reason.
7)
Do not assume the lender will postpone even if they are in
the process of working with you about a loan modification or
short sale. There are thousands of reports of homeowners
who are working with the lender but the trustee’s sale
happens despite promises made by the lender.
8)
Once the sale (auction) is complete then title conveys to
the new owner (probably your lender).
9)
A trustee’s deed will be recorded with the county recorder’s
office. This deed transfers title to the new owner.
10)
Do not remove any items from the house after title conveys
to the new owner – that is theft.
11)
You will receive a 5 day notice to vacate the house.
12) If
you fail to vacate within the 5 days then the new owner can
file a forcible entry and detainer.
13)
There will be a hearing within 10-12 days. The court will
enter an order for you to vacate the house within 5 business
days after the court hearing.
14)
Continue to pay the homeowners dues until the house changes
title (a trustee’s deed is signed)
The bankruptcy process:
1)
When a bankruptcy is filed an automatic stay stops all
civil actions (lawsuits, foreclosures, garnishments,
repossessions, etc).
2)
If there is a trustee’s sale pending on your home the lender
may not precede without first obtaining permission from the
Bankruptcy Court by filing a motion for relief from the
automatic stay.
3)
If no trustee’s sale was started before your bankruptcy was
filed the lender may not proceed without first obtaining
permission from the Bankruptcy Court by filing a motion for
relief from the automatic stay.
4) The automatic stay continues to protect the debtor
and their property until either the Bankruptcy Court enters
an order lifting the automatic stay or a discharge is
entered.
5)
Once the discharge is entered the lenders (who were listed
in the bankruptcy) are permanently stopped from suing you.
The lender still has the right to their collateral (house or
vehicle so if you want to keep these items you need to pay
for them.
6)
A discharge is entered in a chapter 7 after 120 days
(assuming you have completed all the requirements) or in a
chapter 13 3-5 years.
7)
In either chapter 7 or 13 the lender can file a motion for
relief from the automatic stay asking that the Bankruptcy
Court let the lender to as they please as to the property.
8)
In a chapter 7 this motion for relief is usually granted
unless you are current on the mortgage payments.
9)
In a chapter 13 this motion for relief is usually not
granted if you keep the new mortgage payments current after
filing the bankruptcy. You can use the chapter 13 to pay
the back mortgage payments when you filed the bankruptcy.
10)
There is no way to predict how long it will take the lender
to file a motion for relief, or even if they will file one.
11)
When a motion for relief is filed it takes approximately 25
days to complete process from the date the motion is filed
with the Bankruptcy Court.
12)
Once a motion for relief is filed with the Court it is
very important that you let your attorney know if you
have been making the mortgage payments or some other reason
why the lender’s motion is not appropriate. You only have
15 days to file an objection to the motion for relief
otherwise the Court will grant the lender’s request for a
lift stay order.
13) Once the Order lifting the stay is signed by the
judge the lender may continue with their trustee’s sale,
negotiate a short sale or loan modification or repossess the
vehicle.
14)
There is no way to predict how long it will take the lender
to process trustee’s sale, negotiate a short sale or loan
modification or repossess the vehicle. It could be days,
weeks, or months. Until the legal process is completed you
still own the property.
15)
It is your responsibility to check with the person/company
conducting the trustee’s sale of your home/property. Once
your bankruptcy was filed they have been postponing the
sale. This may have been for a few weeks or several
years. This is not the trustee assigned to your bankruptcy
case. It is the trustee that was listed on the notice of
trustee’s sale which you received when the sale was
originally started. If you cannot find this notice of sale
you can get a copy at the County Recorder’s office. It will
have the name and phone number for the trustee.
16)
Do not assume the lender will continue with a loan
modification or short sale once the Court enters the order
lifting the stay. The lender can do anything they want
without the Bankruptcy Court stopping the lender. Be very
careful.
17)
If you have more than one loan on your property each lender
can file for an order and pursue their legal options
(trustee’s sale, deed in lieu, short sale, or loan
modification).
18)
Continue to pay the homeowners dues that come due after the
bankruptcy is filed until the house changes title (a
trustee’s deed is signed)
19)
Once the trustee’s sale is completed the new owner has the
right to evict you as set forth in the trustee’s sale
process detailed above.
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 and Motion for Relief
IMPORTANT NOTE: After October 17, 2005 - 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.
Bankruptcy Monitoring fees, such as "drive by fees" cannot
be charged to Debtor during an open chapter 13 (but see
contract). (In re
Stark vs Crestar Mortgage, (WD NC, 3/31/99) 242 B.R.
866)
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
creditor must obtain a signed court Order before proceeding with the trustee's
sale. Once the motion for relief from the automatic stay is filed with the
Court it will take the creditor approximately 20-30 days to obtain that signed
court Order. Once the creditor obtains the court order now they can move
forward on the trustee's sale or start one, depending on the circumstances.
But, the good news is that because you have filed for bankruptcy the lender is not allowed to
sue you and obtain money judgment. Therefore, you can get rid of the debt on the house and all the
other debts.
If the Debtor is
not making the payments on their property then chances are they will receive a
Motion for Relief of Stay (MFR) shortly after filing the bankruptcy. We talked
about this process when we met to fill out your documents, therefore this notice
should not come as a surprise. But in case you do not remember here are the
basics:
When your
bankruptcy was filed a restraining order called an automatic stay stopped your
creditors from seizing assets without first obtaining a Bankruptcy court order.
Therefore, a MFR is a proceeding that is initiated by the creditor to end the
restraining order against them. It’s a proceeding to allow them to continue
whatever course of conduct they were pursuing before the bankruptcy case was
filed. So if they were in the process of foreclosing a home or repossessing of
a vehicle, your bankruptcy froze that process. The Order granting the MFR
simply allows them to pick up where they left off. But they cannot sue you for
losses, unless their motion asks for this remedy.
If they were
about to sell the house, and you filed a bankruptcy a few days before the sale
date, they can now continue forward with their sale (which has probably been
continued from date to date until this relief order has been entered…so watch
out since it may even be the day the Judge signs the relief of stay order).
IT IS YOUR RESPONSIBILITY TO TRACK THE POSTPONED TRUSTEE'S SALE, THIS OFFICE
DOES NOT DO THAT FOR YOU.
In Chapter 7
there are very few defenses to the MFR so if you want to keep property in a
chapter 7 then keep the payments current, otherwise you should file a chapter
13. In a Chapter 13 the law requires that you start making your regular monthly
payment to each of the secured lenders. Talk to me about making payments to
those lenders who we are scraping off the debts. If you fail to make the
payments in either 7 or 13 then the lenders will most likely be able to obtain
this court order and pursue their remedies against the security (house, car,
appliances, etc).
If you are in a
chapter 13 and want to keep the property then make sure you are making the
regular months payments. Here is an excerpt from the Disclosure statement that
you signed before your chapter 13 was commenced:
YOUR HOME: It is absolutely imperative that
you start making the regular monthly payments to all the secured creditor(s) on
your home at the next regularly scheduled payment after you filed your
bankruptcy. In other words - the next month after filing your bankruptcy you
must make your payment. I require that you make all payments by cashier’s
check and mail to your creditor by certified, return receipt mail, keeping
copies of all payments and transmittal letters. Make certain that you
check with your lender to obtain the correct person or department where you
should send your payments. Tell the lender that this is a bankruptcy matter and
they will transfer you to the correct department that is handling your file. If
you fail to make any of these payments the lender will file for a Court Order
permitting them to take your home. If the lender takes this step and you want
to save your home you will need to pay my fee for responding (at least $500) and
pay the attorney's fees for the lender (usually $600 to $1,000), plus pay them
the missed payments since you filed your bankruptcy. It is expensive to miss
even one payment. If you want to keep you home you must keep the payments
current - NO EXCEPTIONS.
You may do your best to keep your mortgage payments current only to find that
your lender sells your loan to another lender and the loan records are "screwed
up". The following is an e-mail from a chapter 13 trustee relating some of the
nightmares that borrowers/debtors have been facing:
"Our Chapter 13 trustee is having problems with any number of lenders. Lenders
and loan servicing is becoming a big problem as loans get sold and re-sold. The
loan history does not follow the loan, servicers go out of business and getting
an accurate accounting is impossible. The degree to which mortgagees can screw
up the accounting of a mortgage that is being cured in a chapter 13 plan is
boundless. The stories would be amusing if it were not for the very real threat
of foreclosure at the end of a chapter 13 plan."
What can you do to protect yourself? Before and during your bankruptcy you must
request all of the backup documentation and actually look to see that the
payments are credited correctly. If they are not you must immediately notify my
office so that we can object to the proof of claim filed by the lender. This is
your responsibility, after all this is your home you are trying to protect.
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.
