Trustee's Sale and Bankruptcy

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.