Homeowner Liability

Many people either purchased a home at or near the peak of the real estate market (2003-2006) or refinanced their home mortgage to get cash out to make other purchases or even to pay down credit card debts. Now that the real estate market has crashed and many homes are valued substantially less than the amount owed, many people are struggling with the decision of how to keep their home or whether they should keep their home.

Foreclosure is what happens if you don’t pay the mortgage payments. The terms of the mortgage or deed of trust provide that the lender can sell the property to pay the debt if the borrower defaults on making the payments. In Arizona, most homes are secured with a deed of trust and upon default, the lender has the right to order the trustee to sell the property to pay the debt without having to file a lawsuit or ask a judge for permission. This is a non-judicial process and involves the following steps:

  1. The borrower must have missed paying one or more mortgage payments. This may prompt a call from the lender, a letter or both. However, most mortgage companies will not start foreclosure unless you are at least 3 payments behind.
  2. The lender records a Notice of Trustee Sale which includes the name and address of the trustee conducting the trustee sale, a description of the property, the amount of the debt owed (note that this amount changes daily) and the date the sale is to be conducted.
  3. The lender must attempt to notify the homeowner of the Notice of Trustee Sale. Lenders will often send a certified letter to the last known address of the borrower and post the Notice of Trustee Sale to the house on the property. I have seen them on garage doors and front doors. It is not unusual to see such notices on the driveway or even in the street after they have been blown away from the house.
  4. The lender must wait at least 90 days from the date the above notice was recorded before executing the trustee sale. During those 90 days the borrower can pay the arrears and the attorney costs to reinstate the trust to avoid the sale.
  5. The trustee sale is an auction which often takes place at the courthouse but that is not required. The lender does not have to sell if there is no bid or if the price is too low. The lender may postpone the sale several times and the property may remain in the name of the borrower for quite some time. The lender often takes title if there is no successful bid from others.

Because the value of the property has declined so dramatically, often in the range of 30% – 50%, many homeowners are wrestling with the decision of whether they should continue to make the payments. If you made a large down payment at purchase and you have invested substantial sums for improvements to the property, you may be very reluctant to think about any option other than keeping the property. However, there are some economic considerations which may affect your decision. Here are some important considerations:

  • Can you afford to make the payment now and will the payment remain fixed? If so, you might feel an obligation to honor your agreement and continue to make the payments. If you cannot make the payments now or if you are anticipating that when the rate adjusts upward, you will not be able to make the payments, then consider the other options
  • You may recognize that if your property appreciates at historical rates of 2% or 3% per year, you will never regain an equity position in your home. Therefore, your reason for owning a home may no longer exist.
  • You may be able to rent a home in the same neighborhood, perhaps one with the same floor plan, for substantially less than the sum of the mortgage payment, the insurance, taxes and HOA dues.
  • You could save the difference and after a few years, use that nest-egg to pay a down payment on another home which is for sale for nearly one-half of the price you paid for the home you bought at the peak of the market.

However, if you do want to keep your home, and you have gotten behind on the payments, you can use a chapter 13 bankruptcy to catch up on the arrears. You will still need to make the mortgage payments as indicated in the promissory note and also make payments according to a plan of reorganization which will include monthly payments of 1/60th of the amount due for arrears.

Filing a chapter 7 bankruptcy will not resolve the deficiency or the pending foreclosure. However, filing a chapter 7 bankruptcy will delay foreclosure for a few months while your lender seeks permission from the court to proceed with foreclosure. During that time, the lender may entertain allowing a modification of your loan so that you can continue to make the payments.

Call 480-755-8000 to speak with our Arizona bankruptcy attorney today for immediate help.