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Bankruptcy in Arizona and Its Effect on Mortgage Foreclosures and Trustee's Sales

By Joseph McDaniel, Esq.

One of the proximate causes of bankruptcy cases in Arizona is the Notice of Trustee's Sale.

It's not the root cause of the bankruptcy filing; remember that consumer bankruptcy cases are caused by a slow growing issue like credit card debt, and then after the Jenga Tower is weakened, it's pushed over by a proximate cause like unemployment, cancer, divorce, or a lawsuit.

Or exhaustion (which is bad) or a moment of clarity (which is good) on the part of the debtor. 

These days the lead-up to the bankruptcy has often been prosperity; and while that sounds backwards (and you're right, it is backwards!), when people have saved a lot, and are feeling prosperous, they want things to stay that way.

So they find investment advisers to help them track down good investments, to prepare for retirement!

And all the successful investment advisers told prosperous people to stuff money into real estate investments, because the money it was so good for so long!

And then the real estate bubble burst, and Jenga Towers fell all over the United States.

But most people live in hope, which is a nice zip code. Until they can no longer ignore the alligators which have risen to nose level.

And the alligator which normally gets their attention is either the first lawsuit from a credit card company, or the Notice of Trustee's Sale which was hammered into their front yard.

And yes, people just pull those puppies out of the ground and run inside with them, to hide their shame. 

At that point, all but the terminally hopeful tend to seek the advice of a Bankruptcy Attorney in Arizona.

Some people prefer an Arizona Bankruptcy Lawyer, but you get the idea.  It's all the same to me, as long as they comparison shop for credentials, experience and client reviews.

Generally, if the first mortgage has started the Trustee's Sale, the story has some chance of a fairly happy ending. Here in Arizona we have the Arizona Anti-Deficiency Statute, which often keeps a family from needing to file a bankruptcy of any species, and I like it when I find out that the only debt a potential client has is a first mortgage, because the chances are good that they will not need to file any species of bankruptcy.

On the other hand, some folks want more time. I can understand that. And most folks have heard that a bankruptcy will stop foreclosures and trustee's sales, and that's entirely accurate.

But like many things in life, the sizzle is a little better than the steak.

While a Chapter 7 Bankruptcy will stop a Trustee's Sale, it will do so only temporarily.

The usual sequence of events is that the Trustee's Sale starts, and prior to the Trustee's Sale (because the house may be useful in passing the Means Test, even if you aren't making payments!), a Chapter 7 Bankruptcy is filed.

And almost immediately thereafter, the Bank or Mortgage Company files a Motion to Lift the Stay.

Now, there are only two defenses to such a Motion, and they are that the property is necessary for an effective reorganization, and that the property has equity for the bankruptcy estate. 

And as you will see upon reflection, the property is certainly not necessary for an effective reorganization because the case is a Chapter 7, which is not a reorganization! It's a liquidating case, although most debtors get to keep most of their stuff.

And there is almost certainly no equity in the house for the estate; the homestead exemption in most Chapter 7 Bankruptcy Cases in Arizona is $150,000. And yes, I said most; more on that in a later post.

So the Motion to Lift the Stay is Granted by the U.S. Bankruptcy Judge in the District of Arizona Bankruptcy Court.

And now that the Bank has permission, the Trustee's Sale, which is typically continued when a bankruptcy is filed in Arizona, not terminated (which would give the debtor another 90 days, you see?),  now occurs very soon after the Automatic Stay is lifted.

In a Chapter 13, the Automatic Stay and a permanent injunction may prevent a Trustee's Sale from happening at all; but you gotta pay to play.

In a Chapter 13, you will typically propose a Plan wherein you will cure the default over a reasonable time period, and stay current during the life of the plan.

If you want to keep the house.

On the other, other hand, since it's two hundred thousand dollars underwater, why would you?

 

Full post as published by Arizona Bankruptcy Attorney Blog on February 03, 2011 (boomark / email).