The possibility of losing your home to foreclosure is terribly stressful. Some of our clients’ properties are under water, owing the bank more than their homes could sell for on the market. Others are behind on payments with no means of catching up in the little time foreclosure law allows. Still others simply want to let the property go, get rid of the debt, and move on with their lives. Personal bankruptcy really does offer solutions to all of these home loan problems.
How Bankruptcy Helps with Foreclosure
Filing for bankruptcy will give you immediate debt relief. This includes putting a stop to foreclosure proceedings, at least for a while.
At the same time your petition is filed with the Clerk of the Bankruptcy Court, a powerful injunction called the “automatic stay” goes into effect. The stay protects you and your property from debt collectors, creditor lawsuits, repossessions, and home foreclosures.
First of all, your mortgage company is a secured creditor. And in personal bankruptcy, a secured creditor cannot repossess or foreclose on your property without obtaining the court’s permission in advance.
Before any lender can foreclose on real estate, it must ask the bankruptcy judge to lift the automatic stay. This means the bank must prove you defaulted on the loan and that you have chosen no other bankruptcy alternative (for example, a Chapter 7 reaffirmation agreement as discussed below). Only if the judge grants the motion to lift stay can the mortgage company proceed with foreclosure in the county where the property is located.
Wherever you happen to be in the foreclosure process, bankruptcy relief could give you a much-needed temporary delay or provide a permanent fix. One that puts you back in the lender’s good graces. Much depends upon the type of bankruptcy you seek – Chapter 7 or Chapter 13.
Stop Home Foreclosure in Chapter 7
The purpose of bankruptcy is to give you financial relief, a safe harbor from out-of-control debts. In a Chapter 7 liquidation, you can use the safe time provided by the automatic stay to move your family into more affordable housing. Maybe rent a nice place for a year or two and build up your savings. With foreclosure on hold and the lender sidelined, you have time to think, make a plan, and better your situation.
You’ll be making important financial decisions in Chapter 7. Will you enter into a reaffirmation agreement with the mortgage lender? Could you redeem the home by paying off the entire loan amount? Or should you surrender the property to the lender so any balance owed may be discharged in bankruptcy?
Not everyone is eligible for Chapter 7 because of the Means Test. An Allegiant Law Group lawyer will walk you through the possibilities and explain the “whys and hows” of your case.
Stop Home Foreclosure in Chapter 13
Many homeowners file a Chapter 13 wage earner reorganization bankruptcy. Why? Because Chapter 13 allows the debtor with steady employment to cure a mortgage default as part of a three-year or five-year repayment plan. Keeping up with Chapter 13 plan payments and staying current on the mortgage means the lender cannot foreclose on your property.
What if you lose your job, are injured, get sick, or somehow fall behind on your Chapter 13 plan payments? Don’t give up because things haven’t gone well. You still have alternatives! Talk to your lawyer about asking the court for a moratorium on payments or to modify the repayment plan to reflect changed circumstances. It’s even possible to convert a case from Chapter 13 to Chapter 7, and vice versa.
What Kind of Foreclosure Is It?
Most people purchase their homes with money borrowed from the bank. In exchange for making the loan, the lender acquires a security interest in the property. In Arizona, you likely agreed to and signed a mortgage or deed of trust. Both instruments are intended to secure the bank’s right to repayment for the loan.
- Do you have a mortgage? Your lender must go through judicial foreclosure by filing a lawsuit in Superior Court.
- Do you have a deed of trust? The lender may proceed with non-judicial foreclosure without filing a lawsuit.
Either way, the lender must notify you in writing and give you an opportunity to timely cure the default or assert your right of redemption.
Say, for example, the home loan is $100,000 with monthly mortgage payments of $750. Falling behind on a few payments quickly leads to default followed by foreclosure. Foreclosure is the legal process the lender must use in order to terminate the homeowner’s rights and interests in the secured property. Only then can the lender sell the real estate and apply the proceeds of the sale to pay down the debt.
Importantly, the automatic stay stops or suspends foreclosure proceedings no matter what stage they’re at. The creditor has no option but to cooperate in the bankruptcy where everything will be sorted out under both state and federal law.
Have you received a notice of default? Don’t wait. Consult a bankruptcy lawyer right away about protecting your rights.
How the Arizona Homestead Exemption Works
The homestead exemption in Arizona law protects the equity you have in your residence up to $150,000. ARS § 33-1101. If you have more than one home, you will have to choose which property gets the exemption. (The homestead exemption cannot be split to cover two or more properties.)
Along with the bankruptcy petition, you will be claiming the homestead exemption on Schedule C plus all the other exemptions you are entitled to. Homestead exemption law doesn’t prevent foreclosure, but keeping up to $150,000 in equity could sure help your family’s situation!
Did Foreclosure Precede Bankruptcy?
Some clients lost their homes to foreclosure before filing Chapter 7 or Chapter 13. If this happened to you, then personal bankruptcy offers yet another form of debt relief.
There may be a deficiency owed after the foreclosure sale. That’s a nice way of saying the borrower no longer owns the property, but still owes the bank more money. As harsh as this may seem, deficiency judgments are generally permissible.
However, Arizona’s anti-deficiency law prohibits some creditors from filing separate lawsuits to obtain a deficiency judgment. You could very well be the beneficiary of this exception. Here’s the rule: If the foreclosed property was a single one-family or two-family dwelling on to 2.5 acres or less, then the lender cannot obtain a deficiency judgment following the foreclosure sale.
What happens if the lender already has a deficiency judgment against the borrower? File for bankruptcy relief anyway. Among other things, the deficiency judgment could be discharged with other debts at conclusion of the case.
An Experienced Bankruptcy Lawyer Has a Legal Strategy for Every Creditor
Everyone’s situation is different. You could have a loan on real estate located in California, Colorado, Texas, or some other state. You may own more than one Arizona property, such as a vacation home in Flagstaff with your primary residence in Scottsdale or Chandler. You might have two loans on a single Phoenix residence – the primary loan and home improvement loan (or junior loan).
You could owe on a construction loan, too. To avoid foreclosure proceedings, you may have agreed to a short sale of the property or deed in lieu of foreclosure.
Personal bankruptcy addresses all secured creditors’ claims against you, from multiple loans on the same real estate to short sales and deeds in lieu. You will need a bankruptcy strategy to deal with each of these creditors. Because your situation is unique and more than one exception could apply, call Allegiant Law Group and meet with a lawyer who has the experience necessary to help you through this.