Category Archives: Bankruptcy and Mortgages

What Happens If My House Is Foreclosed On Before Filing Bankruptcy But Recording of the Trustee’s Deed Is After I File Bankruptcy?

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If you are trying to save your house from foreclosure the best way to avoid any confusion is to file for bankruptcy as soon as possible before your trustee sale date. Once your bankruptcy case is filed there is an automatic stay in place to prevent the sale of your home. If the trustee sale still goes through, the sale will be voided as it is in violation of the automatic stay.

What happens when you filed your bankruptcy case after the trustee sale was conducted but before the trustee’s deed is recorded with the county? Pursuant to California Civil Code Section 2924h(c), “…the trustee’s sale shall be deemed final upon the acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual date of sale if the trustee’s deed is recorded within 15 calendar days after the sale…”

The courts in California are divided over the interpretation of this issue. One court in the Northern District of California indicated that if the bankruptcy case was filed after the trustee’s sale but before the recording of the trustee’s deed, the recording of the trustee’s deed is not a violation of the automatic stay and the secured creditors can proceed, making the foreclosure final. In Re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997). In the Garner case, Minnie Bee Garner defaulted on her mortgage and her home was foreclosed on March 11, 1997. She filed for Chapter 13 bankruptcy protection on March 12, 1997. The foreclosure sale deed was issued to the third party purchaser on March 13, 1997 and the third party purchaser recorded the deed with the county on March 18, 1997. The secured creditor’s bankruptcy attorney filed a motion for relief from stay and the court granted it and held that as long as the deed was recorded within 15 days of the sale, issuing the deed did not violate the automatic stay. Therefore, the third party purchaser’s interest in the property was not avoided by the filing of Ms. Garner’s bankruptcy case.

A more recent case in the Central District of California held differently than Garner above. In In re: Gonzalez, Case No. 6:11-BK-15665-MW (C.D. Cal. 2011), there was a foreclosure sale of Mr. Gonzalez’s property on February 22, 2011. Mr. Gonzalez filed for bankruptcy on the same day. The exact time of the final bid is uncertain but for purposes of the case the exact time and whether the foreclosure sale went through before or after Mr. Gonzalez filed for bankruptcy did not matter. The deed was recorded with the county recorder’s office on March 2, 2011. The judge in this case held that at the time the bankruptcy petition was filed Mr. Gonzalez still held title to the property because the deed was not recorded yet. The subsequent filing of the deed after the bankruptcy petition was filed violated the automatic stay and therefore the recorded deed is void. The judge goes on to say that the provision of the California Civil Code Section 2924h that deems the sale to be final as of 8 a.m. on the actual date of sale does not matter because the deed filed with the county was void, and execution of a voided deed is a void act and does not create or perfect title. Upon appeal of this decision to the District Court for the Central District of California the Bankruptcy Court judge’s ruling was reversed. Like in Garner, the recording of the deed of trust was not a violation of the automatic stay.

This is a perfect example of similar facts but different outcomes even though they are all from the state of California. Maybe legislation will resolve this issue in a future time so there is no more confusion. As of right now if you have any issues you should consult a bankruptcy lawyer. The best way to avoid this issue is to make sure your bankruptcy case is filed at least a day before your trustee sale date. So that is what happens if your house is foreclosed on before filing bankruptcy and the recording of the trustee’s deed is after you file bankruptcy.

Can I Modify My Mortgage in Bankruptcy?

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One of the most frequently asked questions during my consultations with clients is “Can I modify my mortgage in bankruptcy?”  This question is very reasonable given that most of our clients own houses with mortgages that exceed what their house is worth.  The answer depends on the circumstances.

As discussed in my previous articles, one of the major benefits of filing a Chapter 13 bankruptcy is the ability to get rid of junior liens recorded against a house if the senior lien is underwater.  Getting rid of junior liens has helped a lot of homeowners keep their homes.  However, sometimes filing bankruptcy and getting rid of a second mortgage still not enough to help some homeowners because their house is heavily underwater.  Consider the following example:  Your house is currently worth $180,000, first mortgage is $300,000 and there is a home equity line of credit for $150,000.  Yes, it is a huge advantage for a homeowner to get rid of the $150,000 home equity line in the Chapter 13 bankruptcy, but even without the $150,000 equity line of credit, the house is still underwater about $120,000.

Can anything be done about this?  Can the first mortgage be modified in a Chapter 13 bankruptcy case?  The ability to modify the first mortgage depends on whether the house is considered a primary residence or an investment property.  Pursuant to 11 U.S.C. §1322(b)(2), a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence…” This means that homeowners may modify their mortgages in a Chapter 13 bankruptcy case as long as the mortgage is not for their primary residence.  This is unfortunate since that is precisely what most homeowners need right now – the ability to modify the first mortgage of their primary residence.  There are currently no laws in place that would allow the modification of the first mortgage on a primary residence, but we can always hope that Congress will enact some laws in the future that will help homeowners with their underwater homes.

On a more positive note, 11 U.S.C. §1322(b)(2) of Bankruptcy Code indicates that mortgages on an investment property can be modified.  In the example above, the first mortgage of $300,000 can be decreased in a Chapter 13 bankruptcy case to the fair market value of the home: $180,000.  The only catch is that the homeowner would have to pay the entire $180,000 in the Chapter 13 plan in order to take advantage of the modification.  Chapter 13 plan cannot be stretched to more than 5 years (60 months).  Therefore, assuming a 5-year Chapter 13 plan, the minimum Chapter 13 monthly payment would need to be at least $3,000 ($180,000 / 60).  In some jurisdictions you can propose to pay interest only to the mortgage company and then make a balloon payment during the last six months of the chapter 13 plan.  Please keep in mind that this is a very simplistic calculation geared more towards understanding the concept rather than the actual calculation.  There is normally interest and other fees that would be added to this Chapter 13 monthly payment plan.  The ability to modify mortgages for investment property is unfortunately seldom used mainly due to the fact that homeowners would have to pay for the entire modified amount in their Chapter 13 plans under most circumstances.  Modifying a mortgage for an investment property would be great for people who own investment properties in areas with very depressed home values.