First, the basics of foreclosure law in California. California has a one-action rule that requires lenders to either foreclose and take the property or sue the borrower in order to obtain a deficiency judgment, but not both. California has has the anti-deficiency statute for purchase money loans, i.e. loans obtained at the time and for the purpose of purchasing the primary residence.
Procedurally, a foreclosure officially starts with a Notice of Default ["NOD"] that is recorded in the county in which the property is located. This is not to be confused with a demand letter sent to the borrower because he/she has fallen behind on a few payments. Also, the Notice of Default is not to be confused with any number of general collection letters that may come from various entities once the borrower defaults on the loan.
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A NOD is an official letter/form that is sent to the borrower immediately after it is recorded in the county recorder's office in which the property is located. This triggers a 90 day period in which the borrower can reinstate the loan by paying back the delinquent amounts in addition to late penalties, interest, and attorneys fees. More often than not, the borrower cannot bring the entire delinquency current. The NODis followed by a Notice of Trustee Sale, 90 days after the NOD is recorded.
A Notice of Trustee Sale ["NTS"] is also recorded in the same county in which the Notice of Default was recorded. The difference is that the NTS sets the sale date on which the lender intends to auction the property to the highest bidder [the minimum bid being the amount of the loan plus $1]. The sale date cannot be set sooner than 20 days from the date the NTS was recorded.
At any time before the sale date, the foreclosure can be stopped [at least temporarily] with the filing of a bankruptcy.
A Chapter 7 bankruptcy does not accomplish much in the way of permanently resolving a foreclosure problem if the homeowner wishes to keep the home and find a long term solution to the problem. It is a temporary band-aid measure that stops the foreclosure auction from going forward. The lender will typically ask the bankruptcy court for "relief from automatic stay" to continue the foreclosure process. Almost always, the relief is granted and the lender moves forward with the sale.
A Chapter 13 [or Chapter 11] can be a permanent solution to the foreclosure problem if the borrower has found a way to make the regular mortgage payments [either because he/she has negotiated a lower payment through a loan modification or is willing to make the original mortgage payments] and can make up the delinquent payments over a 3-5 year period. The lender has to accept these delayed payments and cannot continue with the foreclosure sale unless the borrower stops the payments.
Additionally, a Chapter 13 can provide a powerful tool for making a junior lien, like a HELOC loan, deemed unsecured by the bankruptcy court. This process is known as "lien-stripping" by virtue of a Ninth Circuit court ruling. The ruling held that if a junior lien such as a HELOC or second loan is not covered by the value of the home, then the entire amount can be deemed "unsecured." Example: If Bob and Susan have a home that is worth $300,000 in today's market and the first mortgage balance is $301,000 and the second mortgage or HELOC balance is $100,000, then the entire $100,000 is deemed unsecured. However, if the property is worth $302,000, then none of the $100,000 is deemed unsecured.
Why is it important that the mortgage is deemed unsecured? In a Chapter 13 [and often in Chapter 11], the debtor is only required to submit their "disposable" income over a 3 to 5 year period, after which ALL of the unsecured debts are completely eliminated and discharged. Thus, if a person has "income" of $4,000 per month and expenses [including the first mortgage] of $3,900, then the person has $100 per month of "disposable" income. If the borrower only pays $100 towards the $100,000 unsecured debt over a 5 year period, he/she has only paid $6,000 towards the $100,000 and the $94,000 balance is now eliminated. The homeowner has effectively wiped out a large second mortgage while keeping the home.
An experienced bankruptcy attorney can guide the troubled homeowner through the complicated maze of legal options.
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