Pub. 9 2019 Issue 3

4 www.azbankers.org Creditors’ Foreclosure Rights After Chapter 7 Bankruptcy By Larry Hirsch and Rob Northrop A RIZONA, LIKE SEVERAL OTHER AREAS IN THE COUNTRY, WAS HIT HARD BY THE MORTGAGE CRISIS AND THE GREAT RECESSION IN 2007. REAL ESTATE VALUES PLUMMETED BY AS MUCH AS 50 PERCENT, AND BANKRUPTCIES ROSE TO RECORD LEVELS. MANY INDIVIDUALS HAD MULTIPLE LOANS ON THEIR HOMES, AND THEY FILED FOR BANKRUPTCY TO GET OUT FROM UNDER THEIR FINANCIAL BURDENS. IT’S NOW MANY YEARS AFTER THE CRASH. REAL-ESTATE VALUES ARE ON THE RISE. PROPERTY OWNERS ARE NOW SEEING EQUITY (OR WHAT THEY THINK IS EQUITY) IN THEIR HOMES. Of course, we all know that if the homeowner does not pay the mortgage, the lender has the right to foreclose on the house. For those individuals who simply wanted to get out from under the ob- ligations on their mortgages, they walked away from the house and simply waited for the lenders to foreclose. Some stayed in the house and tried to make deals or go through loan modification programs. Some were successful, and some were not. If no payments were made on the mortgage, the house would eventually go into foreclo- sure and be sold at a trustee sale. Many homeowners who filed for bankruptcy decided to maintain payments on their first mortgage. The house had no equity to secure the second mortgage thanks to the value drop from the crash and recession. They continued to pay the first mortgage but stopped payments on the second. They have not heard from the second lien - holder since they filed bankruptcy as much as 10 years ago. Perhaps they have not made a payment even on the first mortgage for years, but for some reason the lender has done nothing. Are they in the clear? Are they at risk of losing their home? This article explores the current state of the law in Arizona on foreclosures and statutes of limitations, the impact of bankruptcy, and how Arizona law may be affected by recent Ninth Circuit case law. While we focus on second lienholders, the same analysis would apply to a first lienholder who simply took no action to foreclose its lien for many years.