Pub. 9 2019 Issue 3

6 www.azbankers.org and a creditor in which the pre-bankruptcy contractual relationship survives. That agreement must be consented to by the debtors (and their attorney) and must be approved by the court at a separate hearing if the debtors are not represented or if the attorney does not certify that the reaffirmation is in the best interest of the debtors. Unlike the Chapter 13 debtor, a Chapter 7 debtor lacks standing to avoid a lien. 2 Those debtors, therefore, emerged from Chapter 7 with no further financial obligation to the second lienholder but still had the lien on their home. The Chapter 7 debtors often thought their problems were behind them. As a result, only a few of them maintained payments on the discharged debts. The bankruptcy discharge created a false sense of security for these individuals. Since they thought they were done, they also thought that they were safe and secure in their homes and had no further obligations to the lenders. They may be in for a surprise. Current Foreclosure Laws As a general rule, the statute of limitations begins to run when a party knows that its rights have somehow been violated and that a cause of action has arisen. 3 The statute of limitations is designed to provide an outer limit by which time a claim must be preserved and prosecuted so that mat- ters are prosecuted in a timely way and that litigants do not sleep on their rights. It is also designed to provide comfort and security to potential defendants so that they know that, at some point in time, their exposure to damages has terminated. 4 Before 1974, Arizona courts did not provide any guidance on how the statute of limitations applied to mortgage foreclosure. Then the Court of Appeals ruled in 1974 that judicial foreclosure actions are governed under the same statute of limitations as contracts in Arizona – six years – because a mortgage obligation is a con - tractual agreement. 5 As a result, a default in payment of the note triggered the running of the statute of limitations, and actions to foreclose were time-barred if they were started more than six years after the default. In 1996, the Court of Appeals held that the statute of limitations on an installment note begins to run on each and every missed payment. In other words, in a 10-year installment payment note, there are actually 120 different triggers to the start of the statute of limitations – and each default can be enforced independently. The statute of limitations applies to each installment separately and does not begin to run on any installment until it is due. 6 But accrual commences on the unmatured future installments when the creditor exercises the optional acceleration clause. The court reasoned that this interpretation forced a damaged party to act in a timely way to enforce its rights, but it also allowed for time for the parties to reach a resolution of the default. How does this work with a note secured by a deed of trust? What happens after a default when the lender wants to commence a trustee’s sale? Lenders, through their trustees, will provide a notice of default and exercise their rights to accelerate the note, which is now in default. To exercise the acceleration clause in the deed of trust, the lender must take the affirmative step to make clear to the borrower it has accelerated the obligation. This is required even if the parties contract out the notice requirement. 7 Demand of the bal- ance in full before all installments are due satisfies the requirement, as well as commencing the foreclosure or recordation of a notice of trustee sale. 8 Once the lender has declared the default and exercised its rights to accelerate and go forward to sale, the limitation period has commenced, and the sale must be completed within the six-year limitation period. However, the lender does have an opportunity to restart the clock on the six-year statute of limitations. If the lender cancels the notice of trustee sale with a clause revoking the acceleration, it is reinstating the obligations of the deed of trust, thereby restarting the statute of limitations on any new default. 9 The revocation of the acceleration requires an affirmative act by the lender to com - municate this to the borrower. Simply recording the cancellation notice does constitute the affir - mative act to revoke the acceleration. The notice must contain a statement that the acceleration of the debt is withdrawn. 10 That analysis is pretty straightforward. But in the context of bank - ruptcy, when a borrower discharges the debt obligation, the install- ment payments have been discharged and the lender cannot enforce Continued from Page 5 Continued on page 8 Before 1974, Arizona courts did not provide any guidance on how the statute of limita- tions applied to mortgage foreclosure. Then the Court of Appeals ruled in 1974 that judi- cial foreclosure actions are governed under the same statute of limitations as contracts in Arizona – six years – because a mortgage obligation is a contractual agreement. 5 As a result, a default in payment of the note triggered the running of the statute of lim- itations, and actions to foreclose were time- barred if they were started more than six years after the default.