June 12th, 2009

The Real Deal: Your Legal Update for Real Estate
Volume 2, Number 1, June 2009

Stop Foreclosure and Remove Second Mortgage through Bankruptcy
By John N. Skiba, Esq.
jskiba@jacksonwhitelaw.com
With home prices at record lows and foreclosures at record highs, many homeowners are facing the fact that their home is worth substantially less than what is owed on the mortgage. Many of these homeowners that feel trapped in a home that is “upside down,” are making the difficult decision to walk away from their properties. There are two areas where homeowners can use a chapter 13 bankruptcy filing to remain in their homes – one, when they are behind on payments and need time to get caught up, and two, to remove a second mortgage or home equity line of credit from their home.

Behind on Payments
If you are behind on your house payments, and even if your house is in foreclosure, a chapter 13 bankruptcy filing will stop the foreclosure on your home and provide you with time (three to five years) to pay the missed payments without the worry that your property will be foreclosed upon.  Upon the filing of a bankruptcy case, the court institutes a stay against any foreclosure action going forward.

Lien Stripping
The Ninth Circuit Court of Appeals has held, and the bankruptcy code allows, that in situations where the value of your home is less the amount owed on the first mortgage, the second mortgage can be “stripped” off.  For example, let’s say the amount owed on a first mortgage is $200,000, and the amount owed on a second mortgage is $50,000, but the home is worth $185,000. In a chapter 13 bankruptcy, the $50,000 second mortgage can be stripped off, leaving only the first mortgage on the property. 

While there are negative credit consequences that must be carefully considered prior to filing bankruptcy, many are unaware of the tools available in a chapter 13 bankruptcy that can help them avoid foreclosure, stay in their home, and reduce the amount owed on the house.  If you would like more information on the bankruptcy process, JacksonWhite offers a free consultation to help determine if filing bankruptcy is an appropriate option for your situation.

Anti-Deficiency Statues and the Kitchen Sink
By Aaron M. Finter, Esq.
afinter@jacksonwhitelaw.com
When searching for items on the Web, I recently found advertisements for used home furnishings.  In the advertisements, the homeowners are offering to sell everything in the homes down to the proverbial kitchen sink.  In some cases, the vendors are so brazen as to expressly state that the items are being sold in advance of an upcoming trustee’s sale.

Regardless of the cause, it is clear the number of foreclosures is rising.  In an effort to minimize damage to the trust property and avoid the need to file a forcible entry and detainer action, many lenders have begun paying borrowers or renters in possession of the property to peacefully walk away from the home, a practice commonly known as “cash for keys.”

The deed of trust (the document that allows a lender to sell a borrower’s home in the event the borrower defaults on mortgage payments) extends to any fixtures such as countertops, built-in cabinets and doors,  that have been added to the property.  Furthermore, the deed of trust generally states that a borrower cannot destroy, damage or impair the trust property, or allow the property to deteriorate or commit waste on the property.  In the event the borrower intentionally damages the trust property, the borrower will likely not be able to benefit from the anti-deficiency statues.

The anti-deficiency statues* do not apply where the borrower, during his/her ownership of the property committed or permitted commission of voluntary waste.  In such a case, the court may allow the lender to collect against the other assets of the borrower to the extent that the diminution in value of the property was caused by the intentional damage to the property.
*See A.R.S. 33-729(A),

The Disclosure of Corrected Defects in Real Property
By Adam B. Decker, Esq.
adecker@jacksonwhitelaw.com
With the rapid growth of residential real estate in the State over the last few years, several homes and several subdivisions were built quickly to satisfy the then existing demand for homes.  In some cases, the rapid construction resulted in unnecessary defects.  Homeowners were then left to repair these defects either through their builder or on their own.  Now, as those homes are being sold, the question arises as to which of those defects need to be disclosed to potential buyers.

The seller of real property, and the licensed real estate agents involved in the conveyance of real property, must disclose all known material facts concerning the real property that may affect the buyer’s willingness to purchase.  This includes the defects in the real property that have been remedied or corrected.  Just because the defects have been remedied or corrected does not mean that the disclosure of that fact is not required.

The operative word for the disclosure is “material” facts.  Material facts are of a nature that knowledge of the item would affect a person’s decision-making process to proceed with a purchase.  Therefore, as to defects in a home, a minor repair involving a cracked tile, a cracked window, a replaced light fixture, caulking, a repainted room, or other actions routinely considered maintenance or improvements likely do not need to be disclosed.

Examples of corrected defects or repairs which have been considered to be material include but are not limited to:  the existence of termites and their treatment, the existence of mold and its remediation, expansive soils, flooding, water damage, roof damage, electrical and plumbing problems, fire, and construction defects which required the hiring of a licensed contractor.

The general rule to follow is if the repair or corrective action involves a defect that you would like to know about if you were in the buyer’s position, the disclosure should be made.  You should disclose, disclose again, and then disclose some more.  The better a seller and licensed real estate agent is at disclosing known material facts, the less likely they are to face legal or administrative action in the future stemming from a transaction.

JacksonWhite Welcomes John N. Skiba
JacksonWhite P.C. is pleased to announce the recent May 2009 hire of attorney John N. Skiba. Mr. Skiba practices bankruptcy law, assisting both individuals and businesses in financial distress.  He also handles general creditor/debtor legal issues and chapters 7, 11, and 13 bankruptcy cases. He has been practicing bankruptcy law in Arizona since 2003.

For questions on Bankruptcy Law and Creditors’ and Debtors’ rights, feel free to contact John at (480) 464-1111.

This newsletter is provided for informational purposes only and is not intended to replace individual legal advice.  Please consult a knowledgeable attorney regarding your specific needs.  For more information on Real Estate issues, contact Aaron M. Finter, Adam B. Decker or John N. Skiba.   ©2009 JacksonWhite P.C.  All Rights Reserved.