The fall of the hammer at the foreclosure sale threatened to leave my widowed client homeless and poorer by hundreds of thousands of dollars.
Instead, we recovered her house from the foreclosure sale under new California law which delays the finality of the change of title. She had rights after foreclosure.
The prompt filing of a Chapter 13 brought the house into the bankruptcy estate. The automatic stay prohibited the foreclosing creditor from finalizing the sale.
The details of the new law are found at CC 2924m. Foreclosure sales are final when the winning bidder is a potential owner-occupant who timely files an affidavit.
So, with the stroke of the governor’s pen, California foreclosure sales went from being final upon acceptance of the final bid at auction to often (but not always) hovering in a pending state for weeks.
The sale process was left hanging, under the new law, to allow competing bids from tenants and certain non-profits. The legislature hoped to further home ownership and expand available housing. As it turned out, homeowners could also rescue their property.
Stopping foreclosure isn’t enough
What hasn’t changed, of course, is the right of the foreclosing creditor to recover its money. Having rights after foreclosure isn’t enought. Keeping title to the house is just the first, though necessary, step for the homeowner. There must be a plan for curing the mortgage arrears or paying off the loan in full.
Thankfully, Chapter 13 bankruptcy provides options to deal with mortgage defaults.
- Challenges to the conduct of the foreclosure can be litigated
- The arrears can be paid back in monthly payments over 3-5 years.
- The property can be refinanced.
- The home can be sold, with equity going to homeowner.
The new law is complex
And, of course, new. So neither courts nor attorneys have much experience with it. Here’s how we got here. I’ve generalized the definitions and details of the statute in this post for the sake of easier reading. Careful reading of the statute is essential.
In an effort to promote homeownership, the California legislature in 2020 carved out exceptions to the prior law that a foreclosure sale was final upon the acceptance of the highest bid at a public auction. Various parties were given rights after foreclosure.
Now, the sale is immediately final only if the winning bidder was a prospective owner-occupant, who files the required affidavit, defined in CC 2924m(a)(1).
But, if the winning bidder was not an prospective owner-occupant, a 15 day window is opened in which an eligible tenant-buyer or an eligible bidder may lodge a bid or notice of intent to bid. Eligible bidder is defined in CC 2924(m)(3), essentially non-profits, public entities, and the University of California. If neither bid nor notice is received in the 15 day period, the foreclosure becomes final.
If during that 15 day period, a tenant matches or overids the high bid at the foreclosure auction, the tenant vests as the owner and a trustee’s deed issues.
If no tenant bids or gives notice within the 15 days, a further window opens for an additional 30 days from the original sale, in which an eligible bidder can overbid the winning bid at auction. The highest bidder becomes the owner as of 5 p.m. on the 45th day, with no provision that finality relates back.
The first bankruptcy case
The bankruptcy effect of the new foreclosure scheme was first seen in a reported case in Hager, in the Eastern District of California.
The issue came before the court in the context of a motion to annul the stay. The highest bidder at the foreclosure was not a prospective owner-occupant and multiple parties filed notices of intent to bid within the 15 day window. The homeowner filed Chapter Thirteen 21 days after the foreclosure, while the 45 day window was open. The auction winner recorded its deed after the bankruptcy was commenced and before the expiration of the 45 day window.
After a delination of the new statutory bidding structure, Judge Lastreto held that the sale was void as violating the automatic stay. “Finalizing the sale on or after [commencement of the bankruptcy] violates the stay. Any violation of the stay is void and without effect. ” In re Hager, No. 22-12056-B-13, at *13 (Bankr. E.D. Cal. June 26, 2023).
Let me state the obvious: waiting until after the foreclosure sale to address trouble paying your mortgage is not a good strategy. At best, it’s a possible salvage effort.
Each step in the foreclosure process increases the costs that get added to your loan payoff. When you’re out of time, you can’t count on finding the best bankruptcy lawyer. And, in a time-crunch, even the best lawyers can make mistakes that may cost you money or opportunities.
If you are facing home loan troubles, be proactive, early. Don’t rely on your rights after foreclosure.