Preparing for Foreclosure – Can Bankruptcy Protect You From Foreclosure?
What does bankruptcy do to a foreclosure sale?
Let’s take a look at what happens when someone files a bankruptcy petition. Immediately at the time of the bankruptcy filing, an automatic stay goes into effect. The automatic stay is governed by federal law specifically 11 USC § 362. There are some exceptions to what the automatic stay can and will stop. Most notably if the debtor has a pending bankruptcy that has been dismissed within 1 year prior to the new filing, the automatic stay expires on the 30th day after the new filing. If the debtor has had 2 pending bankruptcies within the past year, there is no automatic stay and the debtor must request one from the bankruptcy court.
So, if the debtor has not had a pending bankruptcy case within the preceding year, the automatic stay kicks in immediately at the time of filing. This is a very helpful tool to the debtor in many regards. First, the sale of the debtor’s home through a foreclosure auction is halted. Second, the stay allows the debtor time to regroup and project a path forward through their reorganization plan without the threat of having to worry about losing their home.
How do the mortgage company attorneys know to stop the sale after bankruptcy
After filing bankruptcy, the debtors creditors, which include the mortgage company, receive notice of the new filing. This alerts all creditors that an automatic stay may be in place and they should cease collection/legal activities.
What can mortgage company do to get out of the bankruptcy
If the mortgage creditor believes they have cause, the mortgage company may file a motion with the bankruptcy court requesting relief from the automatic stay. Primary instances where their motion will be granted are when the debtor does not maintain mortgage payments after the filing, the debtor does not put forth a reasonable or viable reorganization plan, or the debtor chooses Chapter 7 protection which does not have a reorganization component as with a 13.
Timing of bankruptcy filing
The timing of the bankruptcy filing and the foreclosure sale date are two dates to consider carefully. If the foreclosure has been listed with the court clerk’s office, the hard deadline to file a bankruptcy would be the sale date. If the debtor has not received notice of a foreclosure sale, the debtor may have more leeway as to the timing of their bankruptcy filing. If the debtor files after the sale has gone through, the likelihood of saving the property is slim however, issues with the sale could be raised to overturn the sale.
Foreclosure sale occurred and debtor did not stop it
If there is a deficiency created from the foreclosure of the debtor’s home, the debtor may face collection attempts for the deficiency amount. In this case, a bankruptcy could help the debtor deal with that new debt.
In summary, should the debtor file bankruptcy to stop a foreclosure
This question is one that cannot be answered because each person’s situation is going to be different. A debtor considering this option should seek counsel from a local bankruptcy attorney, most of whom offer free consultations. The best advice is to not wait until the last minute to look at your options so that the debtor can make the best decision for them and their family.