Filing bankruptcy–either Chapter 7 or 13–will protect your home from foreclosure, even if your lender unintentionally or purposely goes ahead with the foreclosure sale.
Here’s a one-sentence summary of today’s blog post:
Bankruptcy’s “automatic stay” will stop a foreclosure, forcing your mortgage lender’s cooperation, but in the rare event your lender unintentionally or purposely proceeds with the foreclosure sale it will be ineffective and your home will still be yours, whether you file a Chapter 7 or Chapter 13 case.
The “Automatic Stay” Prevents a Home Foreclosure
In our last blog post a couple of days ago we described the “automatic stay” as the immediate stopping of virtually all collection actions of your creditors. Especially if you are racing to stop a foreclosure, this powerful tool is one of the most important benefits of filing bankruptcy.
The automatic stay definitely applies to home foreclosures. Your mortgage lender has a lien against your home. A foreclosure is an attempt to enforce its lien against your home. The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of… any act to… enforce [any lien] against any property of the debtor… .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.
So How Could a Foreclosure Sale Still Happen After a Bankruptcy Filing?
After your bankruptcy is filed your lender can file a motion in the bankruptcy court asking for permission to proceed with a future-scheduled foreclosure sale. Or to re-start one that was stopped by your bankruptcy filing. If you want to keep your home such motions for “relief from the automatic sale” can often be defeated. But that’s a different subject from what we’re talking about here.
Instead, what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale and the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be told about the bankruptcy filing? Or what the lender is contacted in time but somehow doesn’t tell its attorney in time so that the foreclosure sale mistakenly still happens? Or what if the lender refuses to comply with the automatic stay and deliberately forecloses anyway?
As long as the bankruptcy is in fact filed at the bankruptcy court before the foreclosure sale takes place, the foreclosure would not be legal. By law it would have to be undone. It does not matter whether such a foreclosure would happen mistakenly or intentionally.
Unintentional Foreclosure Sale
If a foreclosure happens after a bankruptcy is filed because the lender or its attorney didn’t find out in time, or simply messed up for any reason, almost always the lender will act very quickly to undo the foreclosure sale.
If the foreclosure occurred because of its error, the lender will know it acted illegally and that not rectifying the situation right away only aggravates its illegality. So in this situation lenders are virtually always very cooperative in quickly undoing the effect of the foreclosure.
This happens even if the foreclosure happened right after a bankruptcy filing not through lender error, but because there simply wasn’t enough time to inform it about the bankruptcy filing. It is easy to prove that the bankruptcy was filed and that the automatic stay was imposed before the foreclosure sale occurred. And that usually quickly resolves the issue, with the lender rescinding the foreclosure sale.
Either way, if a lender fails to undo a foreclosure sale after being presented with evidence that the bankruptcy was filed first, it would be in ongoing violation of the automatic stay. Since this would make a lender liable for significant increasing financial penalties, they usually cooperate right away.
Intentional Foreclosure Sale
Mortgage lenders or their attorneys virtually never go ahead with a foreclosure if they know that a bankruptcy by the homeowner has been filed. At the least they first file a motion for relief from the automatic stay, which you and your attorney would have the opportunity to oppose and can often defeat.
But in the highly unusual event that a lender would not file a motion but just proceed with a foreclosure in defiance of your bankruptcy filing, the law entitles you to “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges have no patience with mortgage lenders who purposely violate the law.
Chapter 7 vs. Chapter 13
For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both—imposed just as quickly either way.
What’s different usually is how long the protection of the automatic stay lasts. When you file a Chapter 7 “straight bankruptcy” the case lasts only about 3 or 4 months, and the automatic stay ends as soon as the case does. It can end sooner if a creditor files a motion for “relief.”
A Chapter 13 “adjustment of debts” is a payment plan that usually takes 3 to 5 years, and the automatic stay lasts that long. Again, this assumes that your mortgage lender doesn’t ask for and get “relief from stay.”
More importantly, although either Chapter 7 or 13 will give you the same immediate protection from foreclosure, each option gives you very different tools for dealing with your mortgage debt. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.
The tools these two options give you is the topic of our next blog post.