1.2.8 Should the Homeowner File for Bankruptcy to Protect the Home?
Filing bankruptcy triggers an automatic stay for most debtors, freezing the creditor’s ability to foreclose on the home. An emergency filing of a voluntary petition, along with certification of compliance with the 2005 Act’s credit counseling requirement, stays foreclosure;15 other bankruptcy forms must be filed within fourteen days thereafter. The consumer’s attorney should notify the creditor of the automatic stay. Remedies for violation of the stay include recovery of actual damages, attorney fees, and equitable relief.
Creditors must follow strict procedures in obtaining relief from the stay. Debtors can contest the hearing on the creditor’s request for relief from the stay, demonstrate adequate protection for the creditor, and raise defenses and counterclaims.16 The advocate should also consider the following issues:
- ● Can the homeowner use a chapter 13 bankruptcy to cure the default? A default on a home mortgage can be cured within a reasonable period of time, typically three to five years. In some limited instances it may be possible to cure a default even after a foreclosure sale has taken place. See § 9.4, infra.
- ● Can the mortgage be “stripped down” to the value of the property? Strip-down is allowed in a chapter 13 case if the mortgage is not secured solely by the debtor’s home and by certain “incidental property” related to the home, or when the mortgage is wholly unsecured because the value of the property is less than the amount of senior liens, or when the last payment under mortgage comes due during the chapter 13 case. See § 9.6, infra.
- ● Can a judicial lien on the home be avoided in bankruptcy to the extent it impairs an exemption? See § 9.7, infra.
- ● When it is not possible to save the home, can it be sold in bankruptcy so that all of the equity is not lost? See § 9.9, infra.
- ● Can TILA rescission, or other substantive defenses, be raised in an adversary proceeding to challenge the creditor’s proof of claim or respond to a motion for relief from stay? See § 220.127.116.11, infra.