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Home Foreclosures: 9.10 Sale of Property

In some cases, homeowners may have no choice but to sell their home on which mortgage payments are no longer possible. Typically, the price at a private market sale is much higher than the price obtained at foreclosure. This means that the homeowner can preserve more equity.

Home Foreclosures: 9.11.1 Overview

Filing a bankruptcy that does not fully address a mortgage delinquency may impact future legal proceedings and negotiated agreements seeking to avoid foreclosure. Even when the bankruptcy does nothing more than create temporary delay, either because the mortgage holder gets relief from the stay or the case is completed without resolving the delinquency,578 it may nevertheless have an impact on future efforts to prevent foreclosure.

Home Foreclosures: 9.11.2.1 Effect of Prior Discharge

A completed chapter 7 bankruptcy case, and a completed chapter 13 case in which the debtor’s plan did not provide for the curing of a mortgage default under section 1322(b)(5), normally discharges a borrowers’ personal liability to pay a loan.579 While the mortgage lien remains in place, some mortgage holders and servicers are wary of negotiating a workout agreement following a bankruptcy discharge.

Home Foreclosures: 9.2.1.1 General

Bankruptcy law provides for two main types of consumer cases: chapter 7 and chapter 13. Both types are generally effective at stopping a pending foreclosure action. Similarly, debtors may seek to void certain property transfers under both chapters. However, if an outstanding mortgage on the homeowner’s property is in default, chapter 13 will frequently be the better choice.

Home Foreclosures: 9.2.1.2 Chapter 7 (Straight Bankruptcy)

In bankruptcy cases under chapter 7, the debtors file a petition asking the court to discharge their debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) debts in exchange for giving up property, except for “exempt” property that the law allows the debtor to keep. In most consumer cases, all of the debtor’s property will be exempt. But property that is not exempt may be sold, with the money distributed to creditors.

Home Foreclosures: 9.2.1.3 Chapter 13 (Reorganization)

In chapter 13 cases, the debtor must file a “plan” showing how they will pay off past-due and current debts over a period of up to five years. The most important fact about chapter 13 bankruptcy for homeowners facing foreclosure is that it allows debtors to cure defaults on secured loans such as home mortgages.16 In most cases, payments to the mortgage holder will be at least as much as the regular monthly payments, with some additional payment to get caught up on the delinquent amount.

Home Foreclosures: 9.2.2 Gathering the Necessary Information

While the primary purpose in filing for bankruptcy may be to stop a home foreclosure, homeowners will be required to complete a significant amount of paperwork detailing their financial situation. Homeowners must provide the attorney with the information necessary to accurately prepare the bankruptcy petition and schedules.18 The attorney will need to obtain a complete list of creditors and current addresses, account numbers, and balances owed for each debt.

Home Foreclosures: 9.2.4 Litigating in a Bankruptcy Case

Lawsuits within a bankruptcy case are called “adversary proceedings.” The proceedings are initiated by a complaint and are governed by rules that closely parallel the Federal Rules of Civil Procedure.24 Depending on the specific circumstances of the case, the bankruptcy court may be a preferable forum for litigating foreclosure related claims and defenses.25 The jurisdiction of bankruptcy courts to resolve such disputes is generally quite broad, though it is more frequently exercised in chapter 13 c

Home Foreclosures: 9.3.1.1 The Automatic Stay

One of the most important weapons in the consumer bankruptcy arsenal is the automatic stay provision of the Bankruptcy Code.27 Few other legal steps that may be taken by a consumer can effectuate relief so simply, so effectively, and so dramatically. The instant that a bankruptcy case is filed, the automatic stay takes effect, freezing almost all actions against the debtor and the debtor’s property, including a foreclosure or sale of secured property.

Home Foreclosures: 9.3.1.2 The Codebtor Stay

In addition to the automatic stay available in every bankruptcy case, chapter 13 provides a special automatic stay of creditor actions against most people who are codebtors with the debtor.42 This codebtor stay, which can relieve creditor pressure on friends or relatives of the debtor, may be an important reason to file a chapter 13 case.

Home Foreclosures: 9.3.3.1 General Rule

Depending upon the circumstances, the duration of the automatic stay varies significantly. If the circumstances require, the stay can be ended by the court almost immediately, although such immediate relief is very unusual in consumer bankruptcy cases. As a practical matter, the stay is usually not lifted in less than thirty days after the petition has been filed. Indeed, the stay may last for the duration of the case, three to six months in straight chapter 7 cases and up to five years in chapter 13 cases.50

Home Foreclosures: 9.3.3.3 In Rem Stay Relief

Another provision of the 2005 Act allows creditors with claims secured by real property to seek in rem stay relief in certain limited circumstances.72 If the court enters an in rem order and the order is properly recorded, the stay does not apply with respect to the property in a later case filed within two years after the date of the order.73

An in rem order may be granted if the secured creditor proves that:

Home Foreclosures: 9.3.4.1 Stay of Legal Proceedings

The acts prohibited by the automatic stay are set out in a series of overlapping statutory provisions.80 Almost all forms of legal actions are brought to an immediate halt by filing the petition.81 Replevin actions, foreclosures, deficiency actions, attachments,82 garnishments,83 and executions are among the many types of legal proceedings affected by this provision.

Home Foreclosures: 9.3.5 Notice of the Automatic Stay

Effective and early notice to creditors of the existence of the automatic stay is critical for two reasons. First, a creditor without notice may take actions against the debtor or their property, because it is not aware that such actions are precluded. Although these actions are generally void, it may cost the debtor and their advocate substantial time and expense to have these actions reversed. Second, once a creditor has notice, almost any creditor activity in violation of the stay will be illegal and actionable for the debtor.102

Home Foreclosures: 9.3.6.1 Remedies for Violations of the Stay

It has long been held that actions taken in violation of the stay are void.117 This means that any actions taken after the bankruptcy filing, including foreclosure sales, repossessions and judgments are without legal effect.118 This is true whether or not the violation occurred with knowledge of the stay, though there are limited exceptions to this general rule.119

Home Foreclosures: 9.3.6.2 Violations of the Stay by Government Entities

Another issue which unfortunately often arises are the remedies available against government entities for violations of the stay. If the stay is violated through state action as defined for purposes of the civil rights laws,150 remedies under 42 U.S.C. § 1983 may be available against officials who violate the stay under color of law. This is because a violation of 11 U.S.C.

Home Foreclosures: 9.3.6.3 Procedure

Although several courts have held that relief under section 362(k) may be available by motion,162 it may be preferable to proceed by complaint pursuant to the adversary rules, especially if injunctive relief or a contempt remedy is sought.163 This will eliminate any potential issues about the due process rights of the party defending.

Home Foreclosures: 9.3.7.1 Overview

Another issue that may come up in a bankruptcy case which is filed to address a foreclosure is a motion by the creditor for relief from the automatic stay in order to proceed with the foreclosure process. In some cases the creditor will be seeking permission from the bankruptcy court to proceed with the sale of property which has already been foreclosed. In others, the creditor will seek relief from stay in order to foreclose or otherwise enforce the lien.

Home Foreclosures: 9.3.7.2 Form of Proceeding

The rules provide that the proper method of proceeding for relief from the automatic stay “shall” be by motion under Rule of Bankruptcy Procedure 9014.167 Indeed, the stay may not be eliminated without court approval even if the parties agree to relief.168 The trustee and, if the court orders, other creditors are entitled to notice of any agreement to terminate the stay before it is approved, if a motion for relief from stay was not previously served.169