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Bankruptcy: Debtor’s Rights Regarding A Foreclosure Sale At Auction

Critical Update on home foreclosure and auctions!  For decades the law has been very clear: – Once the auctioneer’s hammer goes down at auction, the house is “sold” and the owner cannot get the property back, even by filing for bankruptcy relief.  A 2015 bankruptcy court case, Kameni vs. Ocwen (4th Circuit) has indicated that this is not so.  The court stated that a home foreclosure auction sale is not complete until the sale is ratified by the court since post-sale ratification is part of the foreclosure process.  The ratification process typically takes 30-45 days but could take longer depending on the circumstances.

This argument opens the door to saving the house after the auction has taken place even if one has not filed a petition for Chapter 13 bankruptcy relief. Purchasers of properties at auction find themselves in a difficult position, not knowing whether they have bought the house or not, since it is possible for the buyer to pay all the arrearage and expenses and recover the property. It remains to be seen how this potentially huge change to the application of the  foreclosure auction law will play out in the marketplace.

Homeowners who have reason to believe they might not be able to avoid an auction of their home should consult with a bankruptcy attorney as soon as possible, – even while exploring a loan modification, to better understand their rights and options. The big danger in relying on a mortgage lender’s invitation to apply for a loan modification, is that mortgage lenders typically unduly delay the application review process, lose the paperwork, and give one the run-around, often finally stating that one doesn’t qualify, followed by a foreclosure letter. This delay often results in the arrearage being much greater and makes it more difficult for homeowners to save their homes.  Procrastination is the reason many folk end up losing their homes, so find out what you need to know to plan effectively to save your home! 

This article examines a bankruptcy debtor’s rights regarding his or her real property that is in foreclosure, scheduled for auction, sold at auction, or where the holder of a tax-sale certificate forecloses the rights of redemption.

1. Where the debtor/homeowner is behind on the mortgage payments, the lender forecloses, and an auction date is set. If a person who holds an interest in the property, whether one’s name is on the deed, on the mortgage or deed of trust, or only on the deed or only on the mortgage or deed of trust, such person has legal standing to file for bankruptcy relief to stop the auction. As long as the bankruptcy petition is filed before the auctioneer’s hammer comes down at the auction, even if a minute before, the automatic stay granted by §362 of the Bankruptcy Code goes into effect and the auction cannot proceed. If the auctioneer was unaware of the last-minute filing, it makes no difference, – the sale is invalid.

2. Where the Debtor files for bankruptcy relief under Ch. 7 prior to the auction, the automatic stay goes into effect immediately and the foreclosure process, including any scheduled auction is stayed (put on hold). However, secured real property is not protected in a Chapter 7 bankruptcy case. The creditor can file a motion to lift the automatic stay and, once granted, the mortgage company or lienholder can proceed with the foreclosure process.

3. Where the Debtor files for bankruptcy relief under Ch. 13 prior to the auction, the automatic stay goes into effect immediately and the foreclosure process, including any scheduled auction is stayed (put on hold). Chapter 13 provides the debtor with an opportunity to get caught up on any mortgage arrearage and other delinquent secured debt over a period of the three or five years. If the debtor’s proposed Chapter 13 Plan is confirmed by the bankruptcy court, the creditor has to accept the catch-up payments as provided for in the Plan. If the debtor is unable to propose an acceptable Plan and the court dismisses the bankruptcy case, the creditor is free to continue with the foreclosure process.

4. Where the auction occurs before the Debtor files for bankruptcy relief. If the bankruptcy petition is filed after the auctioneer’s hammer comes down at the auction, the debtor/petitioner is out of luck. As a matter of law, all rights of ownership, legal and equitable, are terminated when the auctioneer’s hammer comes down.

5. What Happens to my Equity in the Property if it is Sold at Auction? If the property is bought in by the bank or mortgage company for the amount owed, the homeowner loses all his or her equity! Yes, your equity is wiped out. If there is one or more bids, whatever net proceeds there are after the liens and expenses are paid, will be paid over to you.

6. Where the property went to tax-sale, the purchaser of the Tax-Sale Certificate filed a Complaint to Foreclose the Rights of Redemption, and the Debtor files for bankruptcy relief. The filing of a bankruptcy petition automatically stays all collection and foreclosure actions, including an action to foreclose the rights of redemption. Certain exceptions apply to abusive serial filers. If the bankruptcy petition is filed before holder of a Tax-Sale Certificate files to foreclose the rights of redemption and is able to obtain a court order foreclosing the rights of redemption before the bankruptcy petition is filed, the owner/debtor’s rights are wiped out.

Procrastination is a key reason many debtors are unable to save their homes. Ignoring the problem won’t make it go away. Once a foreclosure proceeding has begun, time is of the essence! Consult promptly with an experienced bankruptcy lawyer who can explain your rights and options, develop a plan of action and help you stop a foreclosure in time. In certain cases you may be able to pay some or even most of your lawyer’s fees through your bankruptcy plan. If this applies to you, do something. Call today! ROB GOLDMAN LEGAL SOLUTIONS specializes in bringing clients “Peace of Mind.”