One of the most important aspects of Chapter 13 bankruptcy and how it relates to the home mortgage foreclosure process is its ability to put the entire proceedings on hold, no matter how far along they have gone or when they homeowners file for bankruptcy. This means that foreclosure victims can, in many cases, wait until just a few hours before their home is scheduled to be auctioned at a county sheriff sale, and still have the sale stopped.
The stopping of an auction is possible by filing bankruptcy due to the fact that filing immediately creates a federal court order known by the term “Order for Relief.” This is also commonly referred to as the “automatic stay,” and prohibits any creditors from continuing to engage in collection activities while the issue is tied up in the court system. As the sale of a property to satisfy a foreclosure judgment counts as a collection effort on the part of the mortgage company, the auction is prohibited by this federal court order once the homeowners enter into bankruptcy.
Due to the Bankruptcy Abuse Prevention and Consumer Protection Act, passed in October 2005 and also referred to as the bankruptcy reform laws, homeowners with little time to find a solution need to be aware of at least one new aspect of filing bankruptcy. A new requirement stipulates that borrowers must have attended credit counseling within the 180-day period before the petition is filed with the court. If homeowners have not completed this before they file, the bankruptcy will have no effect and the filing may be thrown out (although there are some allowances for an emergency filing).
For homeowners who are considering filing bankruptcy to stop foreclosure on the day of the county auction, it is even more important to make sure the credit counseling requirement is taken care of. Courts are split as to whether or not counseling on the same day as the filing is acceptable or not, with some agreeing that same-day counseling just needs to be completed before the petition is filed, while others argue that the counseling should be done at least one day in advance. As a general rule, it may be better just to get the counseling done long before a final decision as to whether or not to file is made.
One of the main drawbacks to filing bankruptcy a few hours before the sheriff sale of a foreclosed house, though, is that the county government will typically not be aware of the automatic stay going into effect until after the house has been auctioned. The courts do not move swiftly enough to alert all creditors that the borrowers have filed their petition with the court, so it is likely the auction will go ahead as scheduled, while the homeowners will have to try and have the sale rescinded or reversed at a later date. This is because the foreclosing bank may receive no proof of the bankruptcy filing until after the auction has been conducted.
Unfortunately, this is easier said than done, due to the difficulty of convincing large bureaucracies like banks and county court systems to reverse any of their actions or decisions. Homeowners who know they filed for bankruptcy in time to stop the sale may find out later on that the house was auctioned as planned and that the county no longer lists them as owners of the property. This can be especially frustrating, as it is now up to the owners to proceed correctly to have the sale reversed and their names put back into the ownership records, a process which can take months.
Thus, filing bankruptcy in an effort to stop foreclosure at the last minute can be an effective way for homeowners to put the entire process on hold and get some breathing room. However, it is important to know all of the procedures that need to be done before the petition can be filed, and it is also important to make sure that the automatic stay has its desired effects on the auction. Homeowners can rely on bankruptcy as a last-ditch effort to save a home, but they also need to make sure they have completed the pre-filing requirements, as well as keeping track of the sheriff sale to prevent any hasty transfer of ownership from the borrowers to the lender.