Using Chapter 13 bankruptcy to get current on a mortgage
The Bankruptcy Code gives homeowners facing foreclosure the right to cure the default any time up until the foreclosure sale process is completed. The key word here is “process,” and state law determines what the process is for a valid auction or sheriff sale. Until this has been completed, homeowners who file bankruptcy can use the federal laws for another chance to save their home and cure the default.
The Bankruptcy Code itself does not even determine when a house is considered “sold” for the purposes of a valid foreclosure sale. This means that state foreclosure laws will most likely be used in cases where borrowers attempt to pay off a loan through bankruptcy, even after a sheriff sale. Another aspect that works in favor of homeowners is that many states require an auction to be confirmed before it is valid.
This means that homeowners who file bankruptcy have rights during the foreclosure process that are safeguarded at least through the sale of the property. These rights may be guaranteed for even longer than that, depending on how the confirmation process of the auction works after the home has been sold by the courts. If there had been a bankruptcy, the lender may not just be able to sell the house and take it over right away.
Redemption rights may extend the rights of the borrowers even longer. In states that have a redemption period, the borrowers are given a set period of time in which to cure the default even after the home has been auctioned at a trustee sale. But for those homeowners in states where a redemption period is not available, filing for bankruptcy may create a pseudo-redemption period through the right to cure.
However, rulings by state courts on this issue may determine how long this extra right to cure lasts. Some courts have ruled that the foreclosure sale process is completed once the gavel falls at the auction. In these cases, filing bankruptcy will not extend the time to cure the default for any significant period of time. Once the auction has been conducted, the sale process is complete, and the right to cure has expired
Other courts, however, have ruled that the sale process is not completed until the appropriate company or government agent has executed a transfer deed after the sale, the purchase price of the auction has been paid in full, and the sale has been confirmed by the court. In these states, homeowners may be able to file bankruptcy and have the property listed as a part of the bankruptcy estate and turned over to the trustee.
If this happens, the lender and local government will not be able to move forward with any other collection activities or actions to transfer the property. The automatic stay is in effect, the homeowners have an interest in the house, and the property is now a part of the bankruptcy proceedings. If the sale is confirmed or the deed transferred after the filing, it may be reversed at a later date as a violation of the stay.
Filing bankruptcy in this situation may result in homeowners having several additional months to cure the default. While the automatic stay is in effect, the lender, new owner, or local government can perform no action to confirm the sale or remove the borrowers from the house. Even if a Chapter 13 is filed, the owners will be able to cure the default through a repayment plan — even though their home was sold at auction.
There are a whole list of problems with filing bankruptcy to stop foreclosure, but for homeowners whose financial situations have recovered and who can cure their default, it may be a decent solution. Even after a sheriff sale, borrowers may be able to submit a plan that allows them to save the home. Sometimes, just filing bankruptcy is enough to set aside a sale and give the owners more time and one more chance.