Putting a Stop, at Least Temporarily, to Your Home’s Foreclosure

Both Chapter 7 and Chapter 13 will stop a foreclosure.

 

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

That’s the topic for our next blog. 

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Appreciating the Awesome “Automatic Stay”

The “automatic stay” gives protection for you and your assets that is awesomely fast. And very broad. Don’t take it for granted.

 

The last two blogs have dug into the relatively rare situations in which the “automatic stay” does not protect you or your assets. But it’s important to understand that those are unusual exceptions. Almost all the time, the moment your bankruptcy case is filed all creditors must immediately stop every possible kind of collections effort against you.

Awesomely Fast Protection

The automatic stay goes into effect simultaneous with the filing of your bankruptcy petition. The “petition” is the document “commencing a case under [the Bankruptcy Code].” Sections 101(42) and 301(a). So the very act of filing the petition itself “operates as a stay.” Section 362(a).

The instantaneous effect of the automatic stay is amazing especially in comparison to most other court procedures. Most take weeks, or even in the case of emergencies at least days or hours. Usually some kind of request or motion needs to be filed to get the court’s attention, the other side is given some opportunity to respond, and then there may be a hearing of some sort, before finally a judge makes a decision.

But the automatic stay skips all that. It is, at least at the beginning, completely one-sided, in your favor. You “win” an immediate court order, without the creditors having any immediate say about it, without involving a judge at all.

So the automatic stay gives you an immediate breathing spell, freezing all collection efforts against you, whether your creditors like it or not.  

Awesomely Broad Protection

This break from your creditors covers “any act to collect, assess, or recover” a debt—just about anything a creditor could do to.

Besides stopping all collection phone calls and bills, the automatic stay stops all court and administrative proceedings against you from starting, or from continuing. If your bankruptcy is filed right before a lawsuit is to be filed at court against you, the lawsuit can’t be filed. Same with a home foreclosure. A prior judgment against you can’t result in your paycheck or bank account being garnished. If you’re behind on your vehicle loan payments, the repo man can’t come looking for your vehicle. If you owe back income taxes to the IRS, it can’t record a tax lien against your home and vehicle.

The automatic stay is powerful stuff.

“Relief” from the Automatic Stay

Any creditor can ask the court to cancel the automatic stay so that the creditor can again take action against you, your assets, or the collateral in particular. The most common situation for this is a creditor asking for the right to take back the collateral securing the debt—to repossess a vehicle or to start or continue a home foreclosure. Whether or not the court will give it this right, or give “relief from stay” in any situation, depends on all the details of the case. It requires a careful analysis to be done by and discussed with your attorney. 

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Make Sure You Do Qualify for the Essential “Automatic Stay”

Very rarely, the filing of a bankruptcy will NOT stop the creditors from chasing the debtor. Here’s how to avoid this happening to you.

 

The Essential “Automatic Stay”

In just about every bankruptcy case, stopping creditors from pursuing you and your assets is a crucial part of what you get for filing the case—regardless whether it’s a Chapter 7 or Chapter 13 case. This benefit of filing bankruptcy—called the “automatic stay”—generally applies to every case, to every creditor, and to just about to everything that a creditor can do related to collecting a debt.

Exceptions to the “Automatic Stay”

In our last blog we explained some narrow exceptions, which only apply to a narrow set of creditors and to a narrow set of their actions.

Today’s blog is about a very different kind of exception to the “automatic stay,” one that, although very rare, is potentially very dangerous because it could result in this crucial benefit not applying to your case at all. As a result your creditors could continue chasing you and your assets as if you had not even filed a bankruptcy case.

You absolutely want to avoid this from happening. And it’s usually not hard to avoid it.

This Dangerous Exception Only Applies if You Had a Previous, Recent Bankruptcy

If you are now considering filing bankruptcy, AND YOU HAVE NOT FILED a prior bankruptcy case within the last year which was dismissed (thrown out by the court), then this exception will not apply to you. You need to be absolutely sure about this, so please finish reading this blog to make sure.

The Rationale for This Rare Exception

Before these rules were enacted, a very small minority of people filing bankruptcy would file a series of separate cases, one after another, with the intention each time of using the new “automatic stay” of each new case to repeatedly delay a foreclosure or some other collection action.  Congress decided that this was an inappropriate use of the bankruptcy laws, and put a stop to it by taking away the benefit of the “automatic stay” as follows.

The Two Rules

The First Rule: The “automatic stay” WOULD NOT go into effect at all when filing a new case if within the past year you had filed two or more other bankruptcy cases, and those earlier cases had been dismissed.  If this were to happen, the “automatic stay” COULD potentially still be applied to your case after filing but only by convincing the bankruptcy judge that you meet certain conditions.

The Second Rule: The “automatic stay” WOULD go into effect filing a new case if within the past year you had filed one other bankruptcy case, which was dismissed, BUT the “automatic stay” would expire after 30 days. Its expiration COULD be avoided, but only by convincing the bankruptcy judge that you meet certain conditions.

The conditions referred to above that you’d have to meet for imposing or preserving the “automatic stay” involve justifying why the previous case(s) was (were) dismissed and why the present case is being filed. (The details of these conditions are complicated and beyond what can be covered in this blog.)

Watch Out to Make Sure of No Prior Recent Bankruptcy

Be careful because sometimes people can file a bankruptcy case and have it dismissed without realizing or remembering what happened. For example, if someone files a bankruptcy case without an attorney, and somehow does not complete it, the case would get dismissed. Or is someone does hire an attorney and the case gets filed, because of some miscommunication the case could get dismissed. Either way, months later when this person wants to file bankruptcy he or she could not understand or recall that in fact a case did get filed and dismissed.

So…

Avoid this problem by thinking carefully about whether there is any possibility that a bankruptcy case was filed in your name in the past 365 days. And if it possibly happened, tell your attorney about it right away. 

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Specific Creditor Actions that Aren’t Stopped by a Bankruptcy Filing

Virtually all actions by creditors to collect the debts you owe are stopped the minute you file bankruptcy. Here are some special exceptions.  

The “Automatic Stay”

The immediate stopping of collections—called the “automatic stay”—is one of the most important benefits of filing bankruptcy. It’s automatic because it is put into operation by the mere act of filing bankruptcy. It doesn’t need any action by the bankruptcy court or anybody else to become effective. Its purpose is to stay, or stop, all collections.

Because the “automatic stay” is a benefit that a person filing bankruptcy counts on so much, it is very important to understand its exceptions—situations in which a creditor can continue acting in spite of your bankruptcy filing.

The Exceptions

The exceptions all apply to very specific kinds of creditor actions, done by very specific kinds of creditors.

1. Criminal Matters:

A district attorney or other governmental authority can start or continue a criminal case against you. That means that any step of a criminal case against you can proceed regardless of your bankruptcy filing: you can be indicted, tried, and sentenced, and incarcerated.

On a practical level it’s important to realize that this exception doesn’t just apply to felonies and misdemeanors, but sometimes also to mundane matters that you might not consider “criminal” like traffic infractions. These may even differ state by state.

In many other areas, the line between criminal and civil proceedings, and between criminal and civil debts, can get hazy. Examples are an employee’s embezzlement, a vehicle repair shop’s illegal disposal of its hazardous waste, and a bar fight. Each of these could involve either criminal charges or civil claims, or both.

Be sure to tell your bankruptcy attorney about anything unusual such as these, so that you are both prepared for any criminal proceeding that would not be stopped by your bankruptcy case.

2. Family court:

Your ex-spouse, or soon-to-be ex-spouse, or somebody on his or her behalf, can start or continue various kinds of divorce and family court proceedings:

  • to establish paternity of a child
  • to determine or change the amount of child or spousal support to be paid
  • to resolve child custody or visitation issues
  • to address domestic violence disputes
  • to dissolve a marriage (but marriage dissolution cannot include a determination about how assets or debts would be divided between the spouses)

3. Collection of Child or Spousal Support:

  • ongoing support can continue to be collected by its payee, directly or through support enforcement agencies, regardless of any kind of bankruptcy filing
  • unpaid support arrearage can also start or continue to be collected, at least in spite of a Chapter 7 filing:
    • through wage withholdings
    • garnishment of bank accounts
    • seizure of a tax refunds
    • suspension of a driver’s licenses (both regular and occupational)
    • suspension of virtually all other licenses issued by the government, including occupational and professional licenses, and even hunting or other recreational licenses.
    • In contrast, a Chapter 13 filing CAN stop these aggressive methods of collecting unpaid support arrearage, as long as the debtor strictly follows a number of steps—most importantly, starts making the regular support payments right away, arranges to pay the arrearage in full through the Chapter 13 plan, and actually pays everything as proposed.

4. Taxes:

Taxing authorities can:

  • start or finish a tax audit
  • can send you a notice that you owe taxes
  • can demand that you file your tax returns
  • can assess your taxes and send a demand that you pay them (but do no more)
  • in very limited situations can even file a tax lien

To emphasize, the automatic stay stops almost all actions against you by almost all creditors. But if you are involved in any court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse or support enforcement agency, you need to be especially familiar with these exceptions. 

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