Many individuals and/or corporations who have purchased a property at a foreclosure sale know that there is always a risk that the occupant of the property will file a bankruptcy to disrupt the completion of the foreclosure sale and any eviction proceedings that could follow thereafter. The question becomes what does the purchaser of the property at the foreclosure sale need to do when a bankruptcy is filed. At Katz Law, we have handled hundreds of situations like this, and are equipped to deal with such situations.
Generally, the answer depends on whether the foreclosure sale of the property was completed before or after the bankruptcy filing. Minutes (sometimes seconds) matter here. Even if a bankruptcy case was filed minutes before the completion of the foreclosure sale, it is considered “pre-petition” or pre-bankruptcy.
Bankruptcy Case Filed Before the Foreclosure Sale
If a bankruptcy case is filed by the occupant of the property before the completion of the foreclosure sale, it is the bankrupt debtor’s responsibility to give all parties involved (foreclosure trustee, foreclosing lender, etc.) notice of the bankruptcy filing. If notice is properly given, the foreclosure sale must stop immediately and cannot be completed. In such a situation, the foreclosure will be postponed to a later time. If the lender does not postpone the foreclosure sale, and/or ignores the bankruptcy filing, the lender can face severe sanctions for violating the automatic stay.
In order to get relief from the automatic stay, the foreclosing lender will have to take action in the bankruptcy court to lift the automatic stay and resume foreclosure. What particular action needs to be taken depends on what bankruptcy chapter the occupant had filed. If the occupant filed a Chapter 7 bankruptcy, the lender could lift the automatic stay by filing a Motion with the Court and arguing that there is no equity in the property and the loan is in default. If there is equity, it may be hard to get relief from the automatic stay.
If, on the other hand, the occupant filed a Chapter 13 bankruptcy, the lender may not be able to file a Motion to lift the automatic stay (absent extraordinary facts) until the occupant fails to make monthly mortgage payments to the foreclosing lender. Normally, it takes longer for the foreclosing lender to get relief from the automatic stay when the occupant files a chapter 13 case (as opposed to a Chapter 7).
Bankruptcy Case Filed After the Foreclosure Sale
The general rule is that if a bankruptcy case is filed after a foreclosure sale was completed, the property that was foreclosed-on does not come into the bankruptcy as it no longer belongs to the Debtor. However, it is important that the party who has purchased the property at the foreclosure sale record the Trustee’s Deed Upon Sale (the document given to the purchaser upon completion of the sale) shortly after the sale (it is highly recommend that the Trustee’s Deed Upon Sale be recorded within two (2) weeks of the sale).
If the foreclosure sale was completed a short time (hours or minutes) before the bankruptcy was filed, it is recommended that either the foreclosing lender, or the purchaser at the foreclosure sale, filed a Motion seeking relief from the automatic stay or annulment of the automatic stay (retroactive relief from the automatic stay). While this Motion will normally “do the job” in a Chapter 7 bankruptcy filed by the occupant, if a chapter 13 case is filed, the foreclosing lender or the purchaser at the sale may have to take addition steps, such as objecting to confirmation of the Chapter 13 Plan.
Consult With A Qualified Attorney Now!
Bankruptcy can be complicated for non-lawyers, and thus, it is advisable that a purchaser at a foreclosure sale with issues such as those described above contact an experienced attorney. If you need legal assistance with a bankruptcy issue, contact Katz Law now! We are California attorneys who have dealt with a significant amount of scenarios involving bankruptcies and foreclosure sale.
Call us at (844) KATZ-LAW for a FREE consultation!