Fact or Myth; Bankruptcy guarantees a stop to foreclosure.

In an effort to disclose, let me first tell you that I am not a Bankruptcy Attorney….or any other type of Attorney for that matter. This blog is not to be interpreted as legal advice because, it’s not. For legal advice you need to speak to a law professional. This blog is just my opinion and should be consider as nothing more. In my opinion, the concept that Bankruptcy guarantees homeowners a stop to foreclosure is a myth! Let me explain why I have this opinion. First off a creditor, your bank, can petition the court to remove the stay you received as protection from creditors when you filed for bankruptcy protection. In many cases, the moment the bank learns you filed for protection, they run to the court and ask for the stay to be lifted. So, why would a court ever agree to this course of action suggested by the bank? A simply reply, is because the bank has the right to ask and have their request considered fairly among the evidence provided to the court. It also depends greatly on what type of bankruptcy protection you are under, if it’s Chapter 7…..most likely the bank’s request to lift the stay will be granted and that’s because Chapter 7 bankruptcy isn’t designed to protect you from foreclosure, sad but true. If you want a much better chance at protecting the home from foreclosure, you may want to consider Chapter 13 which puts you on a repayment plan and allows you to pay off your debts over time and therefore, gives homeowners a better chance of protecting the home however, either way….nothing is guaranteed. Now, just because the bank request the stay to be lifted, it doesn’t necessarily always mean it will be. The truth of the matter is, your Attorney will have arguments to the court, on your behalf, to keep the protection in place but, even then, nothing is guaranteed. My point is, just because the bank request the stay to be lifted and just because your Attorney is going to argue against it, nothing and, I do mean nothing ever guarantees you will be able to stop foreclosure. It simply boils down to a variety of conditions such as, hardship, skill of the Attorney and the willingness of the court. Unfortunately, many times the homeowners’ walk away wishing they never started the process from the beginning. Ultimately all bankruptcy protection does is buy you some time. You will ultimately still find yourself across the table negotiating with you lender trying to save your home. Only this time, you are also having to pay Attorney fees. A Short Sale may be a better option.

I actually asked a question concerning Short Sales and Bankruptcy in a different section of the forum. I always try to tell homeowners that there is a misconception with bankruptcy because it doesn't get rid of a foreclosure. I'm hoping that I can convince this homeowner who has already filed bankruptcy to list their home as a short sale. Unfortunately, I doubt that they will have the attorney work to remove the property from the bankruptcy so basically, it comes down to waiting for the discharge or for the bank to do a relief from stay. I guess whichever comes first and then try to beat the foreclosure clock. She was a week away from sale when she filed.

I was looking through the CDPE forum today. I know that a lot of us are CDPE's here. I came across a post about bankruptcy and it mentioned the 2nd mortgage. If the bankruptcy wipes it out, they say that the 2nd gets charged off to a collection agency so if you do a short sale, you will still have to settle with the company and make sure the homeowner will not be responsible for any deficiency or else they said it can "come back".

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Comments

Sara Mehrpouyan CDPE February 2, 2010 at 12:38pm

Jesse, if the homeowner has a home equity loan and you're talking about negotiating the release and full satisfaction of the lien (basically settling with them), would we be able to get part of the funds from the 1st mortgage to settle with them? I haven't dealt with a home equity loan yet so I'd like to know. Let's say the sellers don't have any money of their own.
Jesus (Jesse) Gonzalez February 2, 2010 at 2:01am

Hi SraM

That is absolutely correct and that is why it's a policy of my own that when doing a Short Sale for a client I negotiate the release and full satisfaction of all additional lien holders before we proceed. Otherwise, for many clients, it just isn't worth the time if they are still going to have to deal with another collection issue.
Sara Mehrpouyan CDPE February 1, 2010 at 3:32pm

I actually asked a question concerning Short Sales and Bankruptcy in a different section of the forum. I always try to tell homeowners that there is a misconception with bankruptcy because it doesn't get rid of a foreclosure. I'm hoping that I can convince this homeowner who has already filed bankruptcy to list their home as a short sale. Unfortunately, I doubt that they will have the attorney work to remove the property from the bankruptcy so basically, it comes down to waiting for the discharge or for the bank to do a relief from stay. I guess whichever comes first and then try to beat the foreclosure clock. She was a week away from sale when she filed.

I was looking through the CDPE forum today. I know that a lot of us are CDPE's here. I came across a post about bankruptcy and it mentioned the 2nd mortgage. If the bankruptcy wipes it out, they say that the 2nd gets charged off to a collection agency so if you do a short sale, you will still have to settle with the company and make sure the homeowner will not be responsible for any deficiency or else they said it can "come back".
Carolyn Kruse February 1, 2010 at 1:42pm

Bankruptcy will only delay the D day that is coming on the property. It does buy one time to come up with their game plan. With the assistance of their atty though. However, if the borrowor is current or no more than 30 days late and files a reafirmation agreement with the Chapter 7 bankruptcy they can keep the home. This is of course if the lender agrees to it. Trust this is true and does happen. Most often they will agree. As I have seen this first hand.
Jesus (Jesse) Gonzalez February 1, 2010 at 12:29pm

LOL, I didn't think of that but, you are absolutely correct, in fact...I am using that tactic right now to stop foreclosure and negotiate better terms for one of my clients.....lol

Good Point!
Steve Tucker February 1, 2010 at 12:17pm

Additionally, once the bankruptcy is discharged (in a Ch. 7) or once the reorg plan is approved by the court (in a Ch. 13), the bank can once again pursue enforcement of its lien (i.e., the mortgage) on the house via foreclosure. So you're mostly right, Jesse. Bankruptcy usually just delays foreclosure, and oftentimes it doesn't even do that if the bank is able to get the stay lifted prior to the discharge or reorganization.
Jose Rivas (DGRA) CDPE, SFR February 1, 2010 at 12:01pm

That is true Jesse, but that process can postpone the auction sale and give the homeowner some time to short sale the property, and then remove that from that from the bankruptcy file or simply stop the bankruptcy all together. the key is too have a good bankruptcy lawyer.

That is something that might work when the owner is too late to contact the agent and try to explore the short sale options, unfortunately too many home owners are in denial about loosing their homes.

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