Herrin Law | How Bankruptcy Can Stop a Foreclosure
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How Bankruptcy Can Stop a Foreclosure

There are many reasons why someone might choose to file for bankruptcy; however, two of the most prevalent reasons are (1) a debtor’s need for relief, and (2) a desire to preserve one’s assets. For some people, the reasons might be as sentimental as they are financial, such as trying to hold on to a home with a mortgage the debtor is struggling to pay. While on the other hand, for businesses, filing for bankruptcy is likely to be a purely economic decision.

It is a misconception that only the poorest in society file for bankruptcy. Although many of them have poverty-level incomes when they file, few are from the long-term poor. Although they might be down on their luck now, many of the millions who file for bankruptcy annually are in the middle class of American society—such as doctors, lawyers, mechanics, police officers and almost any other profession you can imagine. Bankruptcy is not only for the common man, but has included famous celebrities such as Mike Tyson, Larry King, M.C. Hammer, Kim Basinger, Curtis “50 Cent” Jackson, Jose Conseco, and the group TLC. Not only famous celebrities have filed, but many mega-corporations have as well such as presidential candidate Trump Casinos, Lehman Brothers, Enron, Worldcom (MCI), Kodak, General Motors, Chrysler, Marvel Entertainment, the Texas Rangers and L.A. Dodgers, as well as Circuit City, K-Mart, Popeye’s Chicken, Interstate Bakeries (Twinkies), and a number of large law firms as well. As you can see, the bankruptcy system is not only committed to giving a fresh start to the poorest in our society, but almost anyone who is down on their luck and burdened with debt.

So what happens if I file for bankruptcy?

The instant a case is filed, Section 362 of the Bankruptcy Code creates what is known as an “automatic stay” that prohibits any creditor from attempting to continue to collect from the debtor or the debtor’s property. Specifically it prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of a case.” 11 U.S.C. § 362(a)(6). The automatic stay puts the court in full control of the debtor’s assets instantly and gives the debtor a chance to breathe. After being continually bombarded with phone calls and other collection efforts by creditors, this temporary cease of collection activity that has been exhausting and grinding away at them—for sometimes years—can help them regain some control over their lives.

Are all collection activities stopped once I file for bankruptcy and the automatic stay is in place?

Not all, but almost all—including one of the most important reasons that people file for bankruptcy—to stop foreclosure. Once a foreclosure sale date is set, if a debtor files for bankruptcy—even the day before the sale—the foreclosure must stop. There are some important exceptions for “repeat” or “serial” bankruptcy filers that shortens, or in some cases even nullifies the automatic stay; for example, cases in which the debtor has filed two or more previous cases that were dismissed within the year.

Perfect, so if I file before the foreclosure sale I’m protected. But, what happens if I file after?

The law is pretty clear. Section 1322(c)(1) of the Bankruptcy Code states that a default (missed payment) on a debtor’s “principal residence” can be cured “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.” However, the phrase “sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law” is where the law can get a little tricky. Depending on where you live, this phrase is subject to varying interpretation. Courts in different parts of the country disagree on whether this phrase references the simple act of the foreclosure auction or whether this phrase refers to some moment beyond the foreclosure auction where all of the mortgagor’s (you) potential rights have expired. Confused? You’re not alone, which is why it is of the utmost importance for you to contact a competent attorney right away if you are dealing with foreclosure.