Bankruptcy Might Save Your Home From Foreclosure
It seems counter-intuitive, but sometimes filing for bankruptcy can save your home or other real estate from being lost in foreclosure. Timing is very important, and you will want to consult with our attorneys as soon as possible once there is a default on mortgage or tax payments. Before we get into specifics, let’s look at the features of the Bankruptcy Code (the “Code”) that make a viable option to save real property from foreclosure, or provide time to market the property and preserve equity through a voluntary sale.
The Automatic Stay (the “Stay”) under the Code is one of the most powerful tools available – it stops almost all collection activities upon the filing of a bankruptcy petition, including both mortgage & tax foreclosure sales, and the filing of a petition will also toll statutes of limitation/repose and prescriptive periods. The Stay prohibits most actions against both the debtor and the debtor’s property, with extremely limited exceptions specifically set forth in the Code. The filing of a bankruptcy petition creates what is known as the bankruptcy estate.
The concept of bankruptcy estate property is extremely broad – virtually any legal or equitable interest the debtor has in any property at the moment the petition is filed is property of the estate and protected by the automatic stay. As my law professor put it - imagine a magical Polaroid camera that takes a picture the instant a petition is filed which captures everything in the universe the debtor has any sliver of interest in – that picture represents the initial bankruptcy estate, which can increase in certain situations. Some interests, such as marital property, or an inheritance, bequeath, devise or life insurance proceeds become estate property if the divorce or date of death occurs within 180 days after the filing of the petition in Chapter 7, or any time prior to the final plan payment in Chapters 11, 12 or 13.
The type of foreclosure proceeding will determine when the last moment a debtor can file a petition to invoke the stay and stop the foreclosure. In a mortgage foreclosure, a petition must be filed prior to the time the “hammer has fallen” at the public sale. Up until that moment, the owner has the right of redemption allowing for the cure or payoff of the mortgage. Once the hammer falls at the public auction, which divests title, the debtor no longer has the right to redeem, even though a deed has not yet been exchanged or recorded at this point. After the auction, if there are funds available after the payment of the foreclosure judgment amount, the former owner may be able to make a claim through the surplus money procedures, as well as any other lien holders on the property.
Strict Tax Foreclosure Sale
In a strict tax foreclosure sale, which is utilized by most counties and cities (notable exceptions are Monroe County and the City of Rochester), a petition should be filed prior to the entry of judgment, but in any event must be filed no later than thirty days after entry of judgment as the time to appeal has not yet passed and is tolled by the Stay. In a strict tax foreclosure, the public auction does not divest the debtor of title, divestiture occurs prior to the auction with the entry of the judgment transferring ownership of the property to the municipality (and passage of 30 days without appeal); it is at this pre-auction point that the debtor no longer has a right to redeem, even though a deed has not yet been exchanged or recorded at this point either. The judgment is usually entered months before the actual public auction date; typically, the municipality will not take a deed directly but will instead provide a deed to the successful bidder at the public auction.
Right to Redeem
Although many municipalities follow the New York Real Property Tax Law Article 11 strict foreclosure procedure, it is notable that both the City of Rochester and Monroe County do not. These 2 municipalities provide for an auction structure that resembles the New York Real Property Actions & Proceedings Law Article 13 procedure with the right to redeem any time prior to the hammer falling at a public auction, as well as providing for a surplus money proceeding, if applicable. There is never a surplus money proceeding after a strict tax foreclosure auction – the municipality simply pockets all the proceeds for itself regardless of the amount of the underlying tax obligation, any other liens on the property, or any equity of the former owner. There is sometimes an ability to get property back after a strict tax foreclosure sale, but action must be taken quickly after the transfer to the municipality as developing case law has found the strict tax foreclosure procedures violate the reasonably equivalent value requirement under the Code.
Depending on the situation, the type of bankruptcy will determine the options to save property or equity from foreclosure. Chapter 13 provides a repayment term of 3 to 5 years to allow the mortgage or taxes to be brought current. Upon filing of Chapter 13, the debtor will resume making regular mortgage and/or tax payments going forward, and the arrears will be paid back through the repayment term. Most filers choose the 5-year term to keep the payments as low as possible, and can always pay more when possible to lessen the term. If the payments are unaffordable, or the owner simply wants time to market the property for sale to maximize the equity, Chapter 7 can sometimes be an option as well. Chapter 7 does not provide a term of repayment, but instead allows for the orderly sale of property to preserve maximum equity. Foreclosure auctions will typically bring lower prices than property that is marketed with a Realtor on the Multiple Listing Service. Regardless of the type of foreclosure, it is imperative that the petition be filed before it is too late to stop the auction.
Bankruptcy is a powerful tool that both property owners and tenants can utilize in the foreclosure context, but timing is critical. If your property is subject to foreclosure, contact Mikal J. Krueger at firstname.lastname@example.org or call him directly at 585-512-3546.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.
McConville Considine Cooman & Morin, P.C. is a full-service law firm based in Rochester, New York, providing high-quality legal services to businesses and individuals since 1979. With over a dozen attorneys and a full paralegal support staff, the firm is well-positioned to right-size services tailored to each client. We are large enough to provide expertise in a broad range of practice areas, yet small enough to devote prompt, personal attention to our clients.
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