Lender Auctioned off Home: What Now?


Dear Bankruptcy Adviser, I had filed Chapter 7 bankruptcy, and the lender went and asked for relief from the court and sold the house in an auction before the case was discharged. Is that legal? Can I get my house back? -- Sam

Dear Sam, I will have to make one minor assumption. I assume you were delinquent on the mortgage payments when you filed bankruptcy. This is a safe assumption because the lender cannot take back the house when you are current on the mortgage payments at the time you filed bankruptcy.

It is legal for the lender to seek court approval, take the house out of bankruptcy protection and continue with the sale. The lender is not obligated to wait for your case to be discharged because that could take as long as five to seven months after the case has been filed. A bankruptcy discharge releases you from personal liability for certain specified types of debt. In other words, you are no longer legally required to pay any debts that are discharged. But the lender is not obligated to wait until you receive the discharge to exercise its rights against the property.

In your case, the bankruptcy filing stopped the lender from continuing with the sale of your home by creating a "stay" of the foreclosure process. The stay is an automatic injunction that halts creditor action, with certain exceptions, to continue with an otherwise legal action. In your case, the bankruptcy filing stayed the lender from continuing with the foreclosure sale.

But this is only a temporary postponement. Once the lender receives notification of the filing, it can file a motion with the court called a Motion for Relief from Stay. This motion allows the lender to proceed with its rights under state law to foreclose on property. The lender requests a hearing date with the court to show evidence that you are delinquent on the mortgage payments. When you are unable to show evidence to the contrary, the court will approve the lender's motion.

Some lenders quickly file this motion after receiving the bankruptcy notification, sometimes two or three weeks after you filed your case. Others are not as efficient and take longer to file the motion. Generally, three or four weeks after they file this motion, the lender gets the relief from stay order and can carry on with the foreclosure process -- including selling the property immediately and without further notification.

Your desire to recover your home will depend on the state in which you live. Called the "right of redemption," it is the ability for the former homeowner of a foreclosed property to reclaim the home after the foreclosure sale. Redemption laws are complicated and vary from state to state.

I feel bad that I have to keep giving you more bad news. There is life after bankruptcy and foreclosure. Many of my former clients are buying new homes only two or three years after the bankruptcy and foreclosure. In those cases, they are buying homes as nice as the one they lost for a fraction of the price. It is possible to recover.

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