Although we have published prior articles on this subject on this blog, we continue to receive calls from borrowers who have been told by others that they should “file bankruptcy to stop a foreclosure”. In fact, an attorney who I sought to establish a local counsel relationship with in another state e-mailed me yesterday asking “has your client considered filing bankruptcy to stop the foreclosure?” Once again, as we have stated before and as provided by applicable Bankruptcy law, filing Bankruptcy does not, repeat does not, “stop” foreclosure. It only temporary postpones the process.
Pursuant to 11 USC sec. 362(a), an “automatic stay” is imposed on all proceedings against the person filing bankruptcy when the Bankruptcy petition is filed. This would include any attempted foreclosure, which may be in the form of a foreclosure lawsuit (in a “judicial” foreclosure state) or a scheduled Trustee’s sale (in “non-judicial” foreclosure states). As such, when a person files bankruptcy, any foreclosure proceeding is temporarily halted (but is not permanently “stopped”).
There is a provision in the Bankruptcy laws which permit the foreclosing party to obtain what is called “relief from stay” by the filing of a simple Motion in the Bankruptcy which, when granted (which such Motions almost always are) permits the foreclosing party to resume the foreclosure process outside of the Bankruptcy. As such, the borrower is now left with both (a) having to defend the foreclosure anyway, and (b) all of the consequences of a Bankruptcy (including long-term consequences to the borrower’s creditworthiness, having to surrender credit cards, etc.).
As such, we do not advise clients to “file bankruptcy to avoid foreclosure” because filing bankruptcy does not permanently stop foreclosure nor does it “make the foreclosure go away”. In fact, for most borrowers (whose only real issue is the foreclosure), filing bankruptcy may simply complicate matters and leave the borrower in a worse position than if they simply defended the foreclosure.
Jeff Barnes, Esq.