When Does Bankruptcy Stop Foreclosure?

In most cases, bankruptcy’s Automatic Stay stops foreclosure and most other creditor adverse actions, such as repossession and wage garnishment. The serial filer rule is the primary exception. If the debtor filed bankruptcy within the last six months, even under another name, Section 362 of the Bankruptcy Code has a more limited effect. This rule very rarely comes into effect, since for most people, bankruptcy is a one-in-a-lifetime event.

Furthermore, Illinois law has a rather limited homestead exemption. It only protects $30,000 of home equity, if both owners file a joint bankruptcy. Most people who’ve lived in their homes more than twenty years have substantially more equity. That’s okay, because a Chicago bankruptcy lawyer knows the law and knows how to make the law work for distressed debtors.

Extending the Bankruptcy Shield

Little known legal loopholes, like as-is asset valuation and a tenancy of the entirety, usually allow a Chicago bankruptcy lawyer to protect 100 percent of home equity, regardless of the amount.

County tax assessors publish home values on their websites. The tax assessor value is often much, much higher than the as-is cash value, which according to the Bankruptcy Code, debtors must declare in Schedule A.

The IRS quick sale value often comes into play. The government uses this value, which is 80 percent of an asset’s fair market value, to determine its quick sale value. This same rule arguably applies in bankruptcy cases. As far as the government is concerned, the quick sale value is the quick sale value, whether the homeowner liquidated assets to avoid tax liability or files bankruptcy.

Additionally, a “we buy ugly houses” home investor often offers pennies on the dollar for a no-inspection, as-is, cash sale. Once again arguably, debtors should list this value, not the inflated tax appraiser value, on Schedule A.

Assume Mike and Linda own their $200,000 home free and clear. A home investor might offer $20,000. That figure is well below the protected equity ceiling. Therefore, unless the trustee successfully challenges the $20,000 value, Mike and Linda’s home is safe.

The tenancy of the entirety rule applies if Linda files bankruptcy individually. Illinois law prohibits the sale of one person’s asset (Mike’s house) to pay someone else’s debts (Linda’s credit card debt).

Notice Requirements

The Stay only applies to creditors who receive actual notice of the filing. When people file bankruptcy, the court enters a large note on their credit reports. However, a bank could easily argue that it didn’t see this message and therefore never received notice.

Furthermore, an attorney must do some homework in this area. Banks often bundle and sell MBS (mortgage backed securities) to other banks or other financial institutions. Frequently, the selling bank doesn’t know what’s in the bundle.

An attorney must take care to send notice to not only the original lender, but also the current lender and loan servicing company. Furthermore, if the home is scheduled for a foreclosure sale, the auction or other company handling the sale must receive notice as well.

Diligence on the front end is very important. Foreclosures are relatively easy to stop and almost impossible to undo. 

Work With a Savvy Cook County Lawyer

No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced debt reduction attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Source:

americanbar.org/groups/business_law/resources/podcast/fender-bolling/