What can you do when a borrower files bankruptcy on the eve of a foreclosure sale? Are you entitled to the swift results of dismissing the bankruptcy case based on bad faith?
If you are a commercial lender, odds are you will find yourself in this situation sooner or later: Your borrower defaults on his payment obligations, you file a foreclosure action and – months later – get a judgment and sale date, only to be stopped in your tracks on the eve of the sale when your borrower files for bankruptcy.
In most cases a bankruptcy filing triggers what is called the “automatic stay”, forcing all action against the debtor to stop – including a foreclosure sale. Thus, the foreclosure sale you have been waiting for is cancelled, and the battle you thought was almost over moves to a new arena: the Federal Bankruptcy Court.
Luckily, you have options, and bankruptcy courts generally move fast.
You will want to file a motion for relief from the automatic stay as soon as possible. Depending on the type of bankruptcy filed, these motions may not require a hearing if no one objects, and at the end of the objection period, the court will enter an order lifting the stay, so you can go back to state court and reschedule the foreclosure sale.
In some cases, however, the debtor’s intent to simply delay the foreclosure sale is so obvious that a motion to dismiss the bankruptcy case for bad faith is in order. In one recent case, our clients came to us nearly at their wits’ end. This retired couple had sold a property that was part of their nest egg and agreed to take a short-term balloon mortgage from the buyer. The buyer fell behind immediately on the mortgage payments (while purchasing new appliances for the home), and only ever made two payments. Our clients filed a foreclosure action, obtained a judgment, and eagerly awaited the foreclosure sale, only to see the buyer file for bankruptcy and stop the sale.
In this case, the debtor filed for Chapter 13 reorganization, and the lack of good faith was glaring. In his proposed plan, the debtor impermissibly proposed to modify the mortgage’s total amount and payback period, and he relied on income he could not support with documents. At his meeting of creditors, the debtor admitted that his only reason for the bankruptcy filing was to stop the foreclosure sale and force our clients to the negotiating table.
We filed a motion to dismiss the bankruptcy case for bad faith, arguing that the debtor’s sole purpose in filing for bankruptcy was to forestall the foreclosure; that the debtor had only delayed first the foreclosure auction and then the bankruptcy case by failing to comply with the court’s administrative requirements; that the debtor’s plan could not be confirmed because it proposed to modify the homestead mortgage in contravention of the Bankruptcy Code; and that his representations regarding his income were not credible in light of documented total income of only $6,000 in the two years prior.
At the hearing on the motion to dismiss, which was scheduled even before the objection period for the motion for relief from stay had expired, the court noted our clients’ presence in the court room and recognized their urgent need for relief from the debtor’s abusive tactics. The court, after condemning the debtor’s clear abuse of the bankruptcy process so he could continue to squat in the home at our clients’ expense, not only dismissed the case for bad faith but also extended the lifting of the stay to the debtor’s wife. (A favorite tactic of these types of debtors is to go through the process just described, watch their lenders schedule a new foreclosure sale, and then have their spouse file on the eve of that date.)
Thanks to the swift action of Iurillo Law Group, the debtor’s detour into bankruptcy was short, and our clients were able to complete the foreclosure sale and reclaim their property and peace of mind.
We help lenders, both private and commercial, navigate the bankruptcy process when one of their borrowers abuses the bankruptcy process to buy time. If you are a lender, landlord, or other type of creditor that has been dragged into a bankruptcy case, please contact us to discuss your options.