In states that have a short redemption period – like Michigan – one would expect that last-minute bankruptcy filings to prevent foreclosure would be common. I have consistently been surprised, however, at how many people wait to file at the last minute in a state like Wisconsin, where the typical redemption period is at least six months.
And mind you – that’s just the redemption period. It doesn’t count the 2-3 months of missed mortgage payments before a foreclosure case is ever filed. It doesn’t count the 4-6 weeks before there is a judgment of foreclosure. It also assumes a normal foreclosure timeline. Many foreclosure cases – almost inexplicably – drag on for many more months or even years longer than they should. I’ve seen cases held open for nearly 4 years.
Some homeowners look at bankruptcy as a sort of “last resort” option and they spend the bulk of their redemption period legitimately looking for non-bankruptcy options to save their home. (This is fine, by the way – but you should get your ducks lined up ahead of time. In case you do need to file bankruptcy to stop the foreclosure, you will want to have consulted with an attorney long before the last minute so that a case can be prepared properly.) However, over my many years of practice, I’ve gathered that the vast majority of homeowners file at the last minute because they have spent their redemption period with their heads in the sand – hoping that the problem would resolve itself. (Hint for those of you considering that strategy: it doesn’t work.)
Side Note: Certain decisions simply should not be rushed into. If you need to file bankruptcy to save your home from foreclosure, I personally recommend that you give your attorney at least six weeks of lead time. Why? Certainly not because it takes that long to prepare a case. However, there is a difference between filing a case and filing a case properly. If you actually want your case to go smoothly and succeed, you’re going to want your case filed properly. It doesn’t take six weeks to draft schedules or any of the other things involved in preparing a case. But you should give your attorney six weeks for two reasons. First – so your attorney isn’t rushed. So your attorney has plenty of time to review your case, to make sure that all T’s are crossed and I’s are dotted, to make sure that all supporting documents have been assembled, etc., etc., etc. The second reason is actually for your benefit. Rushing into Chapter 13 is a bad idea. It’s a 3-5 year commitment that requires adherence to a disciplined budget. Giving at least six weeks’ notice will give you ample time to prepare yourself for what you’re about to commit to.
All right – all that preaching aside – let’s hit the actual point of this article. When must a bankruptcy case be filed to stop foreclosure?
As is often the case, we start with the statutes. 11 U.S.C. § 1322(c)(1) guides us here.
Notwithstanding subsection (b)(2) and applicable nonbankruptcy law — a default with respect to, or that gave rise to, a lien on the debtor’s principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.
Read plainly and literally, it would seem that you must file the bankruptcy case before the sheriff’s auction. However, Judge Kelley ruled that debtors could redeem a property from foreclosure up until the date the sale is confirmed by the state court (this is typically about 2 weeks after the sheriff’s auction).
Debtor defaulted on the monthly payments of his home mortgage with the creditor. The creditor commenced a foreclosure action and a court entered a judgment of foreclosure. After a six-month redemption period, the creditor purchased the property at a sheriff’s sale. Before the foreclosure sale could be confirmed by the state court, debtor filed a Chapter 13 petition. In his Chapter 13 plan, debtor proposed to resume making regular monthly payments to the creditor on the mortgage, and to pay the pre-petition arrearage through the Chapter 13 trustee. The creditor objected on the ground that debtor could no longer use Chapter 13 to cure the mortgage default and reinstate the mortgage. In overruling creditor’s objection, the court held that under state law debtors retained the right to redeem property at any time prior to sale, and that the sale occurred upon confirmation by the court. The court held that, because debtor could redeem after the foreclosure sale and before confirmation, debtor could cure his defaults utilizing 11 U.S.C.S. § 1322(c)(1).
In re Wescott, 309 B.R. 308 (Bankr. E.D. Wis. 2004)
So, the technical answer (unless Wescott should ever some day be challenged and over-ruled) is that a homeowner can have until the day the sheriff’s sale is confirmed to save their home in bankruptcy.However, I advise my clients to treat the sheriff’s sale itself as the deadline. If we’re going to run it to the wire, I prefer to know that we still have about two more weeks to file the case if there is critical information still missing by the time of the sheriff’s sale.
It is important to note that Judge Kelley arrived at this decision after a careful analysis of Wisconsin state foreclosure laws, and in comparing them to Illinois state foreclosure laws (the mortgage lender had cited Colon v. Option One Mortg. Corp., 319 F.3d 912 (7th Cir. Ill. 2003), which had a different result). Therefore, this decision applies only to Wisconsin cases. If you are a homeowner in another state – consult with an attorney licensed in your state to determine what the rules are in your jurisdiction.