When is it too late to file bankruptcy to save your home from foreclosure?

Once in a while, I’ll get a phone call from someone who wants to know if I can help them file bankruptcy to save their home from foreclosure.  They tell me that the Sheriff’s Sale is scheduled soon…  Tomorrow morning, in fact.
Can I help them?  Yes.  But that phone call should have occurred much MUCH sooner.
It might not be too late to save your home now, but there are deadlines.  Time is ticking.
First, let’s talk about the legal limitations.
  • Under state law, the redemption period ends once the house is sold at the sheriff’s auction.  Under this deadline, the client has only given me a couple of hours to do what ought to be done over the span of – at minimum – a couple of weeks.
  • Judge Kelley, a bankruptcy judge here in the Eastern District of Wisconsin, has ruled that debtors can still stop a foreclosure up until the date that the sale is confirmed by the state court.  Confirmation of sale typically takes place about two weeks after the Sheriff’s Auction.  In re Wescott, 309 B.R. 308 (Bankr. E.D. Wis. 2004).  Under this deadline, we’ve got a little more time to get the case ready to file – but still not very much time.

Last week, we talked about people who procrastinate in hiring an attorney until things get really really bad, and that there are benefits to hiring an attorney early on – when you are beginning to struggle financially.
Procrastinating in a foreclosure situation is especially troubling because in the State of Wisconsin, the foreclosure process is really quite long – particularly compared to the process in other states.
In a typical residential foreclosure where the homeowner has not abandoned the property, a foreclosure lawsuit is typically not filed until there are two or more missed mortgage payments.  Add another 6-8 weeks before a hearing is held and a judgment of foreclosure is entered (assuming that the homeowner doesn’t contest the foreclosure and that the court docket isn’t swamped).  Then add your standard redemption period of 6 months.  Then the Sheriff’s Sale, and another 2 weeks to get the sale confirmed.  All in all – the typical foreclosure case gives you about 10 months minimum to save your home – from the time you miss your first mortgage payment.
In other words – it’s sort of ridiculous to get a call the night before the Sheriff’s auction.  You had 10 months, if not more.  And frankly, a lot of foreclosure lawsuits are taking a lot longer than 10 months to pay themselves out.
Okay, so all I’ve done so far is explain what your deadlines are and why you shouldn’t wait until the last minute to call a bankruptcy attorney.  But what are the advantages to hiring a bankruptcy attorney early on?
  1. Bankruptcy is complicated.  Chapter 13 is even more complicated than Chapter 7.  If you are going to use Chapter 13 as a vehicle to save your home, you want to give yourself plenty of time to appreciate what you’re getting into.  If you call an attorney the night before the Sheriff’s sale, then you’ll be forced to make a lot of quick, snap decisions that you may regret later.  You’ll also want to allow yourself plenty of time to ask questions.
  2. On that same note, it does take an attorney some time to prepare your case properly.  Filing a “bare bones” petition is dangerous.  If the attorney has not had sufficient time to interview you properly, review your case properly, do his due diligence and research, and to advise you of important information before your case is actually filed.  Asking an attorney to slap together a petition and schedules in a short period of time virtually guarantees slop work, and that could cause big problems later on.  You should allow at least 6 weeks for good, thoughtful preparation.
  3. You’ll have less to pay!  In most Chapter 13 cases, you’re proposing to cure the default.  Each month that passes between your initial missed payment through the Sheriff’s sale just adds to your bill to the mortgage company – to say nothing of late fees, penalties, and interest.  The sooner you can file a bankruptcy case, the less you’ll have to pay back to the mortgage company.

Deadline to Stop Foreclosure

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.

Can bankruptcy stop foreclosure?

Yes, filing bankruptcy can stop your home from going into foreclosure, if you file under Chapter 13.
The bankruptcy code allows for the curing of arrears (past-due amounts owed on secured debts) under Chapter 13. This provides the creditor with adequate protection – meaning that they can rely on the arrears being paid without the need to recover their losses by foreclosing. Chapter 7 does not offer this protection, and so you risk foreclosure if you have arrears and file under Chapter 7, even if the foreclosure action has not begun.
To save your home from foreclosure, your bankruptcy case needs to be filed ideally before the sheriff’s sale, but if you miss that deadline, there is still a small window of opportunity if you can file before the confirmation of sale. In Wisconsin, creditors typically file foreclosure actions in state court after about two months of missed mortgage payments. After the case is filed, it takes about 4-6 weeks before a judgment of foreclosure is entered. In the current housing market crisis, a backlog of foreclosures has created an even longer time before the foreclosure judgment is entered, and that’s assuming the matter is uncontested. After the judgment is entered, there is a statutory six month redemption period (12 months if the creditor elects to not waive a deficiency judgment) in which time you can attempt to catch-up on your payments, renegotiate the mortgage, refinance, or file Chapter 13 to save your home. Sometime after the redemption period, the sheriff’s auction is held. Two weeks later is the confirmation of sale.
Each state’s foreclosure process is different, so be sure you check with your attorney. For example, in Michigan, where I also practice, the redemption period is only two weeks, not six months.
Technically, a Chapter 13 bankruptcy can also prevent a vehicle from being repossessed or other secured collateral, such as furniture, appliances, and jewelry. However, I discourage clients from filing under Chapter 13 solely to prevent auto or other small repossessions. Chapter 13s require a strict and disciplined budget, and can be volatile for a number of reasons. Cars and other small property are relatively disposable items in our society and are frequently replaced in the course of a three to five year bankruptcy plan. Also, repossessions occur much faster in Wisconsin than foreclosures do, with very little notice. In short, if you have multiple reasons to file under Chapter 13, preventing a repossession makes sense. But it is rarely worth the hassle of filing Chapter 13 solely for that purpose.