Foreclosure Auctions – What If the Homeowner Files Bankruptcy Before the Auction?

So you’re ready to go to a foreclosure auction and have prepared well for it. You have even looked at some of the properties and have your eyes on one in particular.

However, the property you’re interested in did not go up for bidding at the auction, even though it as on the schedule.

What happened?

The homeowner may have filed for bankruptcy at the last minute.

Why Do Homeowners Avoid Foreclosure in the First Place?

A struggling homeowner may want to avoid their financial situation becoming public knowledge. If the bank has filed an intent to foreclose on their property, only they and the state will know about it.

If the bank goes through and files for foreclosure, then anyone can read the court records and the foreclosure will be public record.

Many distressed home owners want to avoid foreclosure happening. It will substantially harm their credit. It can affect their current and future employment. And obviously, they will be homeless if their home is foreclosed and auctioned off.

What Filing Bankruptcy Does For the Homeowner

A homeowner can stay in his or her home longer after declaring bankruptcy. Bankruptcy protection delays eviction from their home.

In some states, filing bankruptcy will also prevent the lender from getting a deficiency judgement for the property and going after the homeowner for the debt difference.

A bankruptcy can also protect homeowners from any second mortgage debt and the junior lenders that could sue them after a foreclosure to collect on this debt.

A bankruptcy done before a foreclosure can give a homeowner peace of mind as well. It brings a sense of control in a chaotic time.

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Bankruptcy Can Stop an Auction at the Last Minute

Literally up until the minute of the foreclosure auction, an individual can file bankruptcy to stop the foreclosure. If a homeowner files bankruptcy at 9:08 am, and the auction took place at 9:09 am, they can stop (or rescind) the sale of their property.

Homeowners are generally advised by an attorney to declare bankruptcy as the auction date closes in to save their home. This can stop the foreclosure process as long as it is filed before the foreclosure occurs.

In fact, a recent study found that homeowners who declare bankruptcy decrease the chances of their home going to a foreclosure auction by 70%.

All of this can be a problem for an investor who placed the winning bid at the foreclosure auction. The bankrupt homeowner will take this to court. The judge will determine that the home could not be sold at auction because the owner was under bankruptcy protection.

Bankruptcy Can Stop an Eviction

If a homeowner is about to be evicted from the property, he or she can declare bankruptcy and stall the process. This depends on the state they reside in. As an investor is looking to purchase that specific property at auction, the bankruptcy can halt everything.

Two Types of Bankruptcy Homeowners Will Choose From

A Chapter 7 bankruptcy filing will discharge most of the homeowner’s debts but it could cost them their home.

Chapter 13 bankruptcy offers the benefit of keeping the home and cars. When most homeowners declare bankruptcy, they usually declare Chapter 13. Chapter 13 can include debt repayment plans and debt forgiveness after a certain period of time or number of payments.

The Foreclosure Auction Winner Will Not Get Their Money Back Quickly

If an investor goes to a foreclosure auction, they will need to have cash ready and deposited for any winning bids.

However, if the homeowner files bankruptcy that day, even if the auction takes place, the lender will have to take the house back. It may take awhile (30 days plus in some cases) for foreclosure buyer to get his money back. This is tied up capital unavailable to purchase another foreclosure property.

In a Nutshell

We’ve discussed what happens if a homeowner files bankruptcy before the foreclosure auction. A bankruptcy filing can halt a property from going to foreclosure auction, leaving an investor without a property to bid on or a winning bid with no property. This is just another risk for house flippers looking to buy houses at auction — one that needs to be prepared for.

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