You’ve heard the stories – the real estate investor purchased the property at auction – only to find out that the homeowner filed for bankruptcy at the last minute in an attempt to keep their home. Oops! What now?

Filing for bankruptcy can be a homeowner tactic to delay the foreclosure process and give them more time to try to save their home, or to at least stay in the home longer. But bankruptcy can be a complex process, with twists, turns and unexpected events.

• Can the property be taken away after you purchase it at auction?
  It’s a matter of timing, even down to the hour … did the sale occur before the bankruptcy filing was official? If so, the sale is good and the property is yours. But the sale is invalid if the homeowner managed to file first, and there have been no other court actions to relieve the hold on lender actions. In states like Arizona and Utah a cash deposit is all that is needed to be the winning bidder at auction.  The balance owed is due by 5 p.m. the next business day. In these states, if the homeowner files for bankruptcy before you pay for the property in FULL, the sale will be invalid.

• What if a (now former) homeowner files for bankruptcy after you purchase the property at auction, and then refuses to move?
  Is the former homeowner protected from the eviction process? In most cases, no. Once title has passed to you, the new owner, they are in the same status as any other holdover occupant. However, some cases are more complex and it is wise to consult an attorney about each situation. Rent-paying tenants with a lease are always in a special category.

• Will a homeowner filing for bankruptcy during the foreclosure process prevent the property from ever going to auction?

  o   Filing for bankruptcy under either Chapter 7 or 13 immediately stops all foreclosure action by the lender, including an auction – this is called an “automatic stay”.

  o   But! The lender can file a motion with the bankruptcy court to lift or terminate the automatic stay. If granted, the foreclosure process is likely to proceed, possibly including an auction.

  o   Chapter 13 filers are in the best position to be able to keep their home long-term.

  o   Chapter 7 filers are often the mostly likely to find the property going to auction or another form of sale.

• Can I negotiate a purchase of a property while the owner is in bankruptcy proceedings?
  In some cases, yes – although it could be a tough sell as you need to negotiate a purchase price that allows for the cost of your own legal advice, as well as your usual project expenses and profits. You will have to work with the lender, the court and the owner’s bankruptcy attorney. But you may be the answer to the homeowner’s property problem!

A homeowner in foreclosure filing for bankruptcy is a major complication, but not always a show-stopper. If the price is right, expand your due diligence to include legal advice, and explore the possibilities!

Do you know of homeowners who filed for bankruptcy and were successful in keeping their property from being sold at auction?

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