How Bankruptcy Can Backfire on Homeowners in Foreclosure

Originally Published: 3/12/2012

Many homeowners resort to filing bankruptcy in order to stop an imminent foreclosure on homestead property when no other legal options are available.  While, in most cases, the mortgage holder can still foreclose on the property, it cannot do so until the property is released from the bankruptcy estate.  This can take several weeks or even months (if not longer).  Traditionally, where real property in bankruptcy has no equity, the trustee eventually abandons the property, as a sale would not yield funds to pay unsecured creditors.  However, it has come to our attention that some bankruptcy trustees and third parties have found a way to profit from underwater homes in Chapter 7 bankruptcy.

In a recent bankruptcy case pending in the Tampa Bankruptcy Court, the Trustee served a notice to an unsuspecting homeowner that their home was going to be sold in three weeks time.  However, the property is encumbered by a mortgage and has no equity.  The notice stated that the Trustee was selling the property to a land trust “as is” for $1,500.  This means that the Trustee was essentially selling title to the property with the mortgage still attached.  Thus, the new owner of the property would only keep title until/unless the mortgage holder foreclosed.  The obvious question resulting from this scenario is: why would anyone pay for property that will eventually be lost in foreclosure?

Further investigation revealed that the land trust purchasing the property actually reviews bankruptcy filings to see if the homestead property is the subject of a “slow paced” or early stage mortgage foreclosure. When they find one, they approach the bankruptcy trustee to acquire the property, which they can accomplish relatively quickly in bankruptcy. They then evict the homeowner and rent the property out to a third party until the bankforecloses.  Given that it can take over a year for a bank to foreclose on a property, the land trust stands to gain a considerable profit from its $1,500 investment.  The bankruptcy trustee benefits from its commission on the sale and will obtain $1,500 to pay the debtor’s creditors.

Should this practice gain momentum, the ability of homeowners to use bankruptcy as a means to protect their homes (or as a means to remain in their homes longer) will be lost.  In fact, this practice could result in a much swifter eviction process for homeowners than would be the case outside of bankruptcy. In other words, the bankruptcy filing could backfire on an unsuspecting homeowner. So homeowners considering bankruptcy as an alternative to the voluntary sale of their property should be very careful. For further information regarding options for homeowners facing foreclosure and/or bankruptcy, contact an attorney.

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