Bankruptcy lawyers Arlington TX trusts have handled many Chapter 13 bankruptcy cases over the years, and it was simply a given that once a home was foreclosed on by the mortgage lender, a Chapter 13 would not get that house back. Until now. It appears that that is no longer the case, as the courts are becoming more open to the idea that a foreclosure sale might be considered a preferential treatment of a creditor, and therefore void the sale. Now, this idea comes with a big asterisk. There are several qualifications that have to be meet in order for this theory to work.
First, a debtor has to prove that a transfer occurred. Before 1984, a foreclosure sale was not considered a transfer of property, but the bankruptcy code was amended to define “foreclosure of the debtor’s equity of redemption” as a transfer. This means that this first qualification is easily met.
The second qualification is that the property in the foreclosure sale was transferred to an existing creditor of the property owner. This means that the buyer at the foreclosure sale must be a creditor of the debtor. This effectively limits the ability to void a foreclosure sale to the situation where the mortgage lender purchases the home back at the foreclosure sale. If the home is purchased by any entity other than the mortgage lender, the avoidance of the sale is not available. However, the mortgage lender at the foreclosure sale repurchases over 90 percent of all foreclosed homes in Texas.
The third qualification is the foreclosure sale must be because an antecedent debt exists. An antecedent debt is a debt that exists because of the purchase of the home. This requirement is satisfied if the mortgage lender is foreclosing the home because the debtor used the home as collateral for the loan that is being foreclosed. If the home is foreclosed because of failure to pay taxes, or for some other reason, those foreclosures cannot be reversed.
The fourth requirement is that the debtor must be insolvent at the time of the foreclosure sale. This requirement is almost always met unless the debtor owns a valuable non-exempt property. It is a rare situation where a debtor has non-exempt assets that exceed the amount of debt he or she has, and therefore this requirement is relatively easy to satisfy.
The fifth requirement is that the bankruptcy must be filed within 90 days of the foreclosure sale. If the bankruptcy is filed after that 90-day period, the foreclosure sale will not be avoided.
The sixth requirement is that there must be equity in the home in order to avoid the sale. If the value of the property does not exceed the amount owed to the mortgage lender at the time of the foreclosure sale, there is no preferential treatment because the creditor is not receiving more than the fair market value of the home if the creditor gets less than the house is worth at the foreclosure sale.
Finally, the debtor’s bankruptcy must be filed before the mortgage lender sells the home to a bona fide purchaser. A sale will not be avoided if the mortgage lender has sold the house after the foreclosure sale to a third party that does not have knowledge that the sale could be avoided. This does not mean that the debtor is completely out of luck though. The debtor can still recover damages from the mortgage lender in the amount of the difference between the payoff balance of the loan, and the fair market value of the home.
Thanks to our friends and contributors from Brandy Austin Law Firm PLLC for their insight into bankruptcy practice.