Serial Bankruptcy Filings Preventing Foreclosure, Does a Remedy Exist? Print E-mail
Written by Kerry S. Doolittle   
Monday, 03 May 2010

You hold a mortgage secured by real property.  The debtor is not paying.  You follow the process to foreclose, but the day before the sale the debtor files bankruptcy to prevent the sale.  The debtor does not care about the bankruptcy case because he accomplished the objective.  A few months later, the bankruptcy case is dismissed.  

You begin the process again, paying attorney's fees to send the proper notices, paying the newspaper to publish the advertisement, but once again, the day before the scheduled sale, the debtor files another bankruptcy case. 

Each time this process repeats, you lose six months, collect no payments, and expend a lot of money on attorney's fees and publishing fees.  The debtor is living "rent free" and it only cost him the bankruptcy filing fee once every six  months or so.

How do you get off this roller coaster and finish the foreclosure once and for all? 

The first round, you really have no choice.  You can file a motion to lift stay in the bankruptcy case, but the case may very well be dismissed before the court hears your motion, which will then be dismissed as moot.  

The second round, you will probably have the same result.  It is very difficult to convince a bankruptcy judge that the second filing proves bad faith.  The judge will almost always give the debtor a benefit of a doubt.

The third round, your chances improve as you begin to show both a definite pattern of filing a bare bones bankruptcy petition immediately before a scheduled foreclosure sale and a pattern of not following through with the bankruptcy cases, resulting in dismissal.  However, if you are aggressive, you can both guarantee success and avoid the third round.

By aggressive, I mean that you have to stay on top of things, act as quickly as possible, and keep the pressure turned up on the debtor.  You want to see the bankruptcy cases dismissed as quickly as possible, and you want to recommence the foreclosure as quickly as possible.  The reason?  

Under 11 U.S.C. 362(c)(4), if, when the third case is filed, two prior bankruptcy cases "were pending within the previous year but dismissed", the automatic stay does not arise, which means you can proceed with the foreclosure sale despite the third filing.  Most debtors are not aware of this provision.  You just need to verify that the time period from the date of the final order closing of the first case (often several weeks after the "dismissal") and the date of filing the third case is less than one year.  

Another option, if the timing does not work out, is to file a motion to lift stay and to impose an "in rem" order under 11 U.S.C. 362(d)(4).  This order not only lifts the stay so that you can proceed with the foreclosure process again, it states that the property will not be subject to any stay in any future bankruptcy filing based on a finding that the filing of the petition "was part of a scheme to delay, hinder, and defraud creditors."

The process is time consuming and expensive, but as an alert and aggressive lender you can jump off that roller coaster and stop letting the bad faith debtor take you for a ride.

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