Which bankruptcy and who must file to stop a foreclosure

In this day and age the internet is abound with articles that advise you that if you want to stop a foreclosure on your home then filing for bankruptcy is an effective way of doing that. As now retired Judge Mitchell of the Alexandria, Virginia Bankruptcy Court was fond of saying bankruptcy is “the cheapest injunction in town.” However, what is easy to overlook is which person or entity must file the bankruptcy in order to stop the foreclosure and what bankruptcy needs to be filed in order to stop the foreclosure.

First rule to keep in mind: only the person or entity that owns the piece of real estate headed for foreclosure can protect the real estate by filing for bankruptcy. So, with the proliferation of corporation and especially LLCs these days it is important to recognize that if the real estate is owned by a company then it is the company –the LLC for example- that must file for bankruptcy protection. And it is the deed (not the deed of trust or the promissory note) that will tell you who owns the property. Same goes for married couples. One cannot always assume that both own the home. Again, look at the deed to the house.

For those of you who are intellectuality curious the reason for that is that when a bankruptcy case is filed the “automatic stay” goes into effect-that’s the injunction that Judge Mitchell was talking about. And the automatic stay applies to all “property of the estate.” The property of the estate is just about every conceibale thing that you, the individual or entity that files for bankruptcy owns on the day you file your bankruptcy case. In short, the bankruptcy “shield” only applies to the property that is owned by the debtor.

Second thing to keep in mind is which bankruptcy you select to file matters. Chapter 13 cases can virtually always be voluntarily dismissed by the person who files for bankruptcy. But, that is not the case with chapter 7 cases; there is no automatic right to dismiss such cases once they have been filed. So, if the house happens to have a substantial amount of equity, and you are just looking to buy yourself a few more months do not make the mistake of filing a chapter 7 bankruptcy.  Why? Because the chapter 7 trustee is going to want to sell your house for the benefit of your creditors! In other words, you may find that exiting the bankruptcy arena is not nearly as easy as it is to enter it. So choose carefully!!

And if the mortgages on the house(s) that you are trying to save from foreclosure are in excess of about $1,150,000 dollars then be prepared to have to file an individual chapter 11 case. And here too dangers lie ahead for those who own real estate with equity and are just trying to buy themselves a few months while they work things out with the bank.  As with chapter 7 bankruptcy filings there is no automatic right to have your case dismissed. In other words, you cannot just tip your toe in the water if you decide to file an 11. If you are in it, you are in for the long run if you have equity in your home(s).

And speaking of chapter 11, if a corporate entity owns the real estate, like an LLC, then that particular LLC must file a chapter 11 case (a chapter 7 bankruptcy rarely makes sense for an LLC and chapter 13 is for individuals only) to save the property from getting foreclosed on. Again, here too caution must abound since there is no right to automatically dismiss the chapter 11 case. If the property has significant equity the court may be inclined to allow the case to be converted to a chapter 7 which will result in the real estate being sold by the chapter 7 trustee for the benefit of the creditors of the LLC.

Final point, for spouses who own the home jointly it may be beneficial to not file a joint case in order to leave the door open for the other spouse to file a bankruptcy at a later time if the circumstances prove necessary. This can buy the couple a great deal of time, put the foreclosure off for a very long time and avoid the whole “serial filing” issue.