Buying Property at a Foreclosure Sale

What happens when a buyer purchases investment property at a foreclosure sale, and the owner of the property files for bankruptcy?

There is much press on foreclosures.  With unemployment striking almost every household, people are not able to pay their mortgages, and their homes end up going up for sale.  Some of the buyers are investors who do not need to live in the homes themselves.

The home owner may attempt to keep a home by filing bankruptcy.  All of a debtor’s actions will be strictly examined by the bankruptcy court once a person files for bankruptcy. It is important to find an attorney who advises to avoid unnecessary and costly complications that result from favoring creditors or transferring assets with the intent to shelter them. Though people in financial hardship worry about losing a house, what is more important to stress about is integrity.

If a person decides to file bankruptcy to keep a home from foreclosure, the person needs to appear at a 341 hearing at the bankruptcy court. At this meeting the trustee will question the debtor under oath about assets, liabilities, transfers, income.  On the home, the trustee may ask when it was purchased, the market value, and any rents from the property.  The trustee may send an appraiser to the property.  At the 341 hearing, creditors may be present and question the debtor about the circumstances under which the debtor incurred debts.

When a buyer purchases investment property from a foreclosure, and does not want the debtor to stay at the home, the buyer needs to bring a motion for relief to get relief from the automatic stay. When the court lifts the automatic stay, the buyer gets an order from the federal bankruptcy court.  The buyer can use the bankruptcy court order to go to state court to file a lawsuit against the debtor such as an unlawful detainer action to get a writ to possess the property.

The motion for relief by the buyer requires several days’ notice to the debtor. Until a buyer has the bankruptcy court order, the buyer cannot take any acts against the debtor without violating the automatic stay.

For the motion for relief, the buyer needs to give evidence that the buyer is the new owner of record of the property purchased in foreclosure.  The debtor may claim that it was a wrongful foreclosure sale. For instance, there has been media attention on “robo signing.”   The debtor may argue the foreclosure sale as “void.”  The dispute may need to be ironed out in a hearing in front of a bankruptcy judge.  A successful bidder at a foreclosure auction is usually a bona fide purchaser for value.

Look to an experienced New York bankruptcy attorney to resolve bankruptcy questions.