Chapter 13 vs. Foreclosure sale

[sizz]

Foreclosure sale of Smith's house is scheduled for 2 pm.
At 1 pm homeowner Smith files Chap 13 petition, does not notify referee.
At 2 pm auction, referee sells house to highest bidder Jones for $300,000. Jones makes the required $30,000 down payment.
Two months later, asfter 341 meeting, Smith voluntarily withdraws from the bankruptcy, and sells house privately to Brown for $400,000.
Jones learns of sale to Brown and claims the house is his, not Brown's, for the price of $300,000.
QUESTION: Does Jones have any rights to the house or is the sale to Brown valid? Sizzlaw

[SinkingFast]

Depends on if your State allows for the "Right of Redemption" by the previous owner of record on the Deed.

Some States allow for that and stipulate a time period for the "Right of Redemption" by the owner who was Foreclosed upon. In some cases, the owner would have to Redeem their rights immediately. Other States allow a week, even up to a month after the Foreclosure sale, for the owner of record to Redeem with the "winner" of the Foreclosure Auction.

Generally, the winner at the Foreclosure Auction is the Lender who holds the mortgage. They send a representative to the auction to bid. Most times, the Lender's bid is the highest. Almost always, the other bidders are investors. Everybody knows everybody.

Rarely, does an individual show up at a Foreclosure auction to bid. Even at that, the individual has to be well qualified. They will have to prove they have funds on deposit to cover the downpayment, usually via a letter from their bank, and they'll have to prove they have either personal funds on deposit or an LOC established to pay the remainder of the balance due. In most cases, an individual has to prove all this in advance of Auction day.

Even if Smith claims his "Right of Redemption" to get the house back, Smith is gonna have to have the funds to pay the Lender the "Cure" amount or the high bid amount in full. Money has to change hands. Smith cannot simply say, "I am exercising my Right of Redemption. The house is mine." In the particular case you cited above, Smith would have to fork over the cash, $300K, to Jones to redeem the title/deed. At that point, Jones is out of the loop. Smith can do with the house as he pleases. The sale to Brown would be a valid transaction.

But it all hinges on the time period of the "Right of Redemption" in your particular State.

Brown could be backing Smith's redemption. That's legal too. The Court doesn't care where the money is coming from. Just that Smith has funds on deposit or an approved LOC to pay Jones the full amount of his bid.

[sizz]

Dear Sinking Fast: Thanks for your response. However, doesn't the bankruptcy filing at 1 pm create an automatic stay that would nullify the subsequent foreclosure sale (at 2 pm), so that Jones would have no rights to the house? (Of course, he would be entitled to a refund of his down payment of $30,000.) After all, had the auctioneer been informed of the 1 pm filing, he would not even have held the auction.

[SinkingFast]

Not necessarily. Not under New Law.

That's one of the aims of the New Law. Was to stop last minute, filings as a desperate attempt to enact the Stay to prevent Foreclosure sales and siezure of property.

Filing the day before might have had the desired effect, but not an hour before. At least that's what I understand from what I've read. That's one of the things the New Law was supposed to address. 11th hour filings to prevent whatever bad thing coming that the Filer didn't want to happen. Foreclosure sales were the biggest thing, but there are others. Law suits included.

Even if Smith or Brown goes back to Court to dispute the sale to Jones, the Court is likely gonna award the house and the Sale to Jones as the winner of the Foreclosure Auction. The Court can vacate the execution of the Stay due to the BK filing taking place so close to the time of the Foreclosure auction.

In the eyes of the Court, it looks like Smith filed BK in a last ditch effort to get the Stay in effect to prevent the Foreclosure Sale of the house. With all the behind the scenes wrangling to get the house to Brown, and Smith's subsequent withdrawal of their BK Petition, the Court could even consider the BK Filing a frivolous and fraudulent filing rather than necessary and made in good faith.

Personally,......... I'd leave this one alone. If the Court says Jones won, then leave it alone.

[sizz]

Thanks again, Sinking. From what you've pointed out, it would be wise for Smith not to sell to Brown right away, but to continue with his Chapter 13 plan for as many months as he can, well past confirmation, and then sell. This long waiting period between filing and selling would be evidence of his good faith in filing, before he finally sells to a third party.