Episode 321: Foreclosures & Automatic Stay

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Foreclosure is a legal process in which a borrower or debtor forfeits their right to property by defaulting on payments or other obligations. In Texas, once a debtor is in default, the creditor must send notice to the borrower that they are in default and have 20 days to cure. If, after 20 days, the default continues, the creditor has the right to post notice of a public foreclosure sale. It is during this process that a debtor will file for bankruptcy. The foreclosure process would then be halted by an automatic stay – a provision in the bankruptcy code that kicks in as soon as a debtor files for bankruptcy. While in effect, an automatic stay prevents the creditor from pursuing collections against the debtor – with some limitations.

On the creditor’s side, automatic stays complicate the collections and foreclosure processes. However, creditors may move to lift a stay to resume foreclosure and recover payment.

Automatic Stay Details: What it Prevents and How Long it Lasts

As per Section 361 of the U.S. Bankruptcy Code, an automatic stay goes into effect as soon as a debtor files for bankruptcy – either Chapter 7 or Chapter 13 (or Chapter 11 for business entities). Because it is implemented instantly, it is common for debtors to wait until the last moment before filing bankruptcy to give themselves maximum time to act.

Once an automatic stay is in effect, it will prevent the following actions:

• Moving to foreclose a property
• Creating, perfecting, or enforcing a lien
• Repossessing collateral
• Garnishing wages

Automatic stays only provide temporary protection. If the debts are not discharged in bankruptcy, they remain the debtor’s obligation.

If the stay is not lifted by a court order, it will typically remain in effect as long as bankruptcy proceedings are ongoing. For Chapter 7, this could mean several months. For Chapter 13, this could mean several years.

Debtors must continue making post-petition payments, including taxes, and maintaining insurance on the property. If debtors fail to do so, they risk losing their objection to lift the stay.

Bankruptcy courts may alter an automatic stay if a debtor is potentially “gaming” the system to avoid payment. For example, if a debtor has filed for bankruptcy more than once within the previous calendar year, the stay may be reduced to 30 days total. If the debtor has a history of bankruptcy filings, the court may remove the automatic stay entirely.

When an Automatic Stay is Helpful for Creditors

Automatic stays are primarily a tool for debtors, but they can benefit some creditors, too. If a property has multiple liens against it, an automatic stay freezes collection attempts by all creditors. This gives the court time to organize repayment to all lien holders, giving every creditor a fair chance to attain compensation, though lien priority dictates who is paid back first.

Lifting an Automatic Stay to Continue Foreclosure

Bankruptcy delays the foreclosure process, but creditors may continue foreclosure if they have the stay lifted. The burden of proof falls on the creditor to demonstrate why the automatic stay should be lifted, and reasons given may include:

• Insurance doesn’t adequately cover the property. We recently participated in a case where two hearings were needed to determine whether a particular commercial insurance policy was sufficient for the property in question. After determining that the policy was not sufficient, the stay was lifted.
• The creditor’s business stands to lose money if the stay is not lifted.
• The property is falling into disrepair.
• The property’s value will decline to the point where selling it will not cover costs following bankruptcy proceedings.

Motions to lift an automatic stay are considered on a case-by-case basis by the bankruptcy court. Prior to making a decision, the court will hold a hearing for both sides to make their argument. Sometimes the court will agree with the creditor that the stay should be lifted and foreclosure may continue. Sometimes the court will keep the stay in place.

Courts are more likely to keep the stay in place if the debtor is only a few payments behind and can continue making payments. The debtor must also be able to maintain insurance and tax payments. The court will also be more likely to keep a stay in place if the debtor elects to sell the property and use the proceeds to pay creditors back.

When is the Court Likely to Lift an Automatic Stay?

The court will be more likely to lift a stay and allow foreclosure to continue if:

• The debtor’s equity does not cover the liens held against the property. This is more likely to be the case if there are multiple liens taken against the property. If the liens held against the property are worth more than the property itself, the debtor cannot sell the property unless secured lien holders agree to take less. In this case, the bankruptcy court may force a sale to liquidate the property and pay off lien holders in priority order.
• The mortgage is greater than the property’s worth.
• The debtor is too far behind on payments to catch up within a reasonable timeframe. 

Delayed by an Automatic Stay? An Experienced Real Estate Attorney Can Help

Foreclosure battles can be contentious between creditors and debtors, especially when a bankruptcy stay is involved. And ultimately, whether the stay is lifted or allowed to stand is based on subjective factors. This means either side can win with better preparation and knowledge of the law.

An experienced attorney can provide both for a client. Our practice, for example, specializes in representing creditors involved in bankruptcy proceedings. We can help organize motions to have a stay lifted, allowing creditors to complete foreclosure and recoup what they can on the property.

By Harold "Hap" May, P.C. on February 16, 2024   /   The Legal Play Podcast   /   Leave a comment