<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=183154879077085&amp;ev=PageView&amp;noscript=1">
Scura, Wigfield, Heyer, Stevens & Cammarota Blog

Does the Automatic Stay Exist if a Property Is Sold at a Prior Sheriff Sale?

[fa icon="clock-o"] February 3, 2020 [fa icon="user"] David E. Sklar

street-and-houses-of-upscale-neighborhoodIf you purchased a property at a sheriff sale or if you were the owner of a property that was sold at sheriff sale, you may be wondering about the implications of a bankruptcy proceeding. This blog will explore the implications of a bankruptcy proceeding filed while the former owner is still in possession of a foreclosed property.

THE IMPOSITION OF THE AUTOMATIC STAY ON PROPERTY OF THE BANKRUPTCY ESTATE

The filing of a bankruptcy petition creates an estate that consists of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. §541(a)(1).  The filing of a bankruptcy petition stays, “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  11 U.S.C. §362(a)(3).  This is known as the automatic stay. “The Automatic Stay is one of the most fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors.  It stops all collection efforts, all harassment, and all foreclosure actions.” Midlantic National Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494 (1986). 

BANKRUPTCY FILING DURING REDEMPTION PERIOD

In the immediate aftermath of a foreclosure in New Jersey, the former property owner is afforded a redemption period in which they can redeem the property by paying the full amount that was owed on the mortgage. The right to redeem a mortgage exist as long as a right to object to a foreclosure sale is in existence. Mercury Capital Corp. v. Freehold Office Park, Ltd., 363 N.J. Super. 235, 373 (N.J. Ch. Div. 2003). There is a ten day period that the Sheriff cannot deliver a deed to the purchaser and within which the former owner can redeem the subject property. Id. After the ten day period expires, the sheriff is free to deliver the deed to the purchaser. Id. Once the deed is delivered to the purchaser, then the right of redemption expires. Id. When a bankruptcy is filed during the redemption period, then the redemption period is extended to sixty days from the date of the bankruptcy filing pursuant to 11 U.S.C. §108(b).

IMPACT OF BANKRUPTCY AFTER THE REDEMPTION PERIOD HAS EXPIRED

After a foreclosure proceeding has been completed and the redemption period expires, then the owner of the property must seek to eject the former owner of the property unless the former owner leaves the property voluntarily. An ejectment action of the former owner of a foreclosed property seeks an order from the Court ordering the removal of that person from the property. While the former owner does not have any right of possession or right to ownership of the property, a bankruptcy filing by the former owner will still stay any ejectment action. This stems from a Third Circuit decision which held that “a debtor’s mere right of possession, even without any claim of title is protected by the automatic stay arising from section 362(a).” In re Dunlop, 378 B.R. 85, 91 (Bankr. E.D. Pa. 2007) citing In re Atlantic Business & Community Corp., 901 F.2d 325, 328 (3d. Cir. 1990). Therefore, any ejectment action cannot proceed against the debtor in a bankruptcy proceeding while the automatic stay is in place.

In this situation, the purchaser of the property at the foreclosure sale can file a motion for relief from the automatic stay for cause under 11 U.S.C. §362(d). As was found by the court in In re Dunlop

As a general principle, whether to terminate modify, condition or annul the bankruptcy stay under section 362(d)(1), for “cause,” is committed to bankruptcy court discretion and is to be determined by examining the totality of circumstances. Although the debtor currently is in possession of the Devon realty, possession by a debtor alone, without any right of ownership or contractual right to possession, is not protected to any great degree by the bankruptcy stay. Relief from the stay is typically granted to the owner, or secured creditor of the owner, when the debtor has no right to possession. Embedded in the concept of “cause” for relief from the bankruptcy stay is the issue of whether there is some legitimate purpose to be served in bankruptcy by keeping the debtor in possession… If bankruptcy serves no legitimate purpose in retaining the debtor’s possession, then the property owner should be granted relief from the stay to exercise its non-bankruptcy law rights to recover possession from the debtor. Thus, if a foreclosure sale takes place prepetition, a chapter 13 debtor has not right to cure or reinstate her mortgage under Pennsylvania law. Nor, after such a sale, does she have any right to cure a prepetition mortgage default in a chapter 13 proceeding under federal bankruptcy law. In such circumstances, i.e., where a pre-bankruptcy sale has already occurred, courts have routinely held that relief from the bankruptcy stay is generally is appropriate so the buyer may eject the debtor.

While a former owner remains in the property pending an ejectment action, the purchaser of the property will have to bear the property’s carrying costs. Therefore, it is generally prudent for a purchaser at a sheriff sale who’s been placed in this predicament to file a motion for relief from the automatic stay as soon as possible after the debtor’s bankruptcy filing. Once the purchaser of the property obtains relief from the automatic stay, then that purchaser can reinstate or initiate an ejectment action of the debtor/former owner of the property.

If you are considering filing for bankruptcy or a creditor in a bankruptcy proceeding, it is important to contact an experienced bankruptcy attorney to guide you through your options. It is also important to inform your counsel about every aspect of the potential litigation, so your attorney can guide you through the process as smoothly as possible. For questions regarding a potential litigation, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.

schedule-foreclosure-consultation-cta

 

 

author-profile-image

David E. Sklar

Prior to joining Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, David Sklar graduated from Rutgers University-Newark School of Law with a J.D., Cum Laude. Mr. Sklar was the recipient of a Pro Bono Award and was honored by the New Jersey Bar Association for his commitment to the Street Law Program by being awarded the Street Law Prize.

Need Help? Contact Us Today!

New Call-to-action 


Feeling Trapped by Your Debt? Download your Free eBook