Does a Bankruptcy Stop all Foreclosures?

Not in every case. It seems that Vermont and Connecticut are unique in their approach to foreclosure. Unlike most states which conduct foreclosure by an auction in one form or another, these two New England states have something called “Strict Foreclosure”.

What is “strict foreclosure”?

In very simple terms, when the value of the property is less than, or equal to, the amount of the debt, the Court will not force the mortgage holder to auction the property.  Instead, the Court will set a Law Day which is the deadline to pay off the debt being foreclosed.  Everyone gets a Law Day and it goes in the reverse order (like a countdown) until you get down to the debt being foreclosed.  If you do not pay off the Plaintiff’s debt in full by that day, your claim to the property is foreclosed.

For example, if you owe $150,000 on your mortgage, but your house is only worth $140,000, then the court will give you a law day to pay the $150,000 mortgage.  When you don’t pay in full, you lose the house and then your home equity loan (assuming you have one) is given second chance to pay.  In this scenario, the home equity loan probably won’t pay either.  So on the last Law Day, the first mortgage lender gets the house.  No auction, no expense, no delay.

What does this have to do with bankruptcy?  Well in those states (Connecticut and Vermont), you would think that a Chapter 7 Bankruptcy filing would stop the Law Days, giving you - the homeowner - a chance to save the house.  However, in the case of In re Canney, the United States Second Circuit Court of Appeals decided that while the stay is effective, it only lasts for a short time and then it is gone. Additionally, only the Bankruptcy Trustee assigned to the case gets the opportunity to get the home.  So if you want to save your home in those two states, Chapter 13 may be your only hope.