22 Aug When Foreclosure Can’t Be Stopped by Bankruptcy
Recently my colleague, Craig Andresen, wrote an article on the Bankruptcy Law Network explaining how a Chapter 7 Bankruptcy filing will stop a foreclosure. This is generally true, but as with all general statements, there are exceptions. The states of Connecticut and Vermont have a unique form of foreclosure that a Chapter 7 case will not stop.
Most all states require that a foreclosed home must be auctioned at some point. The details vary; some states require the auction to be done with court supervision and others allow the auction to take place without any court action. However, in Vermont and Connecticut, there is another kind of foreclosure: strict foreclosure. The concept of strict foreclosure does not involve an auction at all. With the entry of a judgment of foreclosure in court, a deadline is set for payment of the foreclosed mortgage in full with all costs or the ownership and possession of the home is terminated. That deadline is called a “law day”. After that date, you no longer own the home and may not continue to reside there. If there are any other liens on the property, they are extinguished one by one, day after day in countdown fashion, until only the foreclosing party is left. If anyone pays the debt in full when it is their turn, that party becomes the new owner of the home.
Since the passing of this time in a foreclosure case does not involve any court action, the automatic stay of a bankruptcy filing is not effective against it. The Federal Court of Appeals for the Second Circuit determined that Vermont’s strict foreclosure law (which is identical to Connecticut’s) is not affected by the Bankruptcy Code. The case is called In Re Canney decided on March 7, 2002. (For those lawyers reading this post, the case can be found at 284 F.3d 362.) In response, Connecticut passed a special statute to deal with this problem provding that the at least in a Chapter 13 case, the judgment of strict foreclsoure is stayed. That protection is only available because the Connecticut General Assembly acted to create the protection for homeowners.