In Rem Relief from Stay: How Lenders Can Stop the Delay to Foreclosure Actions Caused by Serial Bankruptcy Filings
by Lucas B. RocklinNovember 10, 2020
Borrowers Delay Foreclosure Actions by Filing Serial Bankruptcy Cases
A delay tactic used by borrowers to prevent the lender from obtaining and enforcing a foreclosure judgment is to file for bankruptcy, and not just one bankruptcy case, but multiple bankruptcy cases. Often, the bankruptcies are filed in bad faith as part of a scheme to delay and frustrate the foreclosure action. To file multiple bankruptcy cases to delay a foreclosure action, borrowers (i) file multiple successive bankruptcy cases (e.g. a Chapter 7 bankruptcy and then one or more Chapter 13 bankruptcies), (ii) stagger the bankruptcy filings, if there are multiple borrowers on the same loan (e.g. spouses), and (iii) even resort to transferring title to the property to a third party who then files for bankruptcy.
Bankruptcy filings can significantly delay the lender’s recovery, while also causing the lender to incur expenses. With exception, filing for bankruptcy causes an “automatic stay” to enter (per 11 U.S.C. Section 362), stopping the commencement and continuation of all foreclosure and debt collection efforts against the borrower. The automatic stay is the primary reason why borrowers file bad faith bankruptcies. Borrowers typically wait to file for bankruptcy just prior to when the foreclosure judgment enters, or is to be carried out (e.g., on the eve of a foreclosure sale, or on the borrower’s law day in a strict foreclosure).
If it’s the borrower’s first bankruptcy, the lender’s response is typically to file a Motion for Relief from Stay, requesting an order that the lender be permitted to resume its foreclosure action against the borrower. A Relief from Stay order is limited in scope to the bankruptcy case in which the order enters. This means that if the same borrower, a co-borrower, or other party with an interest in the property files a subsequent bankruptcy case (to delay the foreclosure following Relief from Stay entering in the first bankruptcy case), a new automatic stay goes into effect in the subsequent bankruptcy case.
What can lenders do if their borrower files repeated bankruptcy cases to delay the foreclosure action?
Lenders Can Stop the Delay Caused by Borrowers Filing Serial Bankruptcy Cases
In Rem Relief from Stay is how lenders can end the delay caused by borrowers filing serial bankruptcy cases. An In Rem Relief from Stay order is not limited in scope to the bankruptcy case in which the order enters (as is a Relief from Stay order, as described above), but is substantially broader. In Rem Relief from Stay affects the mortgaged property (In Rem from Latin means “against a thing”). It prospectively eliminates the automatic stay from entering as to claims against the mortgaged property in future bankruptcy cases for two years, regardless of who files the bankruptcy case. Stated in other words, following In Rem Relief from Stay entering, any future bankruptcy cases filed by any party (borrowers or others) within the next two years will not stay the lender’s foreclosure action.
To obtain In Rem Relief from Stay, lenders are required (per 11 U.S.C. Section 362(d)(4)) to establish that (i) the bankruptcy filing was part of a scheme, (ii) the object of the scheme was to delay, hinder or defraud creditors, and (iii) the scheme involved either the transfer of some interest in real property without the secured creditor’s consent or court approval, or multiple bankruptcy filings affecting the property.
The principal reason for borrowers filing repeated bankruptcy cases is to obtain the automatic stay to stop the foreclosure and debt collection efforts. Saving lenders time and money, In Rem Relief from Stay is how lenders can put an end to the delay.
Disclaimer: This article is for educational purposes only and to give you a general understanding of the law, not to provide specific legal advice. No attorney-client relationship exists by reading this article. This article should not be used as a substitute for legal advice from a licensed professional attorney in your state.