In re: Coleman, No. 11-00029 (Bankr. D. Hawaii, May 3, 2011)
When there has been a foreclosure sale, do you still have an interest in the property under bankruptcy or other law?
Yes! When your home has been auctioned in a foreclosure, you lose possession of the property and legal title. However, you still retain a possessory interest because of your physical occupancy of the premises. This interest is protected under the law, and a creditor, even one who now has legal title to the home, must go through the process of eviction. This tenable possessory interest in physical occupancy is lost once evicted. However, it is protected in bankruptcy by the automatic stay. Under the automatic stay, once you file bankruptcy, a creditor cannot evict you unless the court grants them relief from the automatic stay.
In a recent 9th Circuit bankruptcy case, a bankruptcy court in Hawaii dealt with this very issue. The debtors, Jean and Richard Coleman, owned property in Kula, Hawaii, for which they had a mortgage with a bank. When they defaulted on payments, a foreclosure was held and the bank purchased the property. The bank attempted to eject the debtors from the home, when Richard filed for bankruptcy relief, stopping the ejectment with bankruptcy's automatic stay. When the bank moved for relief from the automatic stay in order to eject the debtors, the court granted the relief, but then Jean herself filed for bankruptcy. However, she failed to inform the court in the bank's case to eject her and her husband about the recent bankruptcy filing, and the court ordered them ejected from the home.
When the bank undertook the process of evicting the debtors, they finally informed the bank of Jean's bankruptcy filing, and the bank was forced to stop the process and obtain relief from the automatic stay. However, the automatic stay is in place regardless of the creditor's knowledge of its existence. Here, the bank undertook the process of evicting the debtors before it discovered that there was an automatic stay in place and halted the process.
Fortunately for the creditors, the debtor can recover damages for a violation of the automatic stay only when the violation was "willful", meaning the creditor knew about the stay and intentionally violated it. In this case, the burden was on the debtor to prove that damages resulted from the violation, which she failed to do. Thus, while it may be possible to hold off eviction for a time during bankruptcy, recovery for violation of the stay only results from a showing of willful violation and the existence of damages.
