Debtor's property protected from sale by creditors by Chapter 13 bankruptcy filing

Filing for bankruptcy can provide relief from creditor harassment. A bankruptcy petition triggers the protections of an "automatic stay" — that is, in legal terms, it halts almost all actions by creditors.

Individuals who violate this automatic stay may be subject to monetary penalties, as shown in the United States Bankruptcy Appellate Panel case of In re Webb.

An attempt to foreclose on a property

The debtor and his mother had lost an unrelated court case brought by a couple which resulted in a $10,000 judgment. The couple sought to foreclose on property held by the mother in light of the judgment, and a sheriff's sale was set for May. In the interim, the mother transferred the property to her son, the debtor.

The debtor filed for a Chapter 13 bankruptcy petition on the same day as the sheriff's sale and the sale was therefore canceled. The debtor listed the lawsuit judgment on his bankruptcy filings and the couple was notified of the proceedings.

Despite the automatic stay put in place by the bankruptcy petition, the couple's attorney attempted to reschedule the sheriff's sale on the property. The debtor filed an emergency motion asking the bankruptcy court to hold the couple in contempt and to impose monetary sanctions on them for ignoring the bankruptcy's automatic stay.

Was the property protected from the sheriff's sale?

The couple argued that the bankruptcy automatic stay should not apply to them by virtue of an Ohio state law which stated that if a lawsuit has been filed in a matter, then no interest could be acquired by third parties while that action was pending. Essentially, the couple argued that the pending lawsuit prevented the property from becoming part of the bankruptcy estate.

The United States Bankruptcy Appellate Panel noted that the protections of a bankruptcy automatic stay are broad and prohibit debtors from collecting most debts. Here, it was clear that the debtor acquired his interest in the property when his mother conveyed it to him.

Because the sheriff's foreclosure sale of the property had not been completed at the time of the debtor's bankruptcy filing, the property became part of his bankruptcy estate pursuant to the applicable federal law. Therefore, the foreclosure action was, indeed, prohibited by the automatic stay and sanctions were properly imposed on the couple.

Consult with an experienced bankruptcy attorney

Bankruptcy proceedings offer many protections to debtors and may provide the solution you need to your debt situation. If you are overburdened with debt, you should sit down with an experienced bankruptcy attorney to explore which options would be best for your individual circumstances.