In In re Zaptocky
, No. 98-8091 (6th Cir. 04/16/1999) affirmed in Simon v. Chase Manhattan Bank
, 250 F.3d 1020 (6th Cir. 05/22/2001) , the 6th Circuit Bankruptcy Appellate Panel held that the bankruptcy trustee could avoid an invalid mortgage, but that the lender retained an "equitable interest" in the value of the property.
This indicates that the bankruptcy court
can grant an equitable lien in favor of your lender, and thereby force you to pay the lender the unpaid balance of the invalid mortgage. The lender's interest would defeat your homestead exemption, in my opinion.
However, it's not at all clear to me, that the net proceeds from the trustee's sale can simply be handed over to the lender -- because the fact that the lender may have an equitable interest that survives your bankruptcy, does not, by itself, determine the exact amount of that interest. The lender must sue you in a bankruptcy "adversary proceeding" to determine the value of its interest.
Re the motion and your having to move by Oct 31, I still haven't looked up the document -- hopefully, I will have time later this evening.
Hope this helps.