Can someone tell me what happens when a mortgagor files bankruptcy before a foreclosure auction takes place.

If you have done many deals then you get fined on each one.And the kicker is that if you think bankruptcy will get you out of the financial mess, think again. 

I would never suggest bankruptcy as a first option, sellers credit takes a major hit.

So I took his application and he said that he had never filed bankruptcy.

They declared bankruptcy.

You need to think about what it would cost you if your buyer runs the restaurant in the ground and then does not pay you anything for the better part of a year, then add on your foreclosure costs to get the building back.I always like to look at the worst case and if I can deal with that then I figure I am ok, my worst case has been were they file for bankruptcy and I go listen to a bankruptcy judge tell me I can go a year or more without any payments and that's ok.I never make my decision only on what I will make if everything works out perfect, I look at what it will cost when things don't work out. 

Or they might just file for bankruptcy and not pay anything and create a new HOA.

The certificate from the VA will not qualify you for anything until the credit score is fixed.I do not know your situation, but if you file the bankruptcy, you will take the ability to buy real estate with financing out for at least two years maybe even longer.

Option B, as it is tough to prove what constitutes Corporate Advances if it goes to Foreclosure or Bankruptcy. 

Some insurance companies use delaying tactics to forstall payouts because they are contemplating bankruptcy or do not have funds to payout.