Brian is right, I had the same thing happen to a client of mine. We hadn't had a buyer yet, the client filed BK the day before the auction date, the auction was postponed, a few months later the house sold and closed as a short sale.
If you are happy with your agent, keep working with them. If not, as I have suggested in past posts, and will continue to suggest, is that as a buyer you Google every agent that responds to your question here on Trulia, learn as much as you can about who they are online, read their client testimonials, so you know what their clients are saying about them, and then give us each a call and just ask us why we think you should work with us instead of another agent. Then, pick the best fit for you and let them go to work for you with the skill and knowledge that they have. Good luck whatever you do.
Sorry hear about this seller BK will stop the process can take months or years.
Recommend to move on with another home
Brian is correct in the procedure; the problem is the lenders short sale approval process was probably interrupted when the client filed for BK. I had this happen to a short sale of mine. The lender received notification of BK and stopped the process without notifying anyone. I had to call the lender to find out this had happened. The lender instructed me to resubmit the package and start the process over again which I did.
The lender accepted the resubmission and did nothing with the package until my client was able emerge from his Chapter 13 BK.
My personal advice is to keep looking at other homes, even if you keep this one alive. You just don't know how long it may take for this to be resubmitted and no one can tell you with any certainty.
I hope you find a nice home you like even better.