What Happens if a Bank Discharges a Home Loan During a Bankruptcy?

Discharging your home loan in bankruptcy doesn't release your obligation to make mortgage payments if you want to avoid foreclosure.

When you file bankruptcy, the court typically discharges all of your non-exempt debts, including your home loan. However, bankruptcy can discharge only your personal liability for the loan. Regardless of the type of bankruptcy you file, the lien your lender placed on your home to secure the mortgage will remain active after bankruptcy.

About Secured Debts

A secured debt, such as a mortgage, typically involves both personal liability and collateral. In the case of a home loan, you are personally liable for the debt, but you have also pledged your home as collateral to secure the loan. During bankruptcy, you may discharge your personal liability for the debt, but the lender retains an interest in your home.

Foreclosure

If you were behind on your mortgage payments before you filed bankruptcy, the automatic stay prevented the bank from foreclosing on your home. However, if you are still behind on payments after your bankruptcy case closes, the lender can foreclose on your home for the delinquent debt. If you fall behind on payments after bankruptcy, the lender can still foreclose on the home even though the bankruptcy discharged your personal liability for the debt.

Keeping a Home

If you want to keep your home after bankruptcy, you must continue to make your payments even if you are no longer personally liable for them. If you aren't able to pay your lender the amount of the delinquency on your home loan before the close of a Chapter 7 bankruptcy case, it may be more beneficial to file Chapter 13 bankruptcy. Chapter 13 bankruptcy typically lasts longer than Chapter 7 and allows you to pay off your delinquencies over time.

Considerations

If you are making regular mortgage payments after bankruptcy, it may be beneficial to sign a reaffirmation agreement with your mortgage lender. Most states don't require borrowers who discharged their home loans in bankruptcy to sign such agreements to keep their home as long as they make regular mortgage payments. However, if you don't sign a reaffirmation agreement, the lender can't report your timely payments to the credit bureaus.

References

• Moran Law Group: Can I Keep My House Through Bankruptcy?
• Bankruptcy Law Network; My Bankruptcy Is Over and My Mortgage Company Stopped Reporting My Payments to the Credit Bureaus; Pamela Stewart