If a House Was Discharged in a Bankruptcy, Can They They Still Foreclose?

Bankruptcy does not fully protect homes from foreclosure.

Generally, a home mortgage remains effective even after a Chapter 7 or Chapter 13 bankruptcy, which means if you default on your mortgage loan, then you can still lose your home to foreclosure even after you have filed bankruptcy.

Mortage Loans

The difficult thing about mortgage loans is that they all have two very distinct legal features. The first feature is a promise to repay the borrowed money over time, with interest. The second feature is the mortgage lien, which essentially provides the lender with security on the loan to reduce the lender's risk. You grant the lender a lien on your house so the lender can foreclose if you ever default on the loan.

Lien Avoidance

Neither Chapter 7 nor Chapter 13 bankruptcy will discharge a mortgage lien. Technically, bankruptcy can sometimes allow for "lien avoidance," but bankruptcy never allows for lien discharge. Bankruptcy courts have authority to discharge personal financial liability, but they generally don't have authority to discharge liens. In rare circumstances, a trustee may be able to remove a mortgage lien if the lender did not follow the correct procedures under state law to record and perfect the mortgage lien. Generally, though, the lender still has a lien on your home even after bankruptcy.

Discharge

To further complicate things, bankruptcy can actually discharge your personal liability on a mortgage loan. This means you have no personal obligation to pay back the money you borrowed. In short, your repayment obligation is discharged by bankruptcy. However, because bankruptcy does not also discharge the mortgage lien, the personal liability discharge is meaningless if you want to keep your home after bankruptcy.

Effects

After bankruptcy, even if you receive a debt discharge on your home mortgage, your lender can still foreclose if you fall behind on your payments. The lender still has a lien on your home, and the lien is what gives the lender authority to foreclose. When you default on the loan, you authorize the lender to exercise the lien. The only real benefit of bankruptcy, then, is that if the lender does foreclose, and the home sells for less than you owe on the mortgage, you will not be personally responsible to repay the lender the remaining amount. Without bankruptcy, you would probably have to repay the lender for the deficiency. But, even with bankruptcy, your mortgage essentially remains in effect according to its original terms because the lender still has a mortgage lien.

References

• "The New Bankruptcy: Will It Work For You?"; Stephen Elias; 2009