Foreclosure on Discharged Mortgage

When individuals are facing economic struggles, they may proceed with filing for bankruptcy protection to get them back on the right foot. If these individuals are homeowners, the process gets a little more complicated.

Chapter 7 bankruptcy allows individuals to not include their home and associated mortgage in the bankruptcy proceedings, provided they are current on the loan obligation and have the ability to pay for the mortgage to remain in the home. It’s also possible for the individual to include the home and mortgage in the bankruptcy proceedings, which could result in the mortgage being discharged along with other debts.

Unfortunately, this process can be complicated and confusing. Some individuals may believe that when they’re mortgage is discharged, they are no longer financially responsible for paying it. And while that’s technically true, it doesn’t mean the borrower gets the home free and clear of the mortgage and that the mortgage company won’t foreclose on the home.

Below is an explanation of what typically happens when a lender forecloses on a discharged mortgage.

How Chapter 7 Bankruptcy Works

Through Chapter 7 bankruptcy, individuals can have their debts wiped out (i.e., discharged), if they meet various bankruptcy criteria as well as the economic standards set by the state they live in. The process will go through the bankruptcy court system, which will have to approve the bankruptcy.

Individuals will have to list all of their outstanding debts that they have  in bankruptcy. The Chapter 7 bankruptcy proceeding will conclude with the courts discharging the debts that are included — assuming the bankruptcy is approved, of course and the debts that the borrower (i.e., the Debtor) will keep by reaffirming in bankruptcy .

A bankruptcy discharge removes the individual’s responsibility from paying the debt in the future, essentially wiping out the amount they owe. The creditors in this case are often left empty-handed, though the bankruptcy Trustee may use the individual’s assets if unprotected in the bankruptcy to distribute to the creditors to make them as whole as possible.

In this sense, Chapter 7 bankruptcy provides individuals with the opportunity for a financial fresh start. However, it doesn’t provide them with assets free and clear of any debt obligation.

How Bankruptcy Affects Mortgages

As mentioned, if the mortgage is discharged through bankruptcy, the homeowner will no longer be responsible for the mortgage debt. This doesn’t mean that they have a free home to live in, though.

The bankruptcy will only eliminate the mortgage debt. What it doesn’t do is clear the lien on the property. 

All mortgages consist of two sections.

The first part is the promissory note, which is the personal assurance from the homeowner that they’ll repay the money they are borrowing. This is what ends up being discharged during a bankruptcy.

The second part is the actual mortgage itself, or the deed of trust. This is what puts a lien on the property. The lien remains on the property until the home owner pays off the mortgage.

The bankruptcy proceedings don’t discharge the second part, meaning that the lender still holds the lien on the property. Because of this, they still hold a legal right to foreclose on the property to reclaim their asset.

Will Foreclosure Always Follow a Discharged Mortgage?

Surprisingly, lenders won’t always foreclosure on a home after the mortgage has been discharged through bankruptcy. If the homeowner is able to remain current on mortgage payments, and if they don’t have much equity in the home, then the lender may decide it’s not worth their time or effort to foreclose and can continue to accept payments.  However, this does not prevent the mortgage company from foreclosing at any time they may deem it necessary.

In essence, the lender could decide to allow a homeowner in this situation to remain in the home, as long as they keep paying the mortgage. Since there isn’t much equity in the home, the lender might make out better by collecting monthly mortgage payments rather than trying to take ownership of the home.

However, if the homeowner doesn’t make mortgage payments, or if they have a lot of equity in the property, the lender would be more likely to foreclose on it. That’s because they could reclaim a most if not all of the money they were owedwhen the mortgage was discharged during bankruptcy.

How Foreclosure on a Discharged Mortgage Works

Even though the mortgage debt has been wiped out by the bankruptcy, a lender simply can’t kick an individual out of the home. They’ll still technically remain the owners of the home until the lender completes the legal process of foreclosing on the home.

That’s because foreclosure is the legal process that’s necessary for the lender to reclaim ownership of their property. Until this process is complete, the homeowner will remain the legal owner of the property. Foreclosure will formally remove their name from the home and transfer it to the bank, giving them legal rights to the home itself and the ability to re-sell it.

There are very specific steps that all mortgage companies must take to foreclose on a home. Each state has its own rules and regulations for this, and these don’t change just because the mortgage has been discharged in a bankruptcy. 

In other words, a lender can’t simply show up at the property, kick the homeowner out and change the locks. They need to follow the same legal proceedings that are set out by the state in which the property is located.

Work with a Trusted Law Firm


Even if your mortgage has been discharged through a bankruptcy proceeding, you still hold rights to the property until the mortgage company completes the foreclosure process. Many homeowners may not know this, and mortgage companies may try to take advantage of them as they’re in a vulnerable position — forcing them out of the home before they have to.

It’s important to know your rights if you are facing foreclosure on a discharged mortgage. Working with a trusted law firm such as Babi Legal Group will help you avoid being taken advantage of.

At Babi Legal Group, we have more than 20 years of real estate experience, as well as more than 15 years in business law, criminal, bankruptcy, debt collection and debt settlement experience. Our attorneys have the knowledge about what rights you have in this situation, and we ensure all of our clients are always protected.

Contact us today to find out how we can help you.