The Debt is Discharged, but the Mortgage Remains

The Debt is Discharged, but the Mortgage Remains


First understand the three documents relating to the ownership of your home:

• Deed – This is the document that says who owns the home
• Mortgage – This is the document that allows the bank to foreclose on your home if you are not current
• Note - This is the document that makes you personally responsible for the money owed on the home

Typical Factual Scenario:

• You have now received a discharge in a Chapter 7 bankruptcy
• You did not reaffirm the mortgage ( I almost always advise not reaffirming mortgages)
• You still have the property
• You have continued to make payments according to the terms of the original loan

Question: How can this be?

Answer: It’s actually very common, and it gives you the best of both worlds.

In a nutshell: The underlying debt (The note) has been discharged, but the creditor still has a lien on the collateral (The Mortgage.) As long as you continue to make the payments they can’t bother you or the collateral (The Deed is still in your name and you still own the property.) If you ever default, then they can foreclose, but they can never claim that you owe them any money. That would be a violation of the bankruptcy discharge, for which you could file suit against them!

In a little more detail: When you took out this loan you signed papers which gave the creditor two different rights:
(1) to collect money from you; and
(2) to take the property away from you if you failed to make the payments (or if you otherwise defaulted on the terms of the loan).

The bankruptcy discharge eliminates their right to demand money from you, but in most cases it does not affect the lien that they have on your property. This creates the interesting situation described above, where for most purposes the mortgage remains in effect, but you now have the absolute right to walk away at any time if that turns out to be the right thing for you. This is especially true if you have always been current on the payments for this particular loan. They are not allowed to foreclose unless you are in default, and despite what your contract might say, the law does not consider bankruptcy to be a default for these purposes. However, even if you did default in the past, if they continue to accept payments from you then legally they have waived the default, which puts you right back into the driver’s seat.

The bottom line: If you want to keep the property, just keep making the payments and be sure to comply with any other contractual terms, such as paying local property taxes and maintaining valid insurance. If you eventually pay off the loan you will own the property outright. But if you ever decide that paying for the property is not in your best interest, whether that’s because you can’t sell it for enough to pay off the mortgage(s), or because you simply can’t afford to make the payments, you can simply walk away and there’s nothing the mortgage company can say about it. They can still foreclose under the mortgage, but that’s all they can do.