Chapter 7 Discharge Does Not Prevent Subsequent Foreclosure

A reader wrote me stating that she had filed Chapter 7 bankruptcy because a bank was suing her for the amount of her home mortgage. This was not a deficiency action. The bank sued the reader for default under the promissory note without foreclosing on the mortgage. Without foreclosure, the owner would keep her house but the bank would have a judgment against her personally. She filed Chapter 7 to stop the lawsuit.

The bankruptcy petition listed the bank as a secured creditor. The bankruptcy court issued a discharge which included the reader’s personal obligation to the bank. The reader wants to know if the bankruptcy discharge wiped out the bank’s mortgage, or whether the bank can foreclose is he does not make mortgage payments.

A mortgage lender can sue the homeowner based upon only the promissory note for amount borrowed to buy the house. The suit on the note does not disturb the lender’s security interest perfected by recording the mortgage. The bankruptcy’s discharge of the reader’s personal obligation under the mortgage note does not affect the bank’s mortgage. The bank can foreclose the mortgage, but it cannot pursue the reader personally for deficiency liability.

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