What happens to my mortgage in chapter 7 bankruptcy?

The short answer is that normally chapter 7 bankruptcy doesn't result in major changes to a person's mortgage.

While a chapter 7 bankruptcy discharge will get rid of personal liability on the mortgage promissory note, the mortgage lien (deed of trust) survives bankruptcy. So while a bank cannot sue a mortgage borrower personally after discharge, it very much can still foreclose a property if grounds exist to do so. Practically speaking, if mortgage payments are being made, a bank has little interest in foreclosing a house, assuming legal grounds even exist to do so.

Accordingly, the normal practice in North Carolina is that if a mortgage is current when a person files chapter 7 bankruptcy and the person desires to keep the house, the person merely continues making the payment during and after the bankruptcy case.

What is Foreclosure is Pending?

The automatic stay in chapter 7 bankruptcy stops foreclosure proceedings. However, unlike chapter 13 bankruptcy where the stay gives the people who filed bankruptcy a chance to propose a chapter 13 plan to cure the mortgage default and keep the property, chapter 7 provides no built-in mechanism for saving a home from foreclosure.

While it's theoretically possible that one could renegotiate, modify, refinance, or cure by lump-sum during or shortly after a chapter 7 case, thereby using the automatic stay to buy some time, such is seldom a financially realistic solution.

So why have an automatic stay of foreclosure in chapter 7? The automatic stay of collection against property also protects the chapter 7 trustee's right to inquire if there is value in property that would benefit unsecured creditors. So, in the rare case that a property had thousands of dollars of equity above the mortgage balance and the debtor's homestead exemption, a trustee might want to sell the property himself or herself to payoff the mortgage and also other creditors. The automatic stay facilitates this investigation. However, its rare in NC, with a $35,000 homestead exemption, to find a house in foreclosure that a bankruptcy trustee would desire to sell.

What about Modifications?

Voluntary mortgage modifications can be a useful option for a homeowner seeking a more affordable mortgage payment. Modification attempts around chapter 7 bankruptcy can become more complicated, sometimes only due to bank policy and procedure. For example, many banks will have a different department handle modification request from bankruptcy borrowers than from other borrowers, a fact that might reset the modification process when bankruptcy is filed. If a trial modification is underway or a modification is desired sometime in the future, extra care is warranted when evaluating bankruptcy options.

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