What Happens To A Real Mortgage When A Debtor Files For Bankruptcy?

I’m a creditor whose debt is secured by a real mortgage. I’ve received recently a notice that the debtor has filed for bankruptcy under chapter 7 of the US Bankruptcy code. What will happen to both my loan and my mortgage? Will I be enjoined from foreclosing the mortgage? The insolvent debtor by the way is an individual, not a corporation. Please prvide legal basis.
Thank you. 🙂

2 thoughts on “What Happens To A Real Mortgage When A Debtor Files For Bankruptcy?

  1. You have the best kind of security. You have about the strongest position you can get in bankruptcy as a creditor. The way I understand it there will be no need to foreclose. Just file your interest as a creditor as per the instructions on the paperwork.
    Hopefully, they’ll order the sale of the asset and you will be first in line for the funds from it, provided you are the primary mortgage holder and not subordinate to anyone.
    Regardless, be sure to speak with a bankructy attorney. You may get a free consultation or may have to pay a drop, but it will be well worth it for the guidance.

  2. It depends on the circumstances. First and foremost, there is an automatic stay in effect, so you can’t do a thing without consulting a bankruptcy attorney or you could end up in big trouble.
    You will need to review the facts with your attorney to see if it is worthwhile to seek relief from the automatic stay, which would allow you to proceed with a foreclosure action.
    Here’s how it works. If the debtor has little or no equity in the property – i.e., if outstanding balance on the mortgage is close to or exceeds the value of the property, then if the property is sold at foreclosure, there would be nothing left for creditors of the debtor’s estate. In that case, you have a good basis to make a motion to get relief from the automatic stay.
    Another basis is if the property is in danger of being destroyed or has been neglected for a long time. Then you can base your motion on the fact that your security (i.e., the property) is in danger of being squandered and you need relief to protect your secured interest.
    On the other hand, if the bankruptcy trustee who has effectively taken control of the debtor’s assets sees that the value of the property exceeds the balance on the mortgage, he will fight the motion, seeking to have the property sold at a bankruptcy sale so he can keep and distribute the surplus monies to other creditors.
    It’s generally better for you to get relief from the stay and control the foreclosure sale in state court.
    Many debtors will try to “re-affirm” their debts with their mortgagees however, so consult a bankruptcy attorney. They can get online using the PACER system and see what the debtor’s intentions are. You may also wish to attend the Meeting of Creditors or 341(a) hearing to keep tabs on what is going on.
    Note that many debtors in bankruptcy file Chapter 7 to stall or delay foreclosure hoping they will be able to get back on their feet, then withdraw their bankruptcy case after adjourning the meeting of creditors once or twice.
    Now, if the property is sold at a foreclosure sale, and you don’t recoup what is owed, you have a problem, because the deficiency balance is just money that is not secured by anything anymore, and then you fall in with the general class of unsecured creditors who are generally looking at pennies on the dollar.

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