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Can I Discharge a Mortgage in a Chapter 7?

By Joseph McDaniel, Esq.

Well, a discharge in a Chapter 7 case is a very good thing.

It's really an injunction, or a court order. It prevents creditors from taking actions against you to collect the debt, based on your personal liability.

But there's a reason that secured creditors took a lien, or security interest, or deed of trust, on their collateral.

And the reason is that a discharge doesn't scrape a properly perfected voluntary security interest off of the collateral.

If you think about it for just a minute, it will make sense.

If it worked any other way, you could buy a house with a small down payment, then file a bankruptcy, discharge the debt, and keep the house without paying for it!

We would need a bigger bank bailout if the law permitted you to do that!

Lesson to Take Away: a properly perfected secured lien on collateral survives a discharge, but in most cases, the personal liability for the debt does not. So after the discharge order is entered, the creditor still has an interest in the collateral, but is normally unable to sue you, or garnish you, or take other actions to collect the debt.

Full post as published by Arizona Bankruptcy Attorney Blog on February 14, 2011 (boomark / email).