Does a Chapter 7 Bankruptcy Discharge a Secured Mortgage Loan
by Phil M. Fowler
Chapter 7 exposes your home to potential sale by the mortgage lender or the bankruptcy trustee.
Secured debt (i.e. a mortgage loan) has two legal components. The first component is personal liability for the amount borrowed. The other is the security interest, or lien, the lender takes in your home. Chapter 7 bankruptcy can eliminate your personal liability on the secured mortgage loan, but it cannot eliminate the lien.
California law follows the "one-action" rule, which generally requires that a lender must foreclose on the mortgaged property before pursuing collection against the borrower personally. This means that if you stop paying your mortgage, the lender must foreclose before it sues you for the balance owed on the mortgage. Foreclosure ultimately results in the lender's, or a trustee for the lender, selling your house to recover cash to pay
off the mortgage. If the sales price is not enough to cover the entire mortgage, the balance is a deficiency that you might be liable for. The lender might be able to garnish your wages, or seize your bank accounts or other assets to satisfy the deficiency.
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