Mortgage lenders have more protection than many other creditors. After all, the property that the borrower purchases with the mortgage is technically the collateral for the loan. If a homeowner defaults on their mortgage and misses multiple payments back-to-back, the mortgage lender has the option of foreclosing. They can assume ownership of the property and then sell it to a new buyer to recoup the amount used to fund the mortgage initially.
Of course, the foreclosure process is lengthy and somewhat costly. Additionally, homeowners frequently take drastic steps to avoid the loss of their primary residences. Some people even file for bankruptcy to prevent or delay foreclosure.
What rights do mortgage lenders have when borrowers file for bankruptcy when they’re facing foreclosure?
Filers cannot discharge a mortgage
Unsecured lines of credit and debts are potentially eligible for discharge during a personal bankruptcy filing. Provided that the homeowner follows the right procedures, they can halt collection activity by filing and then eliminate some of their financial obligations through a discharge. While a bankruptcy filing temporarily halts foreclosure, it does not absolve the filer of the obligation to pay their mortgage.
Secured loans, including mortgages, are generally not eligible for discharge. Instead, the filer may try to negotiate a mortgage modification. Especially in a Chapter 13 bankruptcy scenario, the goal may be to secure certain concessions from the lender to make the mortgage more sustainable.
Typically, mortgage lenders have to accept reasonable repayment plans during Chapter 13 bankruptcy cases. They may be able to counter unreasonable offers, especially if the mortgage is no longer in good standing due to missed payments.
Frequently, people filing for bankruptcy take action because they are at risk of imminent foreclosure. The automatic stay that the courts grant temporarily halts collection efforts, including foreclosure proceedings. However, lenders may have the option of asking the courts to lift the automatic stay, especially if there are signs of intentional misconduct on the part of the homeowner.
Reviewing the mortgage itself, the records of the homeowner’s payments and the details of their recent bankruptcy filing with a skilled legal team can help lenders evaluate their options. Mortgage lenders have rights and legal protections during consumer bankruptcy proceedings, and they may benefit from having an advocate attend bankruptcy meetings and hearings to assert their rights.