Can a creditor who has a secured debt discharged in bankruptcy foreclose on my home or repossess my car?
People often come to see me asking if a creditor can still foreclose on their home or repossess a car after Chapter 7 bankruptcy or a Chapter 13 bankruptcy reorganization. After all, the debt to the creditor was wiped out (discharged) in their bankruptcy.
This is a little confusing for people, so let’s see if we can clear the issue up using plain English.
Examples of a secured debt
Voluntary Liens on Homes or Cars Are Not Removed by Bankruptcy
Let’s say you gave a creditor a voluntary lien, such as a note and deed of trust (mortgage) on your home, or you gave a creditor a voluntary lien on your car. The creditor has two different rights before you file bankruptcy if you are behind on your payments. One is the right to foreclose on your home or repossess your car. The other is the right to sue you for the debt.
Purchase Money Mortgages Cannot Sue You Even Without a Bankruptcy
In California, we have what is called an “anti-deficiency statute.” That statute essentially says that if the note and deed of trust (mortgage) was to purchase your home, the only right the creditor has is to foreclose. It cannot sue you for money. It is referred to as a “non-recourse” note and deed of trust (mortgage.) If you borrowed money AFTER you purchased the home, including refinancing the loan, the anti-deficiency statute does not apply and the creditor has the right to sue you for the money if they chose to do so.
The Creditor’s Right to Sue You is Wiped Out in Bankruptcy
Bankruptcy wipes out the creditor’s right to sue you for money. They do not have the right to demand the debt to be paid.
The Right to Take Your Vehicle or Your Home Survives Bankruptcy
I rarely represent a creditor except for an occasional individual. I never represent business or corporate creditors. However, I had a case where I represented a client who had a note and deed of trust (mortgage) on a house. No payments had been made in years. The total debt on was due to be paid. The debtors were in bankruptcy. We filed a motion and obtained a “relief from the automatic stay” order from the Bankruptcy Judge allowing us to foreclose on the home.
We were not asking for money. The debt was wiped out in bankruptcy. However, we were allowed to enforce our lien rights against the home. In order to stop the foreclosure, the homeowner paid the creditor off.
Keep in mind that we are only talking about voluntary liens. Those are liens that you have agreed to. The liens have to be properly “secured” such as a note and Deed of Trust (mortgage) recorded with the County Recorder or DMV registration as a lien holder on a vehicle.
Lawsuit Judgment Liens Can Often be Removed Off of Your Home in Bankruptcy
Involuntary liens such as lawsuit judgment liens recorded with the County Recorder are often avoidable. That means the judgment lien can be removed from the property if the lien “impairs,” which means interferes with, your homestead exemption rights. The judgment lien creditor can have their lien wiped out if there is no equity above both: 1) the total mortgage debt on your home and 2) the amount that you can “exempt” or protect under the California Exemption Statutes.
Removing a judgment lien is done by filing a “Motion to Avoid a Judgment Lien.” The bankruptcy itself does not automatically remove the lien off your home.
Reaffirming Debts on Vehicles in Your Bankruptcy
If you have a car that you purchased and you owe money on it, you may have to sign a “reaffirmation agreement” to keep the car. That is an agreement signed by you. Additionally for it to be enforceable, it has to also be signed by either your attorney or the Bankruptcy Judge stating that the reaffirmation agreement: 1) is in your best interest and 2) it is not a hardship for you to make the payments. That agreement becomes a Bankruptcy Court Order.
A reaffirmation agreement gives the creditor back their right to sue you if do not make the payments on time. That means that you are back in the same position with that creditor that you were in before you filed your bankruptcy. If you want to give up the car, you can do that and you will not owe any money to the Creditor because you did not reaffirm the debt.
Reaffirmation agreements are not needed on real property such as a home.
Summary on Secured Debt in Bankruptcy
The bottom line is that secured debts are dis-chargeable and can be wiped out in bankruptcy. However, the lien on the property is not removed from that property. The creditor has the right to take the property if not paid according to the contract you signed.
Gary Ray Fraley Esq. is a California State Bar Board of Legal Specialization Certified Bankruptcy Law Specialist. He has been practicing bankruptcy law for over 37 years. His bankruptcy law office is in Sacramento California.You can reach Gary at (916) 485-5444, by his website www.sacramentobankruptcyattorneys.com or by email at FraleyAndFraley@gmail.com. For more information on Secured debt.