Individuals who file for bankruptcy are generally seeking a “fresh start,” with the ultimate goal being a discharge of the individual’s debts. At the end of the bankruptcy, those debts simply disappear, or so the debtor thinks.
However, the bankruptcy discharge may not be nearly that beneficial to the debtor. A successful bankruptcy only discharges debts; it does not generally discharge a lien like a mortgage. As a consequence, it is not uncommon for a debtor to go through a bankruptcy, receive a discharge, come out of bankruptcy, and only then have the bank foreclose on the mortgage on his or her house. An impatient bank may not even wait for the bankruptcy to end; it may request permission from the court (called “relief from the stay”) and simply move ahead with the foreclosure proceeding while the bankruptcy is still pending. Either way, these can be pretty shocking results, particularly for the debtor who sought bankruptcy protection primarily to save his or her home.
While this is bad news for the debtor, it may not be inevitable. A debtor who files a reorganization bankruptcy (normally a Chapter 13) may be able to stave off foreclosure by making plan payments. But under these circumstances the debtor still has to pay the debt or, at a minimum, the amount of the debt that is not in excess of the value of the mortgaged property.
In summary, bankruptcy may not be the panacea some debtors anticipate.
— Rod Fluck