Many clients come return to our office after we have helped them successfully discharge their debts in bankruptcy. Some ask, “Why am I being sued for foreclosure after getting a discharge in bankruptcy?” “Didn’t I give that property back in the bankruptcy?”
This scenario highlights two important issues: Does filing a bankruptcy change ownership of property? Has the bank violated my rights by suing me after I got my discharge in bankruptcy?
Does Bankruptcy Change Ownership?
Sometimes a Chapter 7 Trustee will take a property and sell it. This clearly takes it out of the debtor’s name, but this is a rare occurrence. Most people with equity in a non-exempt property will not file a Chapter 7. Instead, they will opt for a Chapter 13 to save it. In most Chapter 7s, the Trustee will not take the property, either because it is homestead or otherwise exempt, or because it has no equity (the property is “underwater”).
After the Debtor receives their discharge, if the Chapter 7 Trustee has not sold the property the bankruptcy closes without any transfer of ownership. And although the Debtor no longer has an obligation to repay the money borrowed, the lender still has the right to take it back from the Debtor through a foreclosure.
Has the Lender Violated the Debtor’s Rights?
Perhaps more important is whether the bank has violated a Debtor’s rights by suing after entry of a bankruptcy discharge. The discharge order creates an injunction against all creditors from trying to enforce a discharged debt against a Debtor. Creditors can seek enforcement against property upon which they have a mortgage, but cannot seek payment from the Debtor.
Sometimes a lender will seek payment from a Debtor after entry of a discharge. If this happens, the lender has violated the court’s discharge order and injunction. The result can be that the lender will have to pay damages, and reimburse court costs and attorney fees.
If a lender has sued you after you received your discharge in bankruptcy, cull us to discuss your rights.