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What happens to a mortgage loan in a bankruptcy proceeding?

For most Kentuckians who are thinking about bankruptcy, their most important asset is their home. Unfortunately, the mortgage loan that made possible the purchase of the home may also be a major source of the financial duress that makes a person consider bankruptcy. What happens to the loan and the obligation to repay if a person files a petition for personal bankruptcy?

Answering this question begins with the promissory note and mortgage that the debtor signed when the house was purchased. The terms of the mortgage spell out the rights of the lender to foreclose on the loan if the borrower should default. The terms of the mortgage will also have some effect on the status of the loan after the bankruptcy proceeding is completed.

The major advantage of bankruptcy for a homeowner who has defaulted on the mortgage loan is the automatic stay that is issued by the bankruptcy court when the petition is filed. The automatic stay will stop a foreclosure action immediately. The foreclosure proceeding will be halted even if a foreclosure sale is already scheduled. In a Chapter 7 proceeding, the foreclosure proceeding will remain stayed until the bankruptcy proceeding is complete, usually about 3-4 months. In a Chapter 13 proceeding that results in a plan to reinstate the mortgage, the foreclosure proceeding may be stayed for as long as 5 years while the debtor attempts to pay all arrearages on the mortgage loan.

The exact effect of a bankruptcy proceeding on a mortgage that is in default depends upon a number of factors. Any homeowner who is contemplating a personal bankruptcy should consult a bankruptcy lawyer for advice on the effect of the bankruptcy proceeding on the home loan and mortgage.

Source: Findlaw, "Facing Foreclosure? How Bankruptcy Can Help?" accessed on March 10, 2017

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