Foreclosure after Bankruptcy

Hi Shean,

When a homeowner files for Chapter 7 bankruptcy, it doesn't immediately eliminate the mortgage lien on the property, it just wipes out the borrower’s personal liability for the debt. This means the bank can't go after them personally for the unpaid balance anymore, but it still retains the right to foreclose on the property. Now, bankruptcies often take several months (and in some cases year), to work through the court system. That delay could explain why the actual foreclosure is only happening now, even though the bankruptcy was filed 5–10 years ago.

In many situations, the bankruptcy court must first resolve or discharge the debts before the foreclosure process can legally resume. Sometimes bankruptcy filings are even used tactically to delay foreclosure, but once the case is closed and the automatic stay is lifted, the lender is free to proceed.

As for credit impact, yes, foreclosure can still appear on a credit report separately from the bankruptcy, especially if the foreclosure is completed long after the bankruptcy case was discharged. That said, since the borrower’s debt was wiped out in the Chapter 7, the damage is often limited because the worst of it, the bankruptcy, already did most of the harm. Still, it doesn’t go unnoticed on a credit report.

One key protection to note: once the bankruptcy is settled and the personal debt is discharged, the lender cannot pursue a deficiency judgment. A deficiency judgment is when the lender sues to collect the difference between what was owed on the mortgage and what they recovered at auction after foreclosure. But in a Chapter 7, that liability is gone, the borrower is shielded from those future claims.

Lastly, regarding short sales, if the homeowner still holds legal title to the property (even if they've emotionally or physically abandoned it), a short sale may still be possible. But it would require cooperation from both the homeowner and the lender, and not all banks will.