Q: Can second mortgage lender seek post-sale deficiency judgement after liability was discharged in Chapter 7
In 2009, my neighbor filed for Chapter 7 bankruptcy and kept her house with two mortgages, 100k+ and 25k. Her personal obligation for the second mortgage was discharged. A loan modification of the second mortgage in 2015 adjusted the principle, term, and interest rate. In late 2017, my neighbor's house was destroyed by fire and she subsequently moved across the state. After a year of battling with her insurance company she received money and paid off her first mortgage. However, the second mortgage is still active and that lender has recently initiated foreclosure. Since early 2019, I've had a signed purchase agreement with my neighbor pending resolution of the second mortgage. Our purchase price is FMV but substantially less than what's owed (34k claimed). I know my neighbor can still sell at any time without a short sale agreement but since she is not personally liable for the 34k, can the lender still seek a deficiency judgement for the outstanding balance above our sale price?
If the borrower on the second mortgage loan received a discharge in bankruptcy, and did not reaffirm the debt, that borrower no longer has personal liability, and cannot be pursued for the loan, whether or not the amount owed is a "deficiency."
There are some assumptions in your question that I don't agree with or do not understand, but I believe that this answers your actual question.
A: Your neighbor's Chapter 7 Bankruptcy does not affect the rights of either the first or second mortgagee in the property. Chapter 7 discharges the debtor's personal obligation to pay the debts, but the mortgages are not removed. If the first mortgage was not foreclosed, the second mortgagee still has a valid mortgage against the property. If the second is not paid, they would be authorized to foreclose regardless of the Chapter 7 discharge. I would not recommend purchasing the property unless the second mortgage is paid at closing and you receive a release of the mortgage in writing.
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A: If neighbor reaffirmed debt, it can be foreclosed upon and deficiency judgment granted. If neighbor did not reaffirm debt, then it can still be foreclosed upon but no deficiency judgment can be granted.
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What a mess!
You need to take this problem to your lawyer and have him sort it out. My colleagues have pointed out many of the problems, but I am sure there are others lurking about.
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