How Bankruptcy Works With Foreclosure

A client I will call Paul called in today, and he was confused by a part of his bankruptcy that confuses a lot of our clients. Paul filed Chapter 7 Bankruptcy with the intent to surrender a piece of real estate he no longer wanted. Paul is most of the way through his Chapter 7 and a recent letter from his bank had him confused. I reassured Paul that the Bank wasn’t trying to collect any more money and explained his situation.

Like most of us, when Paul bought his home he signed two different pieces of paper: a NOTE and a MORTGAGE. The note was Paul’s promise to pay, and the mortgage was Paul’s promise to give the bank the deed. When Paul decided he didn’t want to keep his home in his bankruptcy he was attempting to discharge his note. The mortgage remains, and Paul will still have to give the bank the deed.

When Paul’s Bankruptcy concludes, and he is granted his discharge, the bank will look at Paul’s payment history and decide when it is appropriate to act on the mortgage. Eventually the bank will file a special kind of foreclosure, an “in rem” or property only foreclosure, to take the deed to the house. This is required under Illinois law, and takes place in the same court as regular foreclosure and takes the same amount of time. Paul will have at least 8 months after being served to move out of the home. During this time the bank may add charges to the balance of the mortgage, but Paul will never be liable to pay on those charges.

In the end Paul felt better. He will have to wait some time for the process to complete, but he can walk away from the house any time he wants, and he has more than ample time to find a new place to live. Confusing letters from the bank are not going to end up with him being charged any money.

If you have any question about your financial situation, or need advice about foreclosure and bankrupcty, consult with my firm. Find us at

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