So my lender still has its lien even though I did not reaffirm my mortgage?
Updated: Feb 8
When a Chapter 7 debtor does not reaffirm its mortgage in the bankruptcy (and usually you probably do not want to reaffirm real estate), the debt is discharged. This occasionally confuses debtors into thinking they must own their home free and clear. That is absolutely not the case.
The easiest way to know that would not be correct is the old adage that if it is too good to be true, then it probably is. Think about it, if all you had to do to own your house free and clear was to file Chapter 7 bankruptcy and not reaffirm the mortgage, then a lot of people would do that.
The reason the debtor does not own the house free and clear after not reaffirming the debt is because the lender recorded a lien (often referred to as a security deed) when the debtor originally took out the mortgage. As consensual liens cannot be avoided in bankruptcy, the bank’s lien survives the bankruptcy, even if the debt does not.
Now some of you might have heard that you can get rid of the second mortgage lien in bankruptcy. That actually is true, but there are a couple of key differences. For starters, that can only be done in a Chapter 13 and not a Chapter 7. The second point is this “lien strip” can only be done when the debtor’s first mortgage (which survives the bankruptcy), is worth more than the value of the debtor’s home.
Another point to take out of this lien discussion is that it applies not only to real estate, but also to the car liens, provided the car was taken out with purchase money. Therefore, even if the debtor is in a state where he/she can continue to drive the car without reaffirming, the lender’s lien will still remain valid, and the debtor will have to pay off the lien to ultimately get free and clear title.