What is a mortgage lien and how does it affect my bankruptcy case?

A lien is a claim by a creditor against some specific item of your property. The property is called collateral for the loan. It guarantees payment in the event that you fail to make the required payments. A mortgage lien is a special type of lien on real estate that's used to secure repayment of a loan for the purchase price or a home-equity loan.

Your home may be subject to more than one lien (e.g., tax liens, judgment liens, second and third [or even higher numbered] mortgages). If you fail to make payments, the creditor may enforce its rights by taking the collateral (this is called foreclosing), in order to get paid off. Filing Chapter 7 bankruptcy blocks a foreclosure sale temporarily, while filing under Chapter 13 blocks it if your plan provides for paying off the arrearages and keeping payments current during the life of your case.

Even though your personal liability to repay a judgment or other debt will probably be wiped out ("discharged") at the end of your bankruptcy case, liens do not automatically go away. If you do nothing about a lien, the creditor will eventually be able to foreclose and sell the collateral. You have several options to avoid losing your property:

  • You can avoid judicial liens against exempt property. Click here for a discussion of what it means to avoid a lien. 
  • You can redeem the collateral by paying the lender its current market value. See the section on redemption here
  • You can reaffirm the debt on terms that you and the lender mutually agree upon and that are fair to you in the judgment of your attorney or the court. See the topic What Is Reaffirmation here
  • You can also avoid the hassle of a foreclosure sale by surrendering the collateral to the lender. Click here for information regarding what surrender means in bankruptcy.

Your bankruptcy can proceed despite a mortgage lien. However, ignoring the lien will not improve your situation. Consult with an attorney to explore all of your options for protecting your property through the bankruptcy process.