Bankruptcy & Foreclosure: The Black Hole Of Secured Debt

Education & Training with Law Offices of James M. Bosco & Associates


Unfortunately, many homeowners who have been discharged in bankruptcy and have surrendered their property as part of that process are finding themselves trapped in the black hole of bankruptcy and secured debt. Here is a recent example our office has just dealt with:


Client owned a property in Massachusetts. The mortgage company filed for foreclosure and a foreclosure sale date was scheduled. She filed Chap. 7 prior to the foreclosure sale to stop the sale from going forward and subsequently had her Chapter 7 successfully discharged. She was under the impression she surrendered the house as part of the bankruptcy process and has since relocated to another state.


THREE YEARS LATER she was notified by the city inspector’s office that she was being sued for potential code violations as an abandoned property because she was still showing as being the homeowner of record. Needless to say she was surprised to hear of this news as she thought the bank took over the property of part of her bankruptcy.


Over the last couple of years, the number of homeowners being faced with this same dilemma has been substantial. For a number of reasons, more and more lenders are choosing not to move forward with completing foreclosures after a homeowner has been discharged in bankruptcy. Fortunately, we were able to get our client out this situation by negotiating a short-sale settlement with her lender, which officially removed her from being the homeowner of record.   


After a homeowner’s bankruptcy has been discharged (as a general rule of thumb) the lender would normally move forward with the foreclosure process in order to dispose of the asset or accept a deed-in-lieu of foreclosure, but they are not legally required to do so. They may also entertain a loan modification if the homeowner wanted to keep the home.


However, homeowners need to be very careful before entering into any such agreement, as they could be legally reaffirming the mortgage debt that was just discharged. Homeowners should NEVER enter into any such agreements until they first consult with their bankruptcy attorney in advance!


There are not many options for a homeowner when their mortgage debt has been discharged in bankruptcy and their lender refuses to foreclose or take back the property, as they are simply not legally required to do so. There is no authority that would require a bank to foreclose its position on a property that was surrendered in bankruptcy or force them to take back their collateral. There are many reasons why a lender may choose not to foreclose or reclaim the property. They may simply write it off as a bad debt and call it a day and leave the homeowner responsible for the property. Keep in mind that unless and until the house is legally conveyed to another party, the homeowner is still (and will always be) the homeowner and will continue to have all the responsibilities and liabilities that go along with it.  


If a homeowner had enough equity in their property to satisfy the debt, they could always sell the property and voluntarily pay off their lender and be done with it. They would also be able to keep any extra money that might be left over. If the property was upside-down in value, a homeowner could attempt to do a short-sale settlement with their lender. And if the lender refuses to accept a fair market value offer, the homeowner could write a letter to the lender’s foreclosure attorney and to the lender’s legal department directly  making the argument that based on their current circumstances, they can no longer afford to sustain their obligations for their property, such as maintenance, security, insurance, property taxes, utilities, condo fees, etc. and the sale of their property cannot be held in perpetuity as doing so is unfairly causing then to be exposed to further liabilities that are being suffered as a result.


If all else fails, the homeowner may have to file a lawsuit to challenge the lender’s actual legal authority to collect and foreclose on them in the first place. Check out my entry titled: “Massachusetts Foreclosure Defense Strategies” for more information on that approach.


All the Best,


Rick D. Misitano, Senior Paralegal

Arbitrator – Commonwealth of Massachusetts

Law Offices of James M. Bosco & Associates

Methuen Executive Park

240 Pleasant Street

Methuen, Massachusetts 01844

Phone: (978) 687-8804

Fax:     (978) 687-8872

Cell:    (978) 944-0218



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Diana White-Pettis
Bennett Realty Solutions - Upper Marlboro, MD
GRI, CDPE, CNE, WHC Upper Marlboro Homes for Sale


This is excellent information for homeowners who are contemplating such an agreement to know.  Thanks for sharing!


Jun 27, 2014 05:06 AM #1
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

This is interesting information. Why would they not finish the foreclosure? that makes no sense, they are not going to get paid unless they take the property?

Jun 28, 2014 11:18 AM #2
Rick Misitano
Law Offices of James M. Bosco & Associates - Lowell, MA
Defender of Homeowners

Hi Karen:

The reasons are many. One reason is that it is expensive and very time consuming for a lender to go through the foreclosure process in Massachusetts. Keep in mind that when a lender foreclosures on a homeowner, they are taking a big risk of being the ones to own it if the property cannot be successfully sold to a third party on auction day.

If the property becomes an REO, the lender must continue to pay for insurance, property taxes, condo fees, security and maintenance, etc. unless and until they can sell the property. The property could also be so far upside-down in value that the lender may feel it is not economically feasible to foreclose. In addition, the property could also be in very poor condition, have substantial property tax liens, municipal liens, outstanding betterment fees, code violations, etc. and may simply not be a risk the lender wants to take, ultimately leaving the homeowner responsible.

It might actually make more financial sense for the lender to simply write the loan off as a bad debt and either issue a 1099-C (forgiveness of debt) or initiate collection actions against the homeowner accordingly. In Massachusetts such a judgment is good for 20 years and is enforceable by a variety of means (wage garnishment being one of them) ultimately forcing many homeowners to file bankruptcy. 

Jul 03, 2014 02:00 AM #3
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Rick Misitano

Defender of Homeowners
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