Discharge means that the money owed on a certain debt is eliminated- in that the creditor may never pursue the debtor for payment of the debt. In a chapter 7, the debt that is eliminated does not eliminate the lien that is associated with the debt.
Liens may be created voluntarily or involuntarily. Two examples of a voluntary lien are a mortgage and auto financing. Typically at the time of the purchase the buyer permits the creditor to place a lien on the collateral, which is the property purchased. A creditor may also obtain a judgment by successfully suing the debtor and placing the lien against the debtor’s real estate in New Jersey. An example is a credit card company that successfully sues a person in court. There are statutory liens that are created by law automatically by performing a specific act. The above is not a complete list of any and all lien types.
A chapter 7 order discharging a debt does not eliminate the type of liens that are explained in the paragraph above. In other words, a general chapter 7 discharge will discharge the money owed on the mortgage, but will not eliminate the mortgage, which is a lien on the house. This means that the mortgage company can never pursue the homeowner for the money owed on the loan. However, if the debtor does not keep the mortgage payments current, the mortgage company may pursue a foreclosure action and take the debtor’s house, which is the collateral.
It may be possible to eliminate or reduce a judgment lien in the chapter 7 bankruptcy case by filing a separate motion and request with the court. A debtor may not reduce or eliminate a voluntary lien in a chapter 7, with possible exceptions.
Please note that there are a number of factors that effect a debtor’s ability to modify a loan that are not specifically discussed in this blog.
Robert Manchel, NJ bankruptcy attorney, may be contacted at (866) 503-5655 to discuss your financial standing and how bankruptcy protection may be applicable to your personal situation.