What Attorneys Don’t Tell You About Bankruptcy

Q: When I filed for bankruptcy several years ago, my bankruptcy attorney said I no longer had to worry about paying back my home equity loan. I’m trying to sell my home now and the buyer’s title company says that the loan has to be paid. Did my attorney lie to me? Brendan, Scotch Plains, NJ

A: Mortgages and deeds of trust have two parts: 1) part one is the promissory note which is the promise to repay the loan and 2) part two is the lien on the property, which grants the lender the right to foreclose on the property in order to recover money it’s owed in case of a default. In bankruptcy, debts are either reaffirmed or discharged (forgiven). When you have debts like your home equity loan that are secured by collateral, bankruptcy can eliminate your personal liability for the debt but bankruptcy does not eliminate the creditor’s hold on the property which is the lien itself. The promissory note may have been canceled in the bankruptcy but the lien remained on the property. If a lien is still in place, the property cannot be sold until the lien is removed. Your attorney didn’t finish the job. AFTER the bankruptcy, although technically you no longer owed the money from your home equity loan, the lien was still there and lienholders have no incentive to remove a lien unless they are forced to do so. Your attorney should have filed a motion to avoid the lien. This legal motion requests that a judge formally remove the lien on the property after bankruptcy. If this occurs, the lien will no longer exist. Otherwise, the lender can hold you hostage when you are trying to sell your home and still demand payment to remove the lien even after a successful bankruptcy. I’ve unfortunately seen this happen to many homeowners who trusted bankruptcy attorneys and paid them thousands of dollars for their services. Thanks for your question, Brendan.

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