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Bankruptcy A-Z – I is for Individual Liability

by Dorota Trzeciecka on May 16th, 2012

This is a real question that someone posted on AVVO:  I filed for bankruptcy and I was discharged.  Why is the bank foreclosing on my home?

Here is why.  When you sign loan documents for a purchase of a home, a car, a boat, or a motorcycle, you not only give the creditor a security interest in that property, but you also make yourself individually liable for that debt when you sign the note.  What it means is that when you give security interest,  you stand to lose the home, the car, the boat, or the motorcycle, if you won’t make the payments.  But, at the same time, you make yourself individually liable for the debt, and the creditor can pursue you personally for any difference  between what you originally promised to pay, when you signed the note, and what the creditor can recover from the sale of that property at an auction.

It is important that you understand this dual liability concept in the context of bankruptcy.  When you file Chapter 7, commonly known as liquidation bankruptcy, only your individual liability is discharged.  It means that the creditor cannot pursue you for any deficiency from the sale of collateral.  But,  the creditor can still foreclose on your house or repossess your car, boat, or a motorcycle, with the proper procedure called lifting of an automatic stay,  because, in Chapter 7, you cannot discharge security interest  that the creditor has in the property.