The court in which the foreclosure is taking place may deem the bank unsecured if someone shows up in a timely fashion during the foreclosure and disputes the validity of the mortgage by asserting that the mortgage documents are fraudulent, sufficient to convince the court to reduce the lender's status to unsecured.
And, if the note was discharged in bankruptcy, that would leave the bank with nothing to do but lick its wounds.
However, this could cause an issue for the debtor since the debtor would then have to go back to the Bankruptcy Court
and advise the court that the home was actually owned free and clear, in which case it may exceed the amount of exemption the state allows, and thus the Bankruptcy Court may be able to sell the home to give the money to creditors.
For example, say a debtor in Illinois filed Chapter 7 and indicated on their bankruptcy petition
that they owned a home worth $100,000 and that it was secured by a mortgage on which they owed $90,000. Let's also say the State of Illinois allows a debtor to claim as exempt up to $15,000 in equity
in a home (I'm not sure if this is correct since I don't practice law in Illinois, but let's say it is correct for this example). In this case, the Bankruptcy Court would ignore the home since there is only $10,000 in equity and the debtor can protect $15,000. The Bankruptcy Court would not be concerned whether the debtor reaffirmed or surrendered the home, only that there was not enough equity in the home to make it worth selling for creditors.
But, let's say that same debtor later discovers/proves that the mortgage was invalid and thus the debtor owned the home free and clear. Now the debtor has a home worth $100,000 on which there is no mortgage, and the debtor can only exempt $15,000 per state law, thus the Bankruptcy Court would sell the home, pay the debtor his or her $15,000, and give the rest of the funds to the creditors.
If you think this may be going on in your case, you might want to run these issues by your bankruptcy attorney.
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