When the borrower on a note you own files bankruptcy, collection stops under the automatic stay, but your lien generally survives. In a Chapter 7 case the borrower’s personal duty to pay can be discharged while the lien stays on the property. In a Chapter 13 case the borrower keeps the property and pays missed amounts through a court plan, and your job is to file a claim, watch the plan and act if payments stop.
This page is written for the note owner who plans to hold through the case. If you are deciding whether to sell instead, start with can I sell the note if my borrower filed bankruptcy. Everything below is general information from note brokers, not legal advice. Bankruptcy outcomes turn on the chapter, the court, the circuit and the facts, so retain a bankruptcy attorney in the district where the case was filed. For the wider picture of holding paper, see the note investing guide.
The automatic stay
The moment a petition is filed, Section 362 of the Bankruptcy Code puts a hold on nearly every act to collect from the borrower or the property. Late notices, default letters, phone calls asking for payment and any foreclosure step all have to stop, even a sale set for the next morning. Acting in violation of the stay can expose you to damages and sanctions, and an act taken in violation of it can be undone.
What the stay does not do is erase your note or your recorded lien. It freezes enforcement. Payments the borrower chooses to send can usually be accepted and applied, and routine statements may continue where your attorney confirms the wording is informational only. In Chapter 13 a co-debtor stay can also protect a co-signer on a consumer debt.
Chapter 7 vs Chapter 13 for the note owner
| Question | Chapter 7 (liquidation) | Chapter 13 (repayment plan) |
|---|---|---|
| Typical length | A few months to discharge | A plan of three to five years |
| Personal liability | Usually discharged, so no suit for a shortfall later | Arrears are paid through the plan; discharge comes at the end |
| Your lien | Generally passes through the case untouched | Generally stays, with exceptions covered below |
| What the borrower decides | Surrender the property, reaffirm the debt or keep paying | Cure the arrears and keep up the regular payment |
| Your main tasks | Track the borrower’s statement of intention; seek relief from stay if they surrender or stop paying | File a proof of claim, review the plan, object if it shortchanges you, monitor payments |
A simplified comparison. Chapter 11 and Chapter 12 cases follow their own rules, and practice varies between districts.
Proof of claim
A proof of claim is the form a creditor files to tell the court what it is owed. In Chapter 13 it is what gets you paid on the arrears, because the trustee pays from the claims on file. The deadline is set by the Federal Rules of Bankruptcy Procedure and printed on the notice of the case, and it can come early, so put it on your calendar the day you learn of the filing. A claim secured by the borrower’s principal residence needs the mortgage attachment form that breaks out principal, interest, escrow, fees and the arrears figure.
In many Chapter 7 cases the notice says there are no assets to distribute and tells creditors not to file unless asked. Your lien does not depend on a claim in that situation, but follow your attorney’s advice on the specific case.
Your numbers have to be right. Bankruptcy Rule 3002.1 requires the holder of a home loan in a Chapter 13 case to give notice of payment changes and of post-petition fees and charges. A third-party servicer that handles bankruptcy accounts does most of this, which is one more reason to set up professional servicing for notes you own.
How a Chapter 13 plan can treat your note
The plan is the borrower’s proposal for how each creditor gets paid. Once the court confirms it, it binds you even if you never objected, so read it as soon as it arrives.
The anti-modification rule
Section 1322(b)(2) bars a plan from modifying the rights of a creditor whose only security is real property that is the borrower’s principal residence. The plan can cure arrears over its life and keep the regular payment going, but generally cannot cut the rate, the balance or the payment on that kind of note.
Where that protection ends
- Property that is not the borrower’s home, such as a rental, a lot or land, can often be crammed down to its value, with the rest treated as unsecured.
- A note whose final payment falls due before the plan ends can be paid in full through the plan under Section 1322(c)(2), sometimes on changed terms. Seller-financed notes with a balloon payment often fall in this group.
- A junior lien with no equity at all behind it can be stripped off in Chapter 13 in most courts, which is a real hazard for second-lien notes. Chapter 7 does not allow that strip-off.
- Extra collateral beyond the home, or a mixed-use property, can change the analysis.
Where a cramdown is allowed, the court sets the interest rate the creditor receives, and it may be well below the note rate.
Relief from stay
If the borrower surrenders the property, stops making payments after filing, or has no equity in a property they do not need for a plan, your attorney can ask the court to lift the stay under Section 362(d). Once relief is granted, you go back to the state process covered in can I foreclose as the owner of a note. Many Chapter 13 plans end in a negotiated order that keeps the stay in place as long as the borrower pays on time, with quick relief if they miss. Repeat filers get a shorter stay, or none, depending on how recently an earlier case was dismissed.
Pricing a note with a bankruptcy on the record
An illustrative example with round numbers. A note has $80,000 owed, $9,000 in arrears, and the house is worth $140,000. The borrower is in a confirmed Chapter 13 plan that cures the arrears over 50 months, and has made 12 post-petition payments on time. A buyer treats that note close to a re-performing loan: the plan payments and the regular payment are both visible, and there is equity behind the lien. Change one fact, say the plan is not confirmed yet or the property is a rental the plan proposes to cram down to $70,000, and the bid drops to reflect a smaller secured balance or an uncertain outcome.
Illustrative figures only. Real pricing depends on the case record and the property.
Ask for the docket, the plan, the proof of claim and the trustee’s payment ledger before you bid. If you buy during the case, a transfer of claim has to be filed under Rule 3001(e) so the trustee pays you. Investors who join the buyer list see notes we broker, and any bankruptcy history is part of the file a buyer reviews.
When the case ends
A case can end in discharge, dismissal or conversion to another chapter. On dismissal the stay ends and the borrower owes the note as written, arrears included. After a Chapter 13 discharge, the trustee files a notice of final cure and you have a short window to say whether you agree, so keep your ledger current to the day. If the borrower falls behind again after the case, you are back to the usual default options for a note you bought.
Related questions
Can I keep accepting payments after my borrower files bankruptcy?
Usually yes. Voluntary payments from the borrower can generally be accepted and applied. What you cannot do is demand payment, send collection letters or take any foreclosure step while the stay is in place. Ask your bankruptcy attorney before sending any statement or letter.
Do I have to file a proof of claim in Chapter 13?
If you want to be paid on the arrears through the plan, yes, and on time. The trustee pays from the claims on file. The deadline appears on the notice of the case, and a claim on a principal residence needs the mortgage attachment form.
Can a Chapter 13 plan reduce the balance on my note?
Not generally if the only security is the borrower's principal residence, under the anti-modification rule in Section 1322(b)(2). It can if the property is a rental or land, if the note matures during the plan, or if a junior lien has no equity behind it. An attorney should review the plan.
Does a Chapter 7 discharge wipe out my lien?
Generally no. The discharge ends the borrower's personal duty to pay, but the lien stays on the property. If payments stop, you can enforce the lien against the property once the stay is lifted or the case closes.