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Wells Fargo Bank, NA v. Burnham

A-1361-10T4 (N.J. Super. App. Div. 2011) (Unpublished)

FORECLOSURE; BANKRUPTCY —Although a discharge of a bankrupt’s debt under Chapter 7 voids a personal judgment against the debtor, it does not bar a creditor with a mortgage on collateral property from foreclosing on that mortgage.

A borrower executed a note and mortgage. Although he stopped making payments after the first three, he continued to reside in the mortgaged home. The lender instituted a foreclosure action. The court struck the borrower’s answers and the matter proceeded as an uncontested foreclosure. Three years after the loan was made, a foreclosure judgment was issued. It called for a Sheriff’s sale. On the date of the Sheriff’s sale, the borrower filed a Chapter 7 bankruptcy petition. In the bankruptcy, two claims were allowed and the borrower was discharged.

Following discharge, another Sheriff’s sale was scheduled. The borrower applied to stay the sale, arguing that the bankruptcy discharge barred the sale. The lower court denied the borrower’s application, “concluding the bankruptcy discharge personally discharged [the borrower] under the note, but did not discharge the mortgage lien.” The borrower appealed, arguing “that the bankruptcy discharge voided the in personam judgment [the lender had] obtained against him for his personal liability on the note and required [the lender] to obtain an in rem judgment, which [the lender] did not obtain.” The Appellate Division ruled that the borrower was “wrong.” According to the Court, “[a] discharge of debt under Chapter 7 voids any judgment against the debtor in personam, while leaving intact an action in rem against the property.” A bankruptcy discharge “does not operate as an injunction against a creditor who holds a secured claim if the creditor retained a security interest in the real property.” Here, the lender’s claims were secured by a lien on the real property.

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