Bankruptcy Creates Zombie Mortgages

May 26, 2021

Zombie mortgages are a new trend showing up in bankruptcy.  Zombie mortgages are second mortgages that a debtor mistakenly believes to have been written off after a Chapter 7 bankruptcy.   People mistakenly believe these mortgages are dead and long gone.  These second mortgages then revive as a “zombie” mortgage when collections start again several years later.

Zombie Mortgages Will Threaten Foreclosure

Zombie mortgages usually have no personal liability against their debtors.  This means that a zombie mortgage creditor cannot sue the person directly usually to collect the debt. These mortgage holders can only come for the house itself by filing a mortgage foreclosure.

Remember, zombie mortgage situations usually occur after a chapter 7 bankruptcy. During the chapter 7 bankruptcy, all personal liability has been removed from the mortgage. The mortgage collector will stop contacting the debtor.  The debtor may not receive notices for several years, reminding them that they must still pay the second mortgage. The second mortgage holder is usually much weakened from the loss of personal liability from the Chapter 7 bankruptcy case.  Because of this and the lack of notices, the debtor assumes that the mortgage was weakened to the point that it was eventually written off.

However, in almost all cases, the mortgage is never written off and released. What happens instead is that the mortgage is sold some years later to a collection company. This collection company reviews the mortgage on file.  Then, it sends out new collection letters threatening to foreclose on the house. The debtor is now stuck with resuming payments on a very large second mortgage amount.  Even worse, many creditors insist only on a very large lump payment to settle out the debt instead of resuming payments.

Home Values Fuel the Zombie Fire

Increasing home values fuel zombie mortgagesIncreased home values fuel the fire behind zombie mortgage collection. Because home values are now increasing, zombie mortgage holders can now actually get paid through the foreclosure process. They are no longer only threatening foreclosure to generate some collection on the account. Many zombie mortgage holders are now actually foreclosing and taking the house all the way to sheriff’s sale. This allows them to get paid even from a sheriff sale situation.  There is now sufficient value in many houses for both the first and second mortgage to be paid in full through a sheriff sale.

If you have a second mortgage that miraculously “disappeared” after a Chapter 7 bankruptcy, you may want to contact a title company or an attorney to make sure that your mortgage was actually released.  Without a recorded release of mortgage, it is very possible that your mortgage could return from the grave.  A zombie mortgage can create an unexpected, large debt that can be difficult to handle.  It may be wise to do some more research if you ever stopped paying a mortgage after filing for Chapter 7 bankruptcy.

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