When a seller-carry borrower files bankruptcy, the automatic stay under 11 U.S.C. §362 halts all collection activity as of the petition date, and the matter shifts from state-law servicing into a federal proceeding. If the note is secured by real property, the lien survives the borrower’s discharge. The holder’s obligations run from the first notice through case closure.

What does the automatic stay halt on a seller carry?

11 U.S.C. §362(a) halts most collection actions against the borrower and the property as of the petition date. The holder cannot initiate or continue a foreclosure action, send a payment demand, pursue a state-court collection lawsuit, or repossess collateral. The sub-ledger continues to accrue interest and impound figures under the note, but no collection activity runs against the borrower until the stay lifts or the case concludes. A willful violation of the stay exposes the holder to sanctions under §362(k), with damages running against the holder.

What does the holder do in the first ten days after notice?

The first ten days set the holder’s case posture. Capture the petition date and chapter (7, 11, or 13) from the bankruptcy notice. Suspend the next billing statement to avoid a stay violation under the §362(a)(6) prohibition against payment demands. Pull the loan file and sub-ledger entries for the proof-of-claim package. Identify the bankruptcy court venue and case number. Engage bankruptcy counsel where the exposure or state-side complexity warrants it. The §1024.34 escrow closing-out framework does not apply under the bankruptcy stay — the impound continues to run inside the case.

What does the proof of claim require?

Federal Rule of Bankruptcy Procedure 3001 sets the proof-of-claim requirements. The filing attaches the promissory note, the recorded security instrument, and the sub-ledger showing the principal balance and accrued interest through the petition date, plus the escrow analysis where applicable. Rule 3002.1 requires the Chapter 13 proof of claim — where the principal residence is the collateral — to include the Form 410A attachment with the pre-petition arrearage breakdown. The Bar Date varies by chapter and by court. Calendar it against the bankruptcy notice from day one.

What does adequate protection require?

11 U.S.C. §361 sets the secured creditor’s entitlement to adequate protection of the lien position during the case. Adequate protection runs as periodic payments, a replacement lien on additional property, or other relief that protects the holder against collateral depreciation during the case. On a real-property seller carry, the typical adequate protection package is the borrower’s continued payment of insurance and property tax through the impound and continued post-petition mortgage payments under the Chapter 13 plan. Failure of adequate protection is the most common basis for relief from stay under §362(d)(1).

How does Chapter 7 treat the seller-carry lien?

A Chapter 7 case liquidates the borrower’s non-exempt assets and discharges personal liability on most pre-petition debt. The seller-carry lien on real property survives the discharge — the discharge runs against the borrower’s personal liability on the note, not against the in rem position on the property. Post-discharge, the holder runs against the property through foreclosure if the borrower does not reaffirm or surrender. A reaffirmation agreement under 11 U.S.C. §524(c) revives personal liability on the note in exchange for the borrower’s continued retention of the property.

How does Chapter 13 treat the seller-carry lien?

A Chapter 13 case reorganizes the borrower’s debts under a three-to-five-year plan. The seller-carry lien is treated as a secured claim under §1325(a)(5). The borrower cures and maintains the seller-carry mortgage by paying the pre-petition arrearage over the plan term and the post-petition installments on the original schedule. Section 1322(b)(2) prevents modification of a residential mortgage secured only by the principal residence — the anti-modification clause. A non-residential carry or a carry secured by additional collateral is subject to cramdown under §506(a) to the value of the collateral.

What does relief from stay require?

11 U.S.C. §362(d) sets the grounds for relief from stay — cause (including lack of adequate protection) under §362(d)(1), or the absence of equity in the property and the property not being necessary for an effective reorganization under §362(d)(2). On a residential seller carry where the borrower has defaulted on post-petition payments under a Chapter 13 plan, the holder files a §362(d) motion in the bankruptcy court. The motion runs against the procedural framework in the court’s local rules and the bankruptcy judge’s discretion. A granted §362(d) order lifts the stay against the property, and the holder then pursues the state-law foreclosure on the lifted order.

What does the operational discipline look like across the case?

The operational discipline runs in four phases. In the first week, the holder captures the petition date, suspends collection activity, calendars the Bar Date, and files the proof-of-claim package. Across the case, the holder runs post-petition servicing under the §1024 and §1026.41 frameworks adapted to the bankruptcy mechanics, captures the borrower’s post-petition payments in a segregated sub-ledger entry, and produces the Bankruptcy Rule 3002.1 notices on payment-change and fee-and-expense events. At discharge or dismissal, the holder reconciles the pre-petition and post-petition sub-ledgers, updates the loan file, and resumes the pre-bankruptcy servicing posture on a Chapter 7 discharge or completed Chapter 13 plan — or pursues the foreclosure mechanics on a Chapter 7 surrender or Chapter 13 dismissal with default.

Frequently Asked Questions

Does the seller-carry lien survive a Chapter 7 discharge?

Yes. The discharge under 11 U.S.C. §524 runs against the borrower’s personal liability on the note. The security interest on the property is preserved as an in rem claim. The holder forecloses against the property post-discharge if the borrower does not pay or surrender, but cannot pursue the borrower personally for any deficiency.

Can the borrower strip down the seller-carry lien in Chapter 13?

Section 1322(b)(2) prevents strip-down on a residential mortgage secured only by the principal residence. A non-residential carry or an investment-property carry can be crammed down to the value of the collateral under §506(a). The holder’s defense on a strip-down attempt runs through the §506 valuation hearing.

Does the holder send §1026.41 periodic statements during the bankruptcy?

The §1026.41 framework includes a bankruptcy exception at §1026.41(e)(5) that exempts certain statements during the case. Bankruptcy Rule 3002.1 notices replace the §1026.41 periodic statements on payment-change and fee events. Read the §1026.41(e)(5) provisions and the Rule 3002.1 framework against the specific case to identify the binding disclosure schedule.

Does the borrower’s post-petition mortgage payment go through the impound?

Yes, on a Chapter 13 cure-and-maintain plan with an impound. The borrower remits the post-petition installment including the impound portion, the holder applies that portion to the segregated trust account, and tax and insurance disbursements continue on schedule. The pre-petition arrearage runs through the plan trustee.

What is the holder’s 1099 reporting obligation on a bankruptcy?

The IRS Form 1099-C (Cancellation of Debt) framework applies to cancellation-of-debt income on the borrower — a Chapter 7 discharge produces a §108(a)(1)(A) bankruptcy exclusion on the borrower side. The holder’s 1099 filing follows the §6050P framework. Consult tax counsel on the specific filing in any individual case.

What is the single highest-risk action on a bankruptcy filing?

Sending a payment demand or initiating a foreclosure action after the petition date. The §362(a) automatic stay halts collection activity on the petition date, and a willful violation under §362(k) exposes the holder to sanctions. Suspend all collection activity on the date of the bankruptcy notice.

Related Topics

• 5 Default Servicing Mistakes Private Lenders Make With Their Notes
• A Seller Carryback Investor’s Guide to Negotiating With Distressed Borrowers
• 7 Warning Signs a Note Is Going Non-Performing
• 7 Borrower Workout Plays That Save Deals
• 5 Things to Know About Escrow Account Setup for Private Mortgage Notes
• 5 Things to Know About the Escrow Disbursement Process for Private Mortgage Notes
• 7 Late Fee Mistakes Private Lenders Make
• 7 Seller Financing Pitfalls Private Lenders Make
• 10 Real Examples of Default Servicing and Foreclosure Administration for Private Lenders
• 10 Real Examples of Why Self-Servicing a Seller Carry Is the Most Expensive Mistake

This article is educational and does not constitute legal advice. A bankruptcy filing on a seller-carry borrower involves federal bankruptcy statutes under Title 11, federal procedural rules, local court rules, and state-law foreclosure provisions that vary by jurisdiction. Consult qualified legal counsel on the bankruptcy requirements that apply to any specific seller-carry matter.

Sources

• 11 U.S.C. §362 — Automatic stay. Cornell Legal Information Institute.
• 11 U.S.C. §361 — Adequate protection. Cornell Legal Information Institute.
• 11 U.S.C. §506 — Determination of secured status. Cornell Legal Information Institute.
• 11 U.S.C. §524 — Effect of discharge. Cornell Legal Information Institute.
• 11 U.S.C. §1322 — Contents of plan (Chapter 13). Cornell Legal Information Institute.
• 11 U.S.C. §1325 — Confirmation of plan (Chapter 13). Cornell Legal Information Institute.
• Federal Rule of Bankruptcy Procedure 3001 — Proof of claim. Cornell Legal Information Institute.
• Federal Rule of Bankruptcy Procedure 3002.1 — Notice relating to claims secured by security interest in the debtor’s principal residence. Cornell Legal Information Institute.
• Regulation Z, 12 C.F.R. §1026.41(e)(5) — Bankruptcy exception. Consumer Financial Protection Bureau.
• 11 U.S.C. §342 — Notice. Cornell Legal Information Institute.
• 11 U.S.C. §1307 — Conversion or dismissal in Chapter 13. Cornell Legal Information Institute.