A bankruptcy filing on a seller-carry borrower converts the loan from a state-law servicing matter into a federal bankruptcy proceeding. The automatic stay under 11 U.S.C. §362 halts the holder’s collection actions on the date of filing. The proof of claim under Bankruptcy Rule 3001 establishes the holder’s position in the case. The lien survives the discharge on the borrower’s personal liability but the lien-versus-property mechanics run through the bankruptcy court. This guide walks the holder’s obligations from the bankruptcy notice through the case closure, the chapter-specific mechanics on Chapters 7, 11, and 13, and the operational discipline that keeps the lien intact across the proceeding.

What does the automatic stay halt on a seller carry?

11 U.S.C. §362(a) halts most collection actions on the borrower and the property as of the petition date. The holder cannot initiate or continue a foreclosure action, send a payment demand, initiate or continue a state-court collection lawsuit, or repossess collateral. The holder’s sub-ledger continues to accrue interest and impound figures under the note, but the holder runs no collection activity 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 rather than the borrower.

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 the chapter (7, 11, or 13) from the bankruptcy notice. Suspend the next billing statement to avoid a stay violation on the §362(a)(6) prohibition against payment demands. Pull the loan file and the sub-ledger entries for the proof-of-claim filing. Identify the bankruptcy court venue and the case number for filings. Engage bankruptcy counsel where the dollar exposure or the state-side complexity warrants it. The §1024.34 escrow closing-out framework does not apply to a 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 filing requirements. The proof of claim attaches the promissory note, the recorded security instrument, the sub-ledger showing the principal balance and the accrued interest through the petition date, and the escrow analysis where applicable. Rule 3002.1 requires the proof of claim on a Chapter 13 case where the residence is the collateral to include the form 410A attachment with the pre-petition arrearage breakdown. The proof of claim filing deadline (Bar Date) varies by chapter and by court — calendar the deadline against the bankruptcy notice.

Expert Take

“The seller-carry holder who misses the proof-of-claim deadline forfeits the unsecured deficiency claim in the case. The lien itself survives the proof-of-claim deadline — a secured lien on real property is not extinguished by the absence of a timely filed claim — but the borrower-side deficiency vanishes. A calendared Bar Date and a documented proof-of-claim package on the first week of the case is the baseline.” — Thomas Standen, President, Note Servicing Center

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 the depreciation of the collateral 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 (the impound) and the borrower’s continued post-petition mortgage payment 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 the borrower’s 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. The holder runs against the property post-discharge through foreclosure if the borrower does not reaffirm or surrender. A reaffirmation agreement under 11 U.S.C. §524(c) revives the 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.

Expert Take

“The §1322(b)(2) anti-modification protection on a principal-residence seller carry is the strongest holder protection in the Bankruptcy Code. The borrower cannot cram down the principal balance, the interest rate, or the maturity. The borrower runs the cure-and-maintain path, and the holder runs the post-petition servicing with the §1024.41 loss-mitigation framework applied inside the bankruptcy mechanics.” — Thomas Standen, President, Note Servicing Center

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 the 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 runs 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 the post-petition servicing under the §1024 and §1026.41 frameworks adapted for 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 the 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 (Chapter 7 discharge, Chapter 13 successful completion) or runs the foreclosure mechanics (Chapter 7 surrender, 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 stripdown 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. The 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 figure, the holder applies the impound portion to the segregated trust account, and the tax and insurance disbursements continue on the calendar. 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 the 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. The cure is suspending all collection activity on the date of the bankruptcy notice.

Related Topics

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.

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