We recently received a detailed question involving an FHA loan, a HUD Partial Claim, and a Chapter 7 discharge — and it raises important issues about lien rights versus personal liability.
Let’s break this down clearly.
📌 The Scenario
- Borrower has an FHA mortgage
- Hardship occurred
- HUD placed a Partial Claim (silent second lien) in 2022
- Borrower received a Chapter 7 discharge in 2024
- Partial Claim documents state the lender will not attempt to re-establish personal liability after discharge
- Borrower now wants to complete a borrower-to-borrower assumption to remove a co-borrower
- Servicer (LoanCare/Lakeview) says the assumption cannot proceed unless the HUD Partial Claim is paid
Borrower is not asking to remove the lien — just to leave it in place to be paid upon sale or refinance.
So what’s going on here?
🔍 First Principle: Bankruptcy Eliminates Personal Liability — Not Liens
When someone receives a Chapter 7 discharge:
- Personal liability is eliminated
- Valid, properly recorded liens survive
That means the HUD Partial Claim remains attached to the property as a secured lien, even though the borrower no longer has personal liability.
This is normal and expected.
HUD Partial Claims are designed to sit quietly behind the FHA first mortgage and become due upon:
- Sale
- Refinance
- Payoff of the first mortgage
- End of loan term
🏦 What Is a Borrower-to-Borrower Assumption?
In this case, the original borrower is remaining in the home, but wants to remove a co-borrower from the note.
An FHA assumption typically requires:
- Credit qualification
- Income verification
- Servicer approval
- Compliance with FHA/HUD servicing guidelines
Importantly, this is not just a paperwork change — it is a new credit underwriting decision by the servicer under HUD rules.
❓ Can the Servicer Require the Partial Claim to Be Paid?
This is where things become more nuanced.
There are two separate legal concepts involved:
1️⃣ Lien Enforcement (Permitted After Bankruptcy)
A creditor may:
- Enforce its lien rights
- Require payoff in connection with certain transactions
- Protect its secured position
That is not automatically a violation of the discharge injunction.
2️⃣ Collecting a Discharged Debt (Not Permitted)
A creditor may NOT:
- Attempt to re-establish personal liability
- Coerce payment of a discharged debt
- Condition unrelated benefits solely on paying discharged personal debt
The key legal question becomes:
👉 Is the servicer enforcing lien rights tied to the property?
OR
👉 Is the servicer effectively forcing payment of a discharged personal obligation?
🏛 Is This Normal FHA / HUD Policy?
In practice, what often drives this situation is HUD servicing guidelines, not necessarily bankruptcy law.
HUD Partial Claims are subordinate liens held by HUD.
In assumption scenarios, HUD may require:
- Subordination agreements
- Re-approval of lien position
- Or satisfaction of the Partial Claim
Some servicers interpret HUD rules conservatively and require payoff to avoid:
- Lien priority complications
- Risk exposure
- Internal compliance concerns
In many cases, this is a servicing policy decision, not a bankruptcy enforcement action.
⚖️ Is This a Discharge Violation?
Usually, the answer is: probably not automatically.
If the servicer is saying:
“We cannot approve this voluntary assumption transaction unless the lien is satisfied”
That may be characterized as a condition of approving a new credit transaction — not an attempt to collect the discharged debt.
Courts often distinguish between:
- Coercing payment of a discharged debt
vs. - Declining to enter into a new agreement unless certain conditions are met
However, if the servicer is:
- Demanding payment directly from the borrower personally
- Threatening collection
- Suggesting revived personal liability
That would raise discharge injunction concerns.
🔄 Could HUD Allow Subordination Instead?
In some cases, HUD has permitted:
- Subordination of the Partial Claim
- Modification of lien terms
- Assumption processing without immediate payoff
But this depends heavily on:
- Specific HUD program guidance in effect at the time
- The nature of the assumption
- The servicer’s internal policies
- Whether underwriting is being treated as a new obligation
This is often less about bankruptcy law and more about HUD administrative interpretation.
🧭 So What Is This Likely?
Based on similar cases, this situation is most commonly:
✔ A servicing policy issue
✔ A HUD guideline interpretation issue
✔ Not automatically a bankruptcy violation
But it can become a legal issue if:
- The servicer misstates the legal effect of discharge
- They attempt to impose personal liability
- They condition basic servicing (not a new transaction) on payment
🛠 Practical Next Steps
If you’re in this situation, consider:
- Requesting the specific HUD guideline the servicer is relying on.
- Asking whether subordination (instead of payoff) is an option.
- Consulting a bankruptcy attorney familiar with discharge injunction litigation.
- Consulting a mortgage servicing attorney familiar with FHA/HUD compliance.
Sometimes escalation within the servicer or a formal written inquiry yields different answers than a front-line representative.
📌 Final Takeaway
A Chapter 7 discharge eliminates personal liability — but it does not eliminate liens.
A servicer requiring satisfaction of an FHA Partial Claim to approve a borrower-to-borrower assumption is often framed as lien enforcement or underwriting policy, not debt collection.
Whether that crosses into discharge violation territory depends heavily on how the demand is structured and enforced.
These cases sit at the intersection of:
- Bankruptcy law
- HUD servicing regulations
- Mortgage contract law
If you are navigating this issue, it’s worth getting tailored legal advice. These situations are highly fact-specific — and small details matter.
