What happens to an insurance settlement after you are discharged in bankruptcy?

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What happens to an insurance settlement after you are discharged in bankruptcy?

We filed Chapter 7 and were discharged of all debt; it it was deemed a “no asset” case. We surrendered our property that was fire damaged. After we received our discharge we received a insurance payoff of $80,000. That was sent to the mortgage company. The mortgage company has since canceled their foreclosure and the money sits there. Are we entitled to the insurance money because we are no longer liable for the debt or does the mortgage company get to keep the insurance money?

Asked on February 4, 2012 under Bankruptcy Law, Illinois

Answers:

MD, Member, California Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

The mortgage is a promise to pay a secured debt. The debt is secured by the home or the value thereof. If you received a full discharge, you don't get to keep the home or in your situation, the value thereof. So since there was an insurance settlement and you are not reaffirming the debt (say the house was only partially damaged and you either had homestead exemptions or you wished to stay in the home), you don't get to keep the value as paid out by the insurance company. The mortgage was due (and was discharged) but in a traditional situation, the lender would keep the home. Here it keeps the value of the home.


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