When a foreclosure occurs because a loan is in default, the foreclosure lawsuit and ultimate sheriff’s sale “strips” the mortgage(s) from the property, either by paying it off in full or part from the sale proceeds (or in the case of second and third mortgages, by paying a percentage or perhaps none at all).
This is done so that any new purchaser of the property can take ownership free and clear without any encumbrances.
In a deed-in-lieu-of-foreclosure scenario, the lender agrees to accept title or ownership of the property in exchange for releasing the mortgage on the property (or accepting control of the property and then foreclosing on the outstanding loan).
But in either situation, while the mortgage may be removed from the property, the lender still has the right to pursue the borrower for any deficiency in balance owed to the lender (unless, of course, the lender and borrower agree through the deed-in-lieu process to eliminate any deficiency on the part of the borrower).
If a filer is certain the mortgage is no longer in place on the property, the lender should be listed as an unsecured creditor on Schedule F of the petition — assumingthe sale of the property through the foreclosure generated sufficient proceeds to pay the entire mortgage balance. (This would ensure that any deficiency balance is properly discharged.)
In Schedule 7, the debtor must disclose the fact that the foreclosure lawsuit was filed and can briefly describe that the mortgage was removed.