If your lender goes bankrupt you're still on the hook

BusinessWeek reports that as much as a borrower might hope that a bankrupt lender would take them off the hook for repaying the mortgage, life just doesn't work that way.

This article caught my eye because a reader of one of my posts about mortgage company bankruptcies asked a question to which I did not have an answer: "I am in the proc of refinancing, but in Pre forclosure on my home. If Novastr files BK can they continue with the forclosure on my home?" (Sic)

The answer, appears to be that if the mortgage company files for bankruptcy, whoever takes over the loan will proceed with the foreclosure. I say this because according to BusinessWeek, in most cases of lender bankruptcy, nothing changes from the consumer's point of view. When a lender goes out of business, it sells its assets at a discounted price to another financial institution under bankruptcy court supervision and notifies the borrower about the new servicer.

And unless the new servicer has a more lenient policy on foreclosing, it is likely to continue with the foreclosure. Moreover, if the borrower is current on a loan and the lender goes bankrupt, the new servicer will expect those monthly payments to keep flowing.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.