What Does a Discharged Mortgage Mean?

A discharge is a designation that a mortgage -- or any loan -- officially has ended. This is an important step for many borrowers, because how the mortgage ends, or how its payments are dealt with, can have an significant impact on borrower credit. There are two primary types of discharge -- a common discharge, which occurs during the normal mortgage process, and a discharge of mortgage debt, which is created by a special legal mandate of the court.

Common Definition

In the common definition, a discharged mortgage is a home loan that has been paid off in full. When this occurs, the lender discharges -- or closes -- the account. Lenders can close accounts in several ways, depending on how the mortgage ended. A successful mortgage, culminating in the final payments, is satisfactory for both the borrower and the lender. The lender gives the borrower a discharge of mortgage document, which essentially releases the borrower from any further obligation to pay the lender regarding that loan.

Discharged Debt

Discharge also can refer to cancelled debt. Specifically, when a person files for bankruptcy and the court accepts it, the court cancels the debts the individual held at the time of filing, discharging them completely. This has the same effect as a traditional discharge: The debtor no longer has an obligation to make the payments to the creditors. Because this discharge is a legal action, the creditors must accept it, which is a reason debtors who have a large amount of debt choose bankruptcy.

Process

There is a large difference between the mortgage itself and the payments the debtor has not yet paid. When a debtor files for bankruptcy, the bankruptcy only covers the monthly mortgage payments that have come due, but have not been paid. The court discharges these payments, but does not discharge any remaining principal in the mortgage, or any payments that have come due since the debtor filed. These remain owed to the lender.

Considerations

A discharged mortgage paid in full has a positive effect on credit ratings. Discharged debt does not affect credit, but the defaults and bankruptcy leading to it can lower credit scores. Also, a court discharge of debt does not necessarily remove the lender's lien against a debtor's house, so the lender may still be able to take legal action, such as a foreclosure, even if outstanding debts have been cancelled.