Can’t see how they could foreclose after releasing their lien, but they COULD pursue you for the amount owed on the loan. I’d recommend a quick meeting with a local real estate attorney, should be free or at least very inexpensive, and likely worth every penny to have a legal opinion on what to expect.
That is interesting. As to the foreclosure, as Ted Rood stated, the 2nd mortgage no longer exists and thus they cannot foreclose on the property. The release is open ended and they could pursue you for the mortgage amount; but I believe that is highly unlikely. If they had the intent then they would have used the property as a leverage even though there is a 1st mortgage.
The downside here is that your credit will be affected due to the non-payment of this note and it will be highly unlikely that you will be able to qualify for a market based loan within the next 5 years… but considering that they washed away a large debt I think you can deal with it.
(P.S. I also think it would be a good idea to consult with your BK lawyer just to be sure.)