debt

What happens to mortgage after bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
I am underwater on my house and have a small amount past due on the mortgage. I have attempted to resolve the issue with the mortgage company but haven't had any luck. Due to other circumstances, I must file Chapter 7. My question is in regard to the house. As I understand it, I can either reaffirm or not reaffirm the debt in bankruptcy. If I do not, I can still live in the house as long as I make the payments. However, in my situation (the past-due amount), does this option to pay and stay change? Would I be at risk of the mortgage company taking action?
-- Dale

Dear Dale,
Every mortgage company behaves differently, and sometimes the same company behaves inconsistently. I say this because you are asking a question that is very important, but it's hard to answer for everyone. Here are the issues you need to address.

Can you reaffirm the loan?

A reaffirmation agreement is a legally enforceable contract, filed with the bankruptcy court, which states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case.

You need to know whether signing a reaffirmation agreement imposes significant personal liability on you in the event you do lose the house in foreclosure. Some states allow a mortgage lender to foreclose on a property and to come after the homeowner for any unpaid mortgage loan balance. If you live in a state that can sue you for the unpaid mortgage, you need to consider whether reaffirming the loan is worth that future risk.

Can you reaffirm when delinquent on the loan?

Most mortgage lenders do not allow you to reaffirm a loan when you are delinquent on the payments at the time you file bankruptcy. But there are some rare cases in which a lender allows you to place the delinquent balance onto the end of the loan and then reaffirm it.

More commonly, you would need to apply for a loan modification. The delinquent balance can be added into the loan upon receiving loan modification approval.

Can you stay in the house after the bankruptcy without reaffirming the loan?

Many of my clients filed bankruptcy while behind on the mortgage. Sometimes, the client works out a loan modification with the lender during or after the bankruptcy. Other times, the client was a couple of months delinquent and merely remained one or two months delinquent before, during and after the bankruptcy.

I don't know which lenders allow homeowners to do this. To be frank, I think some lenders are so overwhelmed with the number of delinquent accounts, some loans go ignored. I think the lender considers these various factors.

  • The amount of the delinquency.
  • How far upside down is the loan to the value of the house?
  • Is the lender foreclosing on many properties in that same area?
  • Whether you are behind but slowly getting caught up on the delinquency.

That may be your scenario. Maybe the lender just does not want to foreclose on another property and is satisfied that you are making payments. You will know the lender's position once you file bankruptcy. If the lender accepts your payments, you should be fine remaining a few payments behind. Calling the lender will not work. You will simply receive the standard answer, "We would review your loan at the time you file bankruptcy." In other words, who knows?

It is possible the lender will stop accepting payments once you file. That, too, is common. You can immediately contact the lender to work on a loan modification.

As I said, I don't get to answer your question exactly, but I can give you some general guidelines. Hopefully, you find a solution that works for you.

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To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "Bankruptcy" as the topic. Read more Bankruptcy Adviser columns and more stories about debt management.

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