mortgage

After bankruptcy, do I owe on 2nd mortgage?

Justin HarelikDear Bankruptcy Adviser,
I filed a Chapter 7 bankruptcy that was discharged in 2009. I was paying my second mortgage loan to the bank for four years without a reaffirmation agreement. I never missed a payment during that time. I recently found out the bank wrote off that loan and gave it to a credit collection agency, which I have not heard from.

If the bank wrote off the loan, it means the loan is defunct, correct? Would being in Chapter 7 also alleviate any lawsuits against me? Does it also mean the collection agency cannot legally do anything since I completed my bankruptcy?
-- Mike

Dear Mike,
Great questions, but you are not clear on a few major issues. I get this question a lot, and while I know you are just hoping to have some equity in your home, you still have to deal with the second mortgage. Based on the information you did give me, I'll try to answer your questions to the best of my ability.

You are correct that the second mortgage lender cannot sue you. Because you received a discharge in your Chapter 7 bankruptcy and you did not reaffirm the loan, the lender no longer has the right to sue you to enforce its loan. You had to reaffirm the loan while your bankruptcy was active in order to re-establish liability.

However, this is the key part of what you may not understand. When you received the first and second mortgage loans, the lender places a lien against the house for each loan. You have to pay both loans to own the home free and clear. In some states, the lender can sue you for failing to pay on either or both loans. The successful bankruptcy eliminates the lender's right to sue you, but it does not remove the liens from the property. To remove the liens, you must pay the loans.

In your case, the lender may or may not have written off the loan. It is also possible that the lender merely sold the note to another company. The "new" collection company now owns the loan and the lien that is still attached to your home. However, the transfer of the loan to the new company does not bring new liability. You are still protected from lawsuits because you received your Chapter 7 discharge and did not reaffirm the loan. The new company can only foreclose on the property for failure to make monthly payments.

This could be good news now that the loan is with the new company. You may be in a good position to negotiate either a reduced monthly payment or a settlement on the loan balance.

You may be able to settle the outstanding balance for a little more than what the company paid to get your loan from the bank. This removes the lien from your property and eliminates the rest of the remaining balance.

So while the lien still exists, the transfer of the note from one company to another could be great news for you. Call them and see what settlement or payment options exist.

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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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