Chapter 7 Bankruptcy: Mortgage Reaffirmation and Mortgage Modification, Including HAMP
September 20, 2009
We get a lot of questions about whether homeowners should reaffirm their mortgages DURING a Chapter 7 bankruptcy.
(Note:Â reaffirming a mortgage AFTER a bankruptcy is completed / the filer receives his or her discharge is technically not authorized by the bankruptcy code.)
Many lenders tell homeowners their mortgage documents require them to reaffirm if they file for Chapter 7 bankruptcy. This may or may not accurate, and you would need to consult your loan documents to be sure.
Some servicers require homeowers to reaffirm their mortgage before they will consider them for a mortgage modification. This complicates the reaffirmation analysis for reasons discussed below.
But, first let’s back up a bit and discuss reaffirmation and secured debt in general.
Secured debt in bankruptcy
Secured debt such as a mortgage includes two components:Â you are personally liable for paying the debt, AND the collateral (your house, in the case of a mortgage) can be taken away if you don’t pay.
A Chapter 7 bankruptcy generally relieves homeowners of personal liability for paying their mortgage.
But, the lender retains the second “part” of the debt– the right to foreclose if you don’t make mortgage payments.
Reaffirmation of a mortgage:Â what is it?
When you sign a reaffirmation agreement, you agree to remain personally liable on the mortgage after your bankruptcy. Your bankruptcy would otherwise relieve you of this personal liability. More below on why this is significant, but suffice it to say reaffirming your mortgage in a Chapter 7 bankruptcy can be a very bad idea.
Doesn’t the 2005 bankruptcy law require me to reaffirm?
Technically, the 2005 BAPCPA changes to the Bankruptcy Code force debtors to choose between reaffirming a secured loan DURING the bankruptcy or surrendering the collateral.
But, this applies only to secured personal property (example:Â cars.)Â It does not apply to real property.
Deficiency judgments
So, what’s the significance of being relieved of personal responsibility for paying the mortgage if your lender can still foreclose on you? Two words: deficiency judgments.
What is a deficiency judgment?
Let’s say your lender forecloses and sells your house for $200,000, but you owed $300,00 on it. That extra $100,00 is called a “deficiency.”
The lender can theoretically sue you personally for the deficiency if (1) you live in a state where deficiency judgments are available and (2)Â you have not discharged personal responsibility for the debt in bankruptcy.
Although it’s rare, some lenders will try to get deficiency judgments even in cases of short sales or deed in lieu transactions– even though the lender is a willing participant to those transactions. So, read the fine print of your short sale and deed in lieu documents!
On the other hand, some lenders decline to pursue deficiency judgments at all, even in cases of foreclosure. Practices vary widely, so as always you should discuss this with your specific lender and / or mortgage servicer.
How does a bankruptcy discharge affect deficiency judgments?
If you (1) filed bankruptcy, (2)Â did NOT reaffirm your mortgage and (3) received a discharge, you are likely relieved of personal liability for the mortgage.
In that case, you cannot be sued personally for any deficiency after a foreclosure sale, short sale, or deed in lieu transaction.
If the deficiency judgment was entered against you BEFORE you filed for bankruptcy, you will need to take extra steps in your bankruptcy filing to be sure you are relieved of personal responsiblity for paying the judgment. If the judgment has been reduced to a lien on other property you own, other procedures apply. These scenarios are beyond the scope of this post.
Where are deficiency judgments available?
Check your state’s laws to find out if deficiency judgments on mortgages are available in your state. They are available in Maryland and D.C.
Is it ever a good idea to reaffirm?
In light of the above, it is ever a good idea to reaffirm?
Obviously, if the bankruptcy court tells you to reaffirm or else surrender your house, you will need to consider reaffirming. But, you should also consider whether surrendering the house makes more sense.
And, some mortgage servicers refuse to consider a homeowner for mortgage modification (including HAMP modifications) unless the homeowner reaffirms.
Generally, a homeower should NOT consider reaffirming until he or she has a firm, written modification offer in writing specifying all terms– including the interest rate.
Otherwise you could reaffirm but never actually receive a modification offer. You then would have signed up for personal liability and gotten nothing in return.
Be prepared for a “chicken or egg” problem, however. Considering servicers’ seeming reluctance to process modifications, it can be difficult to get them to produce the modification paperwork before they have everything they want– including the reaffirmation.
Don’t let this deter you from requesting a modification, however. Homeowners have reported some servicers did not even raise the issue of reaffirmation when they applied for a post-bankruptcy modification. (And the homeowners, perhaps wisely, did not “remind” the servicers about the bankruptcy discharge.)
This may just be because the servicers are disorganized. Or, maybe servicers have started to realize it is in their best interest to modify.
What Happens to my HAMP Modification if I File for Bankruptcy?
September 6, 2009
Many homeowners sought HAMP modifications because they thought it would help them avoid bankruptcy. But, mortgage servicers are not processing HAMP mortgage modifications nearly quickly enough to offer any real relief to homeowners. With servicers refusing to even acknowledge receipt of modification documents, what now?
Many homeowners applied for HAMP modifications four or five months ago and were current on their mortgages when they first applied. Had they received a timely response to their modification requests, many could have avoided bankruptcy.
But, homeowners are not receiving timely responses from their servicers. In the meantime, their debt situation becomes more and more dire as they struggle to remain current on their mortgages pending a response to their modification requests.
So, the question becomes:Â will filing for bankruptcy take these homeowners out of the running for a HAMP modification (assuming their servicer ever decides to process their HAMP application)?
Homeowner has applied for HAMP but not yet in trial period
If the homeowner has applied for HAMP but is not yet in a trial period, it is generally left up to the discretion of the servicer as to whether they will consider a homeowner eligible for a HAMP modification after filing bankruptcy.
If, however, your loan is owned or guaranteed by Fannie Mae or Freddie Mac, new rules may soon make it mandatory for your servicer to offer you a HAMP modification even if you declare bankruptcy. (This is assuming you otherwise qualify for a HAMP modification.) Note: these changes have been proposed, but have not yet taken effect.
In our experience, some servicers decline to offer HAMP modifications to homeowners who have filed for bankruptcy prior to entering the HAMP trial period.
But, homeowners in this situation should ask their servicer about its policy.
If you servicer will not offer you a modification if you file for bankruptcy, you can crunch the numbers to determine whether you would get more relief from a modification or a bankruptcy filing.
What if you are in your HAMP trial period and you need to file for bankruptcy?
If you have already entered a HAMP modification trial period and you file for bankruptcy, the final modification may need to be approved by the bankruptcy court.
The servicer is generally required by the HAMP servicer guidelines to work with your bankruptcy attorney to try to get the modification approved by the bankruptcy court, if necessary.
What if your HAMP modification is in place but you still need to file bankruptcy?
A homeowner’s filing bankruptcy after a HAMP modification might be considered a violation of the modification plan.
Homeowners who think they might need to file bankruptcy even after getting a modification should ask their servicer if a bankruptcy filing will void the modification.
Many of these are gray areas and servicer policies vary widely. Homeowners should always check with their specific servicer as to what its policy might be. But, it’s important to ask the questions.
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