REFINANCING YOUR MORTGAGE AFTER FILING BANKRUPTCY
Contrary to a common misunderstanding, filing bankruptcy can often improve your credit record instead of harm it. This is true for a number of reasons but mostly because while having excessive debt drags down a credit record, legally eliminating all your debt or greatly reducing its amount tends to improve your credit score. This may happen quite quickly or may take some time.
With an improved credit score, one of your wisest financial moves after bankruptcy is to refinance your home mortgage. But this may be harder to accomplish than your new credit score would indicate. Either your own current mortgage lender or another one you contact may complain that you didn’t “reaffirm” your current mortgage debt in your bankruptcy case.
Reaffirmation is a way to exclude a particular debt from the blanket legal write-off (the “discharge”) of your debts in bankruptcy. You reaffirm a debt in bankruptcy when you voluntarily agree to continue to be legally liable on that debt after the completion of your bankruptcy case.
For a reaffirmation to be legally binding, you sign a “reaffirmation agreement,” usually prepared by your creditor. That agreement must be filed at the bankruptcy court before your debts are discharged, meaning that that it needs to be prepared, signed, and filed at court quite quickly.
If you want to keep your home and remain liable on your mortgage, you would generally want to reaffirm your mortgage debt when you file bankruptcy. But for a variety of reasons, mortgage lenders do not tend to require or even allow reaffirmations. See my last blog post, “The Advantages and Disadvantages of Reaffirming a Mortgage in California,” for more about this. As discussed there, steps can be taken to increase the odds that your mortgage debt will be reaffirmed. But some cooperation by the mortgage lender is needed, so without that the debt is not reaffirmed.
WHAT IS THE PRACTICAL RESULT OF THE LACK OF A FORMAL REAFFIRMATION OF YOUR MORTGAGE?
There should be little or no effect from not reaffirming your mortgage debt as long as you make your mortgage payments on time, and fulfill other related obligations (such as keeping current on property taxes).
A mortgage consists generally of two closely related transactions:
1) the debt: your promise to pay the loan for your purchase of the home;
2) the mortgage: your granting of certain rights over the home to your lender, enabling it to foreclose on the home if you fail to pay the debt according to its terms.
The bankruptcy discharge legally writes off your mortgage debt if you do not reaffirm that debt. But that discharge does NOT affect your mortgage. It does not affect your lender’s ability to foreclose on your home if you fail to pay the debt according to its terms, regardless whether the debt was or was not reaffirmed. Your lender’s rights against your home are unaffected. So whether or not your mortgage lender allowed you to reaffirm the debt should also not change your rights afterwards, including your ability to refinance that mortgage.
SO WHY IS REFINANCING AN UN-REAFFIRMED MORTGAGE SOMETIMES CHALLENGING?
From my many years of dealing with this situation I believe that problems arise because of mortgage lenders’ lack of basic knowledge of the law. Or perhaps they pretend not to know the law, using the lack of reaffirmation as an excuse to avoid refinancing the loan (and thereby avoid reducing the interest rate that you are paying).
Mortgage lenders do not understand, or chose not to understand, the basic legal principle that bankruptcy does not affect their right to foreclose on a home if payments aren’t being made according to the terms of the debt, even if the debt has been technically discharged because of the lack of reaffirmation of that debt.
So if you have been paying a mortgage debt according to its terms, those payments should be reflected in your credit history. And you should be able to refinance that debt after bankruptcy, consistent with that history of payments and your overall improved credit score.
WHAT CAN BE DONE TO IMPROVE YOUR ABILITY TO REFINANCE?
Here are some steps that should be taken by you or your attorney to help:
a) Do whatever can be done to get the mortgage debt reaffirmed during your bankruptcy case. (Again, see my last blog post about how to do this.)
b) If your mortgage lender or servicer is Bank of America, Chase Bank, CitiBank, GMAC/Ocwen, or Wells Fargo and it is either not allowing reaffirmations or using that as an excuse to not proceed with a refinancing or modification, contact the California Monitor for the National Mortgage Settlement. Its general website is at californiamonitor.org/. The California Monitor, Katherine Porter, has specifically invited bankruptcy debtors and their attorneys to contact her office for help with mortgage loan refinance or modification (although it can help only with the five listed lenders/servicers).
c) If the prospective refinance lender bases its refusal to refinance on the lack of a payment history on your current mortgage (on the basis that the debt was not reaffirmed), assertively obtain the payment history directly from your current lender. Then attempt to update your credit report with that payment history, as well as provide that payment history directly to your refinance lender. For more detailed information about this, see my blog post of May 15, 2014 called “My Credit Report Does Not Show Mortgage Payments After Bankruptcy.”
d) Your lender may be overly concerned about not wanting to violate the bankruptcy law that forbids it from pursuing you on a discharged debt. If you did not reaffirm your mortgage debt, it is technically discharged, and in general creditors are not allowed to chase you on debts that have been discharged in bankruptcy. The creditor may be concerned that its involvement in refinancing a debt that has been discharged could be construed as its attempt to convert a discharged debt into one that you must pay.
If this is what is preventing the refinancing, your attorney can prepare a so-called “comfort order.” In it the mortgage lender is given assurances in advance that the refinancing is not a violation of the bankruptcy discharge.
In the common situation that bankruptcy subsequently improves your credit score, you may well be a good candidate for a home mortgage refinancing or modification, assuming that you have mostly kept up your mortgage payments. Talk to your attorney at the beginning of your bankruptcy case about steps to be taken during the case to make a later refinance/modification more likely. And after your bankruptcy case is over, if you encounter resistance to a refinancing or modification, consider giving the lender a “comfort order,” getting your payment history into your credit record, or using the services of the California Monitor if your mortgage lender or servicer is one of the five included within its mandate.