Clarification about mortgages and bankruptcy from a bankruptcy attorney

[Anonymous]

Hi everyone,

I am a licensed bankruptcy attorney and have practiced bankruptcy exclusively for over 8 years. I was on this forum doing a bit of research on a different topic for a client, and have seen many questions regarding mortgages and bankruptcy credit reporting. I thought I'd give some legal background to provide more understanding to those who have questions, and help to clarify.

A mortgage is actually made up of two different legal documents that you sign when you get the mortgage (close on it). One is the Mortgage (or Deed of Trust as it's known in some states), and one is the Note. Each document has language in it that says it is to be read and works in conjunction with the other.

Each document has different legal effects to the creditor and consequences to you, the borrower.

The Mortgage (or Deed of Trust) is the document giving the mortgage company the right to foreclose on your home if you default in any way under the Mortgage or Note, because it contains language securing the loan they give you (mortgage) against your home, so that if you don't pay the loan back to them pursuant to the terms of the Mortgage and Note, they can take your home because of your default.

The Note is your personal promise to repay the loan (mortgage). Signing the Note renders you personally, legally responsible to pay the loan back to the mortgage company pursuant to the terms of the Mortgage and Note.

If you default and stop making your payments, or default in another way under these contracts, the mortgage company can foreclose on you (take your house back) under the Mortgage, or sue you under the Note for the total amount owed, or do both (foreclose and then sue you for any balance remaining owed after the foreclosure sale).

When you file bankruptcy and receive a discharge, the Note is the actual debt relating to the mortgage, and therefore is discharged in the bankruptcy along with the rest of your dischargable debts. The Mortgage (security interest) is unaffected. So, if you default on your mortgage, the mortgage company can foreclose, but cannot sue you under the Note for any amount, since the Note has been discharged. This is why mortgage companies will report your mortgage to the bureaus after a bankruptcy discharge as $0 balance owed, discharged in bankruptcy. This is legally correct, because the bankruptcy has discharged your personal liabililty on the Note and responsibility to pay the Note. So, it will continue to report this way, even if you are making your payments.

If you have reaffirmed the mortgage, then you are actually reaffirming the Note (your personal legal responsibility to pay), and the mortgage company should then report your correct balance and payment history after your bankruptcy discharge.

I agree with other posters on this forum who caution against reaffirming a mortgage - I personally tell my clients never to do so, as you are reinstating your legal, personal responsibility to pay the Note, and giving the mortgage company the ability to sue you under the Note should a future event happen that causes you to default on your mortgage payments. ALSO, once a debt is reaffirmed it can NEVER be discharged in a future bankruptcy, ever. Keep that in mind.

Further, the bankruptcy law doesn't require reaffirmation agreements on mortgages. So, a mortgage company cannot foreclose on you for not signing one (unless there is language in the Mortgage or Note sayign otherwise, but I've never seen that).

Remember that a bankruptcy discharge doesn't affect the mortgage company's ability to foreclose. So, if you want to keep your home, make sure to keep making your payments. There are instances when a mortgage company may foreclose even if you're current in your mortgage payments, because in some instances the mere act of filing bankruptcy can be seen as a default under the terms of the Note and Mortgage. However, this is rare and I personally have never seen it happen.

I hope this is helpful.

***THIS IS ONLY INTENDED AS GENERAL ADVICE. IT IS NOT LEGAL ADVICE, AND IT DOES NOT CREATE AN ATTORNEY/CLIENT RELATIONSHIP. FOR ADVICE SPECIFIC TO YOUR SITUATION, CONTACT A LICENSED ATTORNEY IN YOUR STATE.

[carolina98]

Dear Attorney,

Thank you so much for posting this. I'm in Chapter 7 and have been considering reaffiring because I'm afraid my mortgage company, Bank of America, might take my home. I've never been 30 days late on my mortage in the almost 6 years I've been in my home. I am current on my mortage.

My fear is that if I don't reaffirm that legally the bank could take my home, even if I'm current. That makes me feel like a renter and that I'd be a fool to make improvements on my home only to have it taken away, evern if that's a remote possibility. If I understand you correctly, the Deed of Trust remains in effect even with the bankruptcy. But when I declared BK, I in effect defaulted, is that right, even though my payments are current, and legally they can  take my home. Isn't this a huge risk homeowners face that a bank might take their home, even if it rarely happens, because it could happen at anytime. I have an attorney who has advised me against reaffirming but is agreeing to do it because of my fears. My home is worth more than the mortgage but not a hurge amount more, maybe $20,000.

[carolina98]

Dear Attorney,

If you've read this forum much, you'll see many, many complaints of people who were not late on payments at the time of filing but when they filed BK their creditors reported them late after the filing. I'm one of them. I was only 30 days late on one account (by about 3 days) when I field Chapter 7, but many of my creditors have noq reported me late, really further destroying my credit. I had fair to good credit before filing. I had only two 30 day late payments a couple of years old as derogoatories on my credit report. Now I have numerous late payments showing that were reported after my BK filing.

Could there be a class action suit here? This occurance of reporting people as late after BK is widespread and is happened to many people, as evidenced by reports on this forum. I think the credit card companies are doing it to harass people who filed for BK. What credit companies are doing is illegal, as I understand it. I was not 30 days late befort I filed, and now I have many reports of 30 days late. If creditors can get the reporting right before you file for BK, they can get it right after you file for BK.

I know I can try to clean up the errors, and I will. But I know it will be  a long process and based on what I've read on this forum I may not get it all corrected. Thank you.

[Anonymous]

Carolina/Attorny

This is EXACTLY what happened to me. i was not late on any of my accoutns.. but had to file for asset protection due to a business failure. I have had No issues since 2005, and my score hovers around 695-700,

I was looking at buying a house lately, so decided to clean up all these charge offs (which Experien says creditors  CAN report paying history inc. charges offs during the time from filing --> discharge).  This is not my first attempt to correct erros, but since my BK was filed in 10/05 and discharged 4/06- I thought time had passed and CR's would be more apt to take a look at errrors. Wrong I was again.

I have even received letters from the creditors saying the account was never late, and paid in full. BUT Experien (they have been the worse offender) will not take them as valid. Sent these off to EXP many times, all time saying documentation not accepted.  Even worese several of the accounts that say IIB/charged off are not even on my bankruptcy papers.

I recenetly spoke with a supervisor, and what this lovely lady did. Was remove the charge offs after my discharge date (oh thank you after 6 yrs of hell).. but added charge offs to all 7 accounts on the date of dishcarge.. Accounts that were paid in full, credit lines for my house that were not charged off and even paid in full years after the BK discharged.

I am still searching for the BK law that explains a stay- that creditors cannot take action during the stay, and that includes credit reporting. Why does experien not now this?  And if anyone else has dealt with their policy about allowing creditors to report during the file to discharge time frame, please advise.. 

Any attorney that I can pay to sue them... willing to do that also.. this needs a class action.

Cynthia

[Anonymous]

I have a follow up to the answer provided by the BK attorney.  I'm also an attorney, but not in BK.  I have a question.  What happens during the pendency of the BK?  I know the mortgage companies are not permitted to accept payments unless provided otherwise by counsel (I believe, anyway), and the general rule is to resume immediately after discharge (do correct me if I'm wrong).  During the pendency of the BK - petition through discharge - does interest/late fees/payments, etc. continue to accrue??  I have a client who was advised to refrain from making all payments during her BK, but to resume right after discharge if she wanted to keep her home.  She did not, so did not resume and is now selling, as there is equity.  The lender has come back with payoff statements far exceeding the original amount of the note.  This means many things beyond this forum, but most importantly here, the lender ran every amount conceivable while the BK was pending.  Is this permissible?  Thank you in advance!

---

@Anonymous wrote:

Hi everyone,

I am a licensed bankruptcy attorney and have practiced bankruptcy exclusively for over 8 years. I was on this forum doing a bit of research on a different topic for a client, and have seen many questions regarding mortgages and bankruptcy credit reporting. I thought I'd give some legal background to provide more understanding to those who have questions, and help to clarify.

A mortgage is actually made up of two different legal documents that you sign when you get the mortgage (close on it). One is the Mortgage (or Deed of Trust as it's known in some states), and one is the Note. Each document has language in it that says it is to be read and works in conjunction with the other.

Each document has different legal effects to the creditor and consequences to you, the borrower.

The Mortgage (or Deed of Trust) is the document giving the mortgage company the right to foreclose on your home if you default in any way under the Mortgage or Note, because it contains language securing the loan they give you (mortgage) against your home, so that if you don't pay the loan back to them pursuant to the terms of the Mortgage and Note, they can take your home because of your default.

The Note is your personal promise to repay the loan (mortgage). Signing the Note renders you personally, legally responsible to pay the loan back to the mortgage company pursuant to the terms of the Mortgage and Note.

If you default and stop making your payments, or default in another way under these contracts, the mortgage company can foreclose on you (take your house back) under the Mortgage, or sue you under the Note for the total amount owed, or do both (foreclose and then sue you for any balance remaining owed after the foreclosure sale).

When you file bankruptcy and receive a discharge, the Note is the actual debt relating to the mortgage, and therefore is discharged in the bankruptcy along with the rest of your dischargable debts. The Mortgage (security interest) is unaffected. So, if you default on your mortgage, the mortgage company can foreclose, but cannot sue you under the Note for any amount, since the Note has been discharged. This is why mortgage companies will report your mortgage to the bureaus after a bankruptcy discharge as $0 balance owed, discharged in bankruptcy. This is legally correct, because the bankruptcy has discharged your personal liabililty on the Note and responsibility to pay the Note. So, it will continue to report this way, even if you are making your payments.

If you have reaffirmed the mortgage, then you are actually reaffirming the Note (your personal legal responsibility to pay), and the mortgage company should then report your correct balance and payment history after your bankruptcy discharge.

I agree with other posters on this forum who caution against reaffirming a mortgage - I personally tell my clients never to do so, as you are reinstating your legal, personal responsibility to pay the Note, and giving the mortgage company the ability to sue you under the Note should a future event happen that causes you to default on your mortgage payments. ALSO, once a debt is reaffirmed it can NEVER be discharged in a future bankruptcy, ever. Keep that in mind.

Further, the bankruptcy law doesn't require reaffirmation agreements on mortgages. So, a mortgage company cannot foreclose on you for not signing one (unless there is language in the Mortgage or Note sayign otherwise, but I've never seen that).

Remember that a bankruptcy discharge doesn't affect the mortgage company's ability to foreclose. So, if you want to keep your home, make sure to keep making your payments. There are instances when a mortgage company may foreclose even if you're current in your mortgage payments, because in some instances the mere act of filing bankruptcy can be seen as a default under the terms of the Note and Mortgage. However, this is rare and I personally have never seen it happen.

I hope this is helpful.

***THIS IS ONLY INTENDED AS GENERAL ADVICE. IT IS NOT LEGAL ADVICE, AND IT DOES NOT CREATE AN ATTORNEY/CLIENT RELATIONSHIP. FOR ADVICE SPECIFIC TO YOUR SITUATION, CONTACT A LICENSED ATTORNEY IN YOUR STATE.

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[despritfreya]

". . I know the mortgage companies are not permitted to accept payments unless provided otherwise by counsel (I believe, anyway), and the general rule is to resume immediately after discharge (do correct me if I'm wrong)."

A misconception. If a debtor wishes to keep a home they must continue to service the underlying obligation. Failure to do so prior to discharge may simply result in the filing of a Motion for Relief From the Automatic Stay so that the lender can begin the foreclosure process under state law sooner rather than later.

　

"During the pendency of the BK - petition through discharge - does interest/late fees/payments, etc. continue to accrue??"

Nothing changes as it relates to the contract between the parties other than, unless reaffirmed, the lender's ability to demand $$.

 "I have a client who was advised to refrain from making all payments during her BK, but to resume right after discharge if she wanted to keep her home."

She got bad "advice" as by not making the payments she now finds herself in default under the terms of the mortgage (deed of trust).  Of course, if she was not current prior to filing bk, she was already in default.

"She. . . is now selling. . . The lender has come back with payoff statements far exceeding the original amount of the note."

The lender's lien against the property is equal to the terms and conditions of the underlying promissory note that is secured by the mortgage.  To obtain the release of that lien she will either have to pay the full claim or get the lender to agree to a short sale.

Des.

[DaveInAZ]

@Anonymous wrote:

I have a follow up to the answer provided by the BK attorney.  I'm also an attorney, but not in BK.  I have a question.  What happens during the pendency of the BK?  I know the mortgage companies are not permitted to accept payments unless provided otherwise by counsel (I believe, anyway), and the general rule is to resume immediately after discharge (do correct me if I'm wrong).  During the pendency of the BK - petition through discharge - does interest/late fees/payments, etc. continue to accrue??  I have a client who was advised to refrain from making all payments during her BK, but to resume right after discharge if she wanted to keep her home.  She did not, so did not resume and is now selling, as there is equity.  The lender has come back with payoff statements far exceeding the original amount of the note.  This means many things beyond this forum, but most importantly here, the lender ran every amount conceivable while the BK was pending.  Is this permissible?  Thank you in advance!

---

I am not an attorney and do not have any legal training, however I am someone who went BK7 (filed 9/2010, discharged 1/31/2011) and did not reaffirm my mortgage but was never late on the mortgage prior to filing, during BK, and since discharge. It is my understanding that unsecured creditors cannot accept payments during BK as that can be considered preferential treatment (and also foolish), but secured creditors - mortgage and car loans - can accept payments, and that is common when the debtor plans to "pay & stay" a house or "pay & drive" a car. But, secured creditors are prohibited from making any attempt to collect the debt, they can only accept voluntary payments that are unsolicited. My mortgage lender - was Marshall & Isley, merged/acquired by BMO Harris Bank - happily accepted my payments during BK, I didn't want to risk going 30 days late - my Deed of Trust states that their failing to enact foreclosure when a paymanet is 30 days late not not prevent them from doing so in the future. After discharge I even got Marshall & Isley to resume auto debit payments. But when BMO Harris took over they stopped that and inisted they could only accept payments sent to them, they couldn't take the money from my bank account as that could be construed as an "attempt to collect a discharged debt". So since then I have continued to keep my mortgage current by using my bank's bill pay service to send them the payment, and they send me monthly statements - which show the correct remaining balance declining by the amount of principal applied from my payment.

Now, you second question is more complicated. My best guess is that if the Mortgage/Deed of Trust specifies the penalties for not making timely payments then they are enforcable since the Mortgage/DoT was not affected by the BK. However if it's the Promisary Note that specifies penalties they are not enforcable, since that was discharged in BK.

[DaveInAZ]

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@carolina98 wrote:

Dear Attorney,

Thank you so much for posting this. I'm in Chapter 7 and have been considering reaffiring because I'm afraid my mortgage company, Bank of America, might take my home. I've never been 30 days late on my mortage in the almost 6 years I've been in my home. I am current on my mortage.

My fear is that if I don't reaffirm that legally the bank could take my home, even if I'm current. That makes me feel like a renter and that I'd be a fool to make improvements on my home only to have it taken away, evern if that's a remote possibility. If I understand you correctly, the Deed of Trust remains in effect even with the bankruptcy. But when I declared BK, I in effect defaulted, is that right, even though my payments are current, and legally they can  take my home. Isn't this a huge risk homeowners face that a bank might take their home, even if it rarely happens, because it could happen at anytime. I have an attorney who has advised me against reaffirming but is agreeing to do it because of my fears. My home is worth more than the mortgage but not a hurge amount more, maybe $20,000.

---

The only legal way for a lender to foreclose is if you are in default of the Mortgage/Deed of Trust. Being 30 days late is the most common default, It is possible and legal for lenders to include other situations that would result in being in default. For example, it is not uncommon for Credit Unions to include on a car loan pomissary note that just filing for bankruptcy makes you in default, and if you do not reaffirm the loan they will repossess that car even if you have never been late.But that is extremely rare for that kind of language to be included in a Mortgage, and I have never heard of Bank of America foreclosing after BK if you continue to remain current on your payments. Banks do not want to foreclose on a mortgage as they usually loose money doing so, they very much prefer to accept your timely payments. When a property is foreclosed it is sold at auction resulting in the lowest possible selling price, and if the mortgager was not reaffirmed and was discharged in BK they cannot come after you for any deficiency (Mortgage balance minus Selling price minus Selling costs).

My BK7 was discharged on 1/31/2015. I was never late on my mortgage prior to filing, never late during BK, and have never been late in the 4 1/2 years since discharge, and I have had zero problems. I most certainly do not feel like a 'renter', I am a proud home owner, and take pride in my ownership in maintenance and improvements. I planned on reaffirming my mortgage as I had equity and could afford the payments. But my attorney was adamantly against reaffirming and finally convinced it would be foolish to reaffirm - reaffirming exposes you to a huge liability should your financial situation turn bad again in the future due to unforeseen events, while not reaffirming but remainly current on payments gives you the benefits of home ownership with no downside..

I highly recommend you talk again with your attorney and seriously reconsider reaffirming the mortgage. Don't be afraid, be strong.

[Anonymous]

You make perfect sense.  In this case, the banks would not accept any payments during the bankruptcy so perhaps that was just policy.  Interesting little tidbit and I think state specific loophole.  The client had a Volvo leased that she kept current during the BK and after.  About 2 weeks after the discharge, the Volvo lender (Volvo financing) repossessed.  I thought this could not possibly be okay, but apparently there's an exception for leaseholders as opposed to secured lienholders of a vehicle in bankruptcy.  The bankruptcy attorney I consulted with on that said something about State specific so I guess there is some State law in addition to the general Federal bankruptcy Code, but again, this is so not my area.  I just thought that is a crazy and unfortunate thing for this poor woman!  Had she known, she never would have paid the $800 per month on that lease!

[Anonymous]

Thank you.  Somehow I knew this was the case.  It's sad because she got payoff statements informally just a few weeks ago that were consistent with what she was told during the bankruptcy.  The house is now listed and an offer came in....magically $25k is added on to the actual payoff.  I've seen worse in my own practice, but it's just sad.  I can handle the civil contract part but the intervening bankruptcy is something I am never sure about, as BK law is simply too complicated for me because I don't practice in the area.  Anyone who states they understand a thing about bankruptcy through anencdotal evidence should be quite careful.  It really is a tough area of the law when there is an issue, so everyone who's not a lawyer practicing in this area, do be careful giving legal advice if it may appear you are doing so!  Just a cautionary word, as everyone here seems quite aware of their obligations.  I do appreciate the responses and think I now I have all I need to properly advise my own client (beyond telling her to also consult with competent BK counsel!).  Thank you again!