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Any exploration of this topic requires an understanding of reaffirmation agreements. Under New York bankruptcy law (In re Boodrow) a debtor does not have to sign a Reaffirmation Agreement for a mortgage on real estate. This is a good thing (especially when dealing with second or third mortgages), since a signed Reaffirmation Agreement causes you... Read More »
Any exploration of this topic requires an understanding of reaffirmation agreements. Under New York bankruptcy law (In re Boodrow) a debtor does not have to sign a Reaffirmation Agreement for a mortgage on real estate. This is a good thing (especially when dealing with second or third mortgages), since a signed Reaffirmation Agreement causes you to remain personally liable for the mortgage debt after bankruptcy, and for any resulting deficiency judgment determined to be due after a foreclosure of the “reaffirmed” mortgage.
Modifications After a Bankruptcy Discharge
Even if you did not reaffirm your mortgage (which we would not, in most circumstances, advise you to do anyway) in your bankruptcy case, there is absolutely no prohibition against your lender offering you a HAMP mortgage modification after receiving your Chapter 7 Discharge. The HAMP Handbook for Servicers of Non-GSE Mortgages, version 4.0 sets forth that “Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP”. In addition, if you did not reaffirm your mortgage debt, the following language must be inserted in the Home Affordable Modification Agreement: “I was discharged in a chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based upon this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement.”
Modifications During a Pending Bankruptcy Case
Borrowers in an active Chapter 7 or Chapter 13 bankruptcy case are eligible for HAMP consideration. In addition, if you are in a HAMP trial period plan and subsequently file bankruptcy, you may not be denied a HAMP modification due to the bankruptcy filing. In 2009 the Southern District of New York adopted a Loss Mitigation Program, where the modification process is put on a timeline and “monitored” by the Bankruptcy Judge through intermittent status conferences. Debtors can choose to participate in this process, or pursue a modification on their own outside of bankruptcy.
How Does Bankruptcy Affect Your Liability On A Modified Mortgage?
If your mortgage modification agreement was entered into prior to your Chapter 7 bankruptcy filing:
- The terms of the modified mortgage survive the bankruptcy filing and discharge.
- Your personal liability on the payment obligation gets discharged in your subsequent bankruptcy, providing you do not reaffirm the mortgage debt in the bankruptcy. The mortgage lien survives the bankruptcy, but if the lender eventually has to foreclose all he can do is sell the property at auction–he cannot pursue you for a deficiency judgment after the auction sale.
If your modification agreement is entered into after your Chapter 7 Discharge:
- Your personal liability on the payment obligation was discharged in your prior bankruptcy, providing you did not reaffirm the mortgage debt in your bankruptcy. The post-bankruptcy modification does not reaffirm the debt, as reaffirmation can only occur in Bankruptcy Court (1) while your bankruptcy case is pending, and (2) after full compliance with the strict requirements of Code § 524. The mortgage lien survived the bankruptcy discharge, but the lender has recourse only against the property, and cannot pursue you for a deficiency judgment after the auction sale.
If your mortgage modification is entered into while your bankruptcy case is pending:
- Your personal liability on the payment obligation will be discharged in bankruptcy, providing you do not reaffirm the mortgage debt in your bankruptcy. The modification does not reaffirm the debt, as reaffirmation can only occur when there is full compliance with the strict requirements of Code § 524. The mortgage lien will survive the eventual bankruptcy discharge, but the lender will have recourse only against the property, and cannot pursue you for a deficiency judgment after the auction sale.
A loan modification does not re-establish liability on a loan that is (or was) discharged in bankruptcy. The modification changes the terms of the loan, but a new loan is not being created, and the debtor is not agreeing to once again take on personal liability for the loan. The only instance where personal liability on a modified loan survives a bankruptcy is if it was reaffirmed during the bankruptcy. Contrast this with a post-bankruptcy mortgage refinance, where (1) an entirely new loan is being created (after bankruptcy), and (2) you would have personal liability on the payment obligation.
It appears that certain lenders are now claiming that they cannot agree to a mortgage modification because the homeowner did not reaffirm their loan in bankruptcy. As noted above there is no “rule” establishing this; in fact, quite the opposite is true. Such assertions are simply the internal company policy of the particular lender, but they are causing some people to wonder whether they should have reaffirmed their mortgage during their bankruptcy. These lenders are suggesting that “they would have been open to considering a modification, had only a reaffirmation agreement been signed”. While this sounds somewhat disingenuous, given the fact that nothing bars them from entering into a HAMP modification, it sidesteps the real issue at hand, where the stakes are fairly high and two distinct factors must be considered. On the one hand, a reaffirmed mortgage creates the certainty that you will be saddled with future personal liability on the note (generally to the tune of several hundred thousand dollars). On the other hand, there is the possibility that the lender might offer a modification in the future. The issue ultimately boils down to: Is maintaining a general hope for a possible future modification worth anchoring yourself to hundreds of thousands of dollars worth of non-dischargeable mortgage debt?
Can I leave some creditors off of my bankruptcy?No. Any creditor whom you owe a balance to must be listed on the petition. Does this mean you should go pay off all the credit cards that you want to keep?No. Even with a $0.00 balance the credit card companies will likely close your accounts once you file bankruptcy. Some creditors WILL let you keep your account but even if this is the case, you do not want to pay off any large balances right before filing for bankruptcy. If any creditor receives more than $600 in the 90 days prior to filing it is considered a preferential treatment, meaning that the trustee can request the money back from the creditor.I owe $1000 to my Dad (any family member or friend). Can I pay him back right before I file bankruptcy?No. As stated above, if you owe money to someone they are a creditor. The trustee and the Bankruptcy Court do not allow preferential payments. They do not like to see you pay Dad back, but not Visa for example. For this reason, any payments made to family members or friends in the past year before filing must be listed on the petition. You certainly do not want the trustee contact Dad to get the money back that you paid to him.Does this mean I can never pay my Dad, or any family member or friend, back the money that I borrowed? No. The bankruptcy wipes out your LEGAL liability to the creditors. However, you can choose to make VOLUNTARY payments to certain creditors if you chose. Keep in mind this cannot be done until the bankruptcy case is closed. I owe my Doctor money. Does this mean that I have to change doctors? No. Similar to the voluntary payment to Dad described above, you can make voluntary payments to the doctor if they are requiring payment before using their services again. However, you will want to check with the doctor before making payments. A lot of times, they will wipe of your balance before the bankruptcy and let you start fresh with a new account.
Do I have to appear in front of a Judge for my bankruptcy? No. The Judge does oversee the bankruptcy process; however you are not required to appear in front of him. Depending on your specific case, your attorney may need to appear in front of the Judge for certain motions or objections that may arise, but you do not need to attend.So do I have to go to court at all for my bankruptcy?Yes. One time during your bankruptcy you are required to appear in front of a trustee who has been assigned to your case. This appearance is often referred to as the “meeting of creditors”.What happens at the meeting of creditors? The meeting of creditors is required under 11 USC §341 of the United States Code. This meeting is required in order to receive your discharge under both Chapter 7 and Chapter 13 bankruptcies.At the meeting the trustee will ask you questions under oath. There are some required questions and other questions will be asked depending on what you have listed on your petition, schedules, statements, and related documents. Generally, the questions are aimed towards verifying information you have listed (i.e. Are all of your creditors listed? Is your income still the same at it was on the date the petition was filed?).If you were honest and reviewed for accuracy your documents before they were filled with the court, then you will have nothing to worry about at this meeting.Are my creditors going to show up and tell me that I have to pay them back?Yes and no. Can creditors show up at your meeting of creditors? Yes, but they usually do not. Even if some of your creditors do show up, they cannot come and tell you to pay them back. Their appearance is permitted to allow them to ask you questions about your income, assets, etc. Again however, appearance by creditors is rare.Who is the trustee and what does he do?The trustee is appointed by the United States trustee, an officer of the Department of Justice, who oversees the bankruptcy. The trustees’ role is to determine whether there are assets that can be liquidated for the creditors’ benefit. They are essential appointed to make sure your bankruptcy complies with the bankruptcy code and that you have disclosed all income and property and that those items do not exceed that which is allowed in the bankruptcy in order to receive a discharge.In Closing…. The meeting is nothing to be worried about. If you have been thorough and completed your forms honestly and accurately, then this will be a breeze. Show up on time with your ID and SS card and the rest is easy!
What happens if I get behind on mortgage payments while I am in a Chapter 13?You made the decision to file a bankruptcy and decided to keep you home. You file a Chapter 13 and are making your mortgage payments and your Chapter 13 plan payments as scheduled. Something comes up and you get several months behind on the post-petition mortgage payments. Now what? Several things will happen…First is that the attorney for the mortgage company will likely contact your attorney let you know that payments are delinquent. If this happens, the attorney should contact you advising you that payments needs to be brought current. However, this step of a “warning” from the mortgage company is not required and does not always happen.The next step (often times the first step), is that the mortgage company’s attorney will file a Motion for Relief with the court in your bankruptcy case. Essentially this is the mortgage company bringing notice to the court that you are delinquent on post-petition payments on your mortgage. They are also asking the court to grant the mortgage company relief from the automatic stay. In short, the mortgage company wants permission to be able to continue with a foreclosure process even though you are in a bankruptcy due to being delinquent.The motion for relief will set out a hearing date. 7 days prior to that hearing date a response must be filed by you or your attorney (if you are represented) stating your intentions, whether you intend to become current on the mortgage, etc. If not response is filed, the motion for relief will automatically be granted to the mortgage company 7 days before the hearing.Options
1. Become Current: Respond to the motion and become current on post-petition mortgage payments before the hearing2. Stipulation Agreement: Depending on how far behind you are on your mortgage, you can ask the mortgage company to allow you to enter into a stipulation agreement. This stipulation agreement usually requires some sort of down payment and spread the delinquent post-petition mortgage payments out over 6 months. This may sound like a great option, however, be aware that you now have 1) ongoing mortgage payments, 2) chapter 13 plan payments, and 3) a stipulation payment.3. Surrender the home: If at this point you realize you cannot maintain payments on the mortgage, you can allow the Motion for Relief to be granted and surrender the home through the bankruptcy. The decision to file bankruptcy and the decisions related to any motion for relief in a bankruptcy are important and should not be made based on this article. You should seek legal advice before making a decision.
What is a wage order and what are the benefits?A wage order in a Chapter 13 is where a portion of your Chapter 13 plan payment is automatically deducted from your paycheck by your employer. Your employer then sends the money directly to the trustee.If you are paid bi-weekly then the monthly payment will be prorated. For example, if your Chapter 13 plan payment is $300 then $138.46 would be taken out of each paycheck.Benefits to wage order:
- Presumed current if less than 10 days late
- No paying entire payment out of one paycheck
- Payments guaranteed to be made (so long as your employer is following the order)
- You are not tempted to spend the money elsewhere
- Allows for an overall successful completion of a Chapter 13 plan
In Illinois, wage orders are required where the Debtor is employed. In Missouri, while it is not required, it is strongly recommended as is ensures payments will be made to the trustee on a regular basis.What are your payment options if you do not have a wage order?Payments can be made in the form of a cashier’s check or money order and mailed to the trustee. You can also set up for an official bank check to be sent on a monthly basis directly to the trustee. They will NOT however accept a personal check from you.To avoid incurring the fees of a money order on a monthly basis for your entire Chapter 13, talk to your attorney about setting up a wage order for you.
By Mary Ann Pekara
Detroit filed for Chapter 9 bankruptcy protection in U.S. Bankruptcy Court in the Eastern District of Michigan today.
Detroit will now enter into a 30-90 day period to determine whether or not the city is eligible for Chapter 9 protection and all creditors will have an opportunity to fight for who will get a piece of the $18.5 billion debt.
As the largest city in the US to file bankruptcy, Detroit was the 5th largest city in the country in 1950 with a population of approximately 1.8 million people. Today, Detroit's population is under 700,000.
What used to be one of the largest manufacturing cities in the country is now a city riddled with billions of dollars of debt.
In March, Michigan Governor Rick Snyder asked Emergency Manager, Kevyn Orr, to resolve the city's overwhelming debt issue. Orr was the one to ask for Snyder's approval to file the bankruptcy.
Snyder commented, "I have reached the conclusion that this step is necessary after a thorough review of all the available alternatives, and I authorize this necessary step as a last resort to return this great City to financial and civic health for its residents and taxpayers. This decision comes in the wake of 60 years of decline for the city, a period in which reality was often ignored."
Bringing you the most up-to-date news, tips and blogs throughout the web. Here’s your Bankruptcy Update for July 18, 2013 Once Listed For $125 Million, The Versace Mansion Heads To Bankruptcy Auction Detroit files for bankruptcy protection Real Housewive’s Peggy Tanous’ Fake Marriage, Claims She’s Divorced In Bankruptcy Filing
This is a common question among debtors who either don’t own their home, or are still making mortgage payments. Some homeowners worry about what will happen to their house when they file bankruptcy. It helps to understand your options prior to filing based on your unique situation. In most cases, debtors end up keeping their [...]
I get this complaint all the time: “My mortgage company is not reporting that I am paying my mortgage payment on time each month because I did not reaffirm their loan.”
Reaffirmation Agreements are documents that are signed in Chapter 7 with creditors for debts you want to keep. This is typically a home loan, a car loan or a furniture loan. These loans are secured to the property that people want to keep, and the reaffirmation agreement basically pulls that debt out of the bankruptcy. The agreement is voluntary, but most folks want to reaffirm the car and mortgage loans.
The problem is, most mortgage companies no longer offer reaffirmation agreements. My guess is that the banks do not believe the reaffirmations are necessary since bankruptcy cancels the debt but not the mortgage lien. Regardless of whether a bankruptcy is filed or not, if a person fails to pay the mortgage the bank has the right to foreclose. Fifteen years ago mortgage companies sent us reaffirmation agreements on virtually every case, but now I rarely see the agreements even offered unless a debtor calls the bank to demand one.
Not reaffirming the mortgage loan creates a big problem when a person tries to refinance their mortgage. Without a credit report showing that the payments are being made on time it is difficult to refinance. When interest rates drop everyone wants to refinance their loan, but without proof that the loan is being paid on time this can be difficult.
How can a person report that they are paying the mortgage on time after the bankruptcy case is closed if a reaffirmation agreement was not signed?
One solution to this problem is to self-report the mortgage payment, sometimes called alternative credit reporting. This can be done through organizations like PRBC that allow consumers to provide proof that they are paying mortgages, rent, utility bills, cell phone bills and other bills on time. The National Credit Reporting Association (NCRA), the National Association of Mortgage Brokers (NAMB), the Mortgage Guaranty Insurance Corporation (MGIC) and Fair Issac (FICO) have agreements with PRBC to help homeowners report their mortgage payments. PRBC has reached an agreement with Fair Isaac to provide a FICO Expansion Score that helps lenders approve mortgage applications.
My hope is that we see an expansion on these types of alternative credit reporting options. There are several benefits to not reaffirming a mortgage loan. If you become unemployed or sick and cannot make future house payments, the benefit of not reaffirming the mortgage can be significant. If self-reporting options improve over time, reaffirming a mortgage loan may become a thing of the past.
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