After bankruptcy, you can use all the help you can get when it comes to maximizing your chances for a new loan. Don't let your old mortgage get in the way of refinancing or getting a new loan.
When you file for bankruptcy and get a discharge of your debts, you're no longer personally liable for repayment of any of the obligations that are discharged.
That means nobody can personally collect from you. If a creditor has a secured interest in your property, they can repossess that property and nothing more.
If you file for bankruptcy and discharge your debts under Chapter 7, all a mortgage company can do is foreclose and take back the property. Once they tell the property, the bank can't come back to you for a deficiency.
Unfortunately, that's a double-edged sword.
Credit Reporting Of Mortgages After Bankruptcy
If you file for Chapter 7 bankruptcy and discharge your mortgage obligations, the creditor can report only that the balance due is $0 and the debt was discharged in bankruptcy.
The creditor cannot report a balance due, nor can it report any payments you make on the loan after bankruptcy. Doing so may violate the Fair Credit Reporting Act and subject the mortgage lender to legal liability.
This, in spite of the fact that you may well be paying the mortgage after bankruptcy.
This payment stream, however, won't be reflected on your credit report after your bankruptcy discharge.
Can Reaffirmation Help?
One way of fixing the problem may be to reaffirm your mortgage loan through the bankruptcy process.
Reaffirmation is a side agreement between you and your lender whereby you agree to remain personally liable for repayment of the debt in spite of the bankruptcy filing. In essence, you are waiving the bankruptcy discharge as to this particular creditor.
Though this may at first blush look like a fix to the credit reporting problem, reaffirmation carries significant long-term risks. If you fall behind on your mortgage after bankruptcy, the lender may be able to sue you for the deficiency if the foreclosure doesn't bring in enough money.
In addition, your late payments will be reported to the credit reporting agency if you fall behind again. This will only serve to lower your credit score - which is exactly the opposite of what you want to have happen after bankruptcy.
Take Matters Into Your Own Hands
A new lender is looking not for a positive credit report with respect to your mortgage. Rather, the inquiry is one of whether you've been making timely payments to the mortgage lender.
To prove this you can provide the new lender with cancelled checks. This may not be compelling without more, so you're going to want to couple your documentation with a Qualified Written Request, or QWR.
The Real Estate Settlement Procedures Act (RESPA) gives homeowners the ability to request information from their mortgage lender in the event that they have reason to believe that their account is in error.
Given the fact that the lender is not reporting your payments post-bankruptcy, it's reasonable to make such an inquiry requesting an accounting of the payment history on your loan.
The servicer must acknowledge receipt of the request and respond within specified time periods, and will provide you with a complete breakdown of payments received and how the funds were allocated. You can take this to the new lender or your mortgage broker.
Accomplish Your Goals And Minimize Your Liability
If your goal is to refinance your mortgage with a new lender or simply get a new loan elsewhere, you're going to want to maximize your chances. By keeping proper records and making use of the QWR process, you can get closer to accomplishing these goals without assuming post-bankruptcy liability for the mortgage debt.
SOURCE: Jay S. Fleischman is a bankruptcy attorney with offices in Los Angeles and New York. He can be found on Google and Twitter, where he shares information about consumer protection issues and personal finance.