A common problem many post-bankruptcy homeowners have is refinancing one’s home loan. Many people have approached me in a situation wherein their lender refuses to refinance their loan on the grounds that they did not reaffirm their loan post-bankruptcy, therefore, they claim, there is no loan. Let me take a few short paragraphs to explain the situation to you.
If you file bankruptcy, it does not relieve you of your mortgage. If you stop making payments, the lender will foreclose on the property, and if you keep making payments, you will eventually pay off the house. Chapter 7 bankruptcy cannot remove a mortgage. Chances are if your lender is responding to your attempts to refinance in such a way, it’s nothing more than an indication that he doesn’t want to work with you. In this situation, I would first try to find another lender. Be sure to explain your situation before applying, though. No need to get the same excuse from two lenders twice.
If you can’t find a lender, you could probably file a motion to reopen your bankruptcy case and then file the reaffirmation agreement. The only reason I say probably is because I don’t know for sure how these situations are being handled across the country, though I know courts in California permit it. However, if you’re going to do this, you must consider the following: If you reopen the case and reaffirm the loan, it may, depending upon the state you live in, reestablish your personal responsibility for the mortgage loan. In doing this, you promise to repay all or a portion of the debt that otherwise would have been discharged in your bankruptcy case.
After this is when there begins to be a greater risk. Even if you reopen your bankruptcy case to reaffirm your loan, the lender could still say that you don’t qualify for a refinance. This would likely lead to you being unable to make payments and the lender foreclosing on your home. You could even be sued for a deficiency balance; something that could only be done once the loan was reaffirmed. Though you may have a bad faith defense against the lender, it would be a very expensive case to fight.
You need to know whether or not reaffirming the loan in your state reestablishes responsibility, and how likely your refinance application is to be approved. Then, you can make an informed decision on whether or not to reaffirm.
To discuss your refinancing options post-bankruptcy in more detail, please get in touch with the southern California bankruptcy attorneys at Westgate Law. We can advise you regarding how bankruptcy will affect your credit once your debt is discharged.