Reaffirming A Mortgage After Bankruptcy

Reader Question: My daughter and son-in-law (the kids) went through bankruptcy a couple of years ago, but did not include their home in bankruptcy. The judge approved their decision to do so. Now they are trying to refinance their home to get a better interest rate, but they were informed they did not do the paperwork for “reaffirming a mortgage.” The attorney says it was not his work to do. The bank says it was not their work to do either. My daughter and son-in-law were unaware they had to reaffirm the loan. What recourse do they have? Is there any help for them? Money is tight for them – they’ve been paying extra principal since then – and now find that those payments do not go towards his credit rating. Thank you. Kathy H.

Monty’s Answer: Hello Kathy, as there is much information about the bankruptcy and other circumstances that are unknown to me, I must qualify my answer. Even so, I hope to point you in the right direction. It may be understandable the bank and the attorney do not want to take the time to help the kids straighten this out. Was the loan affirmation paperwork from the lender presented to the kids at the time? My understanding is that reaffirmation is a standard item to consider in Chapter 7 bankruptcy when the debtor wishes to retain property.

The gist of the conversation is that for a debtor to choose to agree to reaffirmation would depend on the value of the home and the amount of the mortgage at the time. Was reaffirmation discussed between the judge and the attorney during the bankruptcy proceedings?

Before you begin this research, write a one-page overview of the events involved in the kid’s situation. Include the names addresses and phone numbers of all the parties involved, including the judge, attorney, lender, daughter and son-in-law and any other parties. State the approximate dates and the sequence of events to present a clear picture of what transpired. Just state the facts without opinions or commentary. This one page document will serve to make certain everyone you share this story with receives the same information, and if you have to fill out forms later, you have all the information at your fingertips. I suspect you will provide this information to a number of people.

Here, are some questions, pertinent information and steps to take to determine the best course of action to follow in addressing this situation.

What are the value of the home and the remaining balance of the loan today? I have no information on when they bought the home, the location or how much of a down payment they made, but the first thing to determine is whether or not the property is “underwater”. If that turns out to be the case, then I would question whether refinancing is the immediate solution. Also, if the home is underwater the lender may have some obligation to refinance if the lender has sold the mortgage to Freddie Mac or Fannie Mae. Here, is a link to an article I wrote some months ago that may offer information that will raise more questions to consider. While the kid’s situation is a little different than the owner in the article, the underlying problem the owner had with the home may be similar.

With the lender that is still collecting mortgage payments, they may not be interested in granting relief to lower the interest rate. The article above describes the different options people underwater may have available to them in HARP and HAMP refinancing. I am uncertain how bankruptcy affects these programs. One move that may be helpful is to make an appointment with a HUD approved credit counselor. HUD states the counselors know the rules that lenders and consumers must follow to qualify for refinancing. Another agency that may offer assistance is the Consumer Finance Protection Bureau. I have had no direct experience with them, but I have other readers say when the CFPB called a bank for them, the bank reacted. Check them out to learn firsthand if this is true.

Because you have stated money is tight for the kids, I see no harm in asking the judge in the bankruptcy for some help. Write a cover letter and include the overview as described earlier. The Clerk of Courts will have his address. I would ask the judge if your attorney should have been more diligent if reaffirmation was discussed. If the judge says the lawyer should have been more diligent, the attorney may be more willing to help. If this tactic turns into a dead-end, you may ultimately want legal advice from someone down the line to help decide how to proceed.

You may want to seek other opinions about this situation. If it turns out the house is not underwater, and there is equity, have the kids talk to other lenders. This link to finding a mortgage will be helpful. The rules regarding bankruptcies, foreclosures and refinancing are changing unusually quickly in this tumultuous lending environment. This makes the job of keeping up with changes transpiring difficult and creates dated and misleading information in the market place. Proceed cautiously.

Kathy, it is commendable that you are helping the kids with this situation. It will be easier to deal with if you possess up to date information and speak with knowledgeable people. They can be hard to find. That is why it is important for you and the kids to commit to educating yourselves about the issues involved. Ask me if you have other questions. I would like to hear how this turns out for your daughter and son-in-law.

Monty