Re-affirming an obligation post-Chapter 7

7 Replies

Question about re-affirming obligations under a Chapter 7.  If a borrower has a mortgage and has cleared a Ch 7 bankruptcy, then makes a payment on the loan, have they re-affirmed the obligation, such that it now effectively not a chapter 7 loan?  Key questions are whether they then become personally liable again and whether I can contact them again?  

Second scenario, same questions, but this time the borrower has entered into a loan modification agreement.  

Thanks 

Sean

If the mortgage is reaffirmed it is a specific process and document set (really just the paperwork and approval). I am not sure what you mean by "cleared". If the debt was specifically discharged, then there is no further personal liability. Payments made on the account are not a reaffirmation of the debt onto themselves.  

Not to be confused with the action in the BK case of surrendering the property.  If the borrower surrenders then the Mortgagee can continue with an uncontested foreclosure.  If the circumstances on title are ripe, a DIL or sale may also be used to disposition the lien.  A surrendered property is the Mortgagee's responsibility to retrieve.  Until such time as title has formally conveyed, the Borrower is the titled owner.  In such a case, the mortgagee is only a Mortgagee not a property owner.  

The stay order for the mortgagee lasts the duration of the BK plan unless relief is filed for and awarded by the BK court. The Mortgagee can ask for lift of the stay in the event the borrower has made intention in the plan to surrender the property.  The injunction then becomes permanent in the event of a discharge of the debt.  Post discharge injunctions can get the Mortgagee in trouble if they try and collect for violation of the injunction.  Not really a self service situation.  Use your Servicer for contact.

For the modification idea, a post bankruptcy modification does not specifically re-establish personal liability. Personal liability can not be reaffirmed post bankruptcy. The debt is 'forever' discharged. That can not be changed or undone once discharged. So in this setting, while we tend to say a modification is a new extension of credit, this is the exception to the easy definition there. A post BK modification is for lien rights not personal liability. For that reason, post BK modifications are rare. Said modification agreement with any terms related to reaffirming personal liability will not hold up as the agreement can not supersede the power of the BK court. In such a setting the loan would typically be requested to be refinanced to re-establish proper personal liability. There have been attempts in vain to re-open the BK to allow a reaffirmation to be entered into the plan and for the most part those have all failed. Once it is discharged, it is gone forever.

Thanks Dion, 

Yes, by cleared I mean discharged. Sounds like I'll have to rely on either their desire to stay in the house or the FC (or DIL etc) proceeds. Though I guess in practice that's the case with every NPN,

Cheers 

Is this the same as a junior loan being stripped in bankruptcy, then the homeowner begins paying on it again? I'm still a bit in the clouds about when a judge strips or dissolves a junior lean. Does that mean the the owner of the loan/bank can no longer collect? Or is it merely stripped from the homeowner's file, but the balance still needs to be paid? And it'd be paid, for example, when the homeowner sells the house or via a foreclosure sale.

Originally posted by @Erica Baruti :

Is this the same as a junior loan being stripped in bankruptcy, then the homeowner begins paying on it again? I'm still a bit in the clouds about when a judge strips or dissolves a junior lean. Does that mean the the owner of the loan/bank can no longer collect? Or is it merely stripped from the homeowner's file, but the balance still needs to be paid? And it'd be paid, for example, when the homeowner sells the house or via a foreclosure sale.

 Erica, you and Sean are learning much about BK related to notes I see.  LOL.  All good stuff.

A "cram down" is what you are referring to. A cram down occurs only on junior secured liens.  A cram down simply unsecures the lien.  The debt is owed but the property can no longer be used as collateral for that lien.  Cram downs are not overly common but when a junior lien is attached to a property and that lien has no equity due to senior lien interests the BK Trustee may file for the lien to be unsecured.  The idea is, there is no equity anyway to use to service that debt so they might as well be treated like an unsecured creditor.  Unsecuring that lien does change the lien's standing in a BK plan as secured liens are different than unsecured.  Essentially, it allows for the debt to discharge 'easier'.  

Cram downs usually only happen in BK 13 or BK 11 plans.  Until recent years a Chapter 7 BK did not even provide for the possible stripping of the lien.  While all BK plans can enjoy a stripping or cram down they are not as common in BK 7, likely due to the state of the debtor who files BK 7.  

Originally posted by @Erica Baruti :

@Dion DePaoli thanks for shedding light. Does that mean we can no longer collect?

 The note can be collected on as an unsecured debt, like a credit card.  There is no longer a mortgage or deed of trust securing the note so using the property to collect is not an option any longer.  In the event the lien was crammed down then you should check the BK plan as it may very well get discharged in the BK plan as well.  If the debt is discharged, it is gone forever.  No collection is possible.  

The plan may provide for some payments to the creditor as compensation to the discharge.  Very little chance that will be substantial but a couple of dollars might be recovered from Trustee payments.  Again, you have to check the approved plan.  All plans are different.  

It is possible to be crammed down and then the debtor fails on the plan.  The lien will remain unsecured but the debt did not discharge because the plan was not fulfilled.  Collection is possible.  The debtor can also re-file BK with some caveats.  

For the sake of saying it, the value of such a lien is $0.00 from a purchase/invest standpoint.  

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