There was an article in the newspaper today concerning the increasing number of mortgage modifications for troubled homeowners. I have received inquires from some of my bankruptcy clients who are attempting to modify their home mortgage after filing Chapter 7 bankruptcy. These former bankruptcy debtors complain that the lender told them they could not modify their mortgage because, “the mortgage was not included in the bankruptcy.” Initially, I could not understand what these people were trying to say because all bankruptcy petitions must include all unsecured and secured debts, including mortgages the debtor intends to modify for an exempt home they intend to retain. A call to one of the lender’s legal departments clarified the issue.
Many Chapter 7 debtors state on their petitions that they intend to keep their exempt home and “reaffirm” the debt, but during the bankruptcy they do not sign reaffirmation agreements with their mortgage lenders. Bankruptcy law requires debtors sign reaffirmation for personal property they keep, such as their car, but there is no required reaffirmation agreement for loans secured by real property, such as the homestead. If a debtor lists his mortgage but does not reaffirm the mortgage note the debtor no longer has personal liability on the mortgage note after the bankruptcy discharge. The mortgage lender attorney explained that his client, the mortgage company, can not or will not modify a mortgage when the borrower is not personally liable to pay the mortgage. In other words, why would the lender want to extend their own risk on a defaulting loan and offer better mortgage terms to a borrower who has eliminated their own personal risk?
Debtors who hope to modify mortgages may want to consider reaffirmation of their mortgage debt. Debtors should be wary of signing a binding modification agreement with their mortgage lender based on the lender’s oral statements and the debtor’s hope that the mortgage can be modified. Debtors can withdraw reaffirmation commitments until the bankruptcy case is closed or for 60 days, but thereafter, the reaffirmed debt binds the debtor whether or not the mortgage lender agrees to an attractive loan modification.