Chapter 7 Debtor Did Not Reaffirm Mortgage – Is Her Home Now at Risk?

I have a few questions and I'm not sure how to get them answered so I decided to write to you after seeing your website. I really need some advice or guidelines and would appreciate your help. Please let me know your rates and I'll be more than happy to pay as I need these answers for peace of mind.

My Chapter 7 bankruptcy was discharged in September, 2006 in Atlanta. At that time, my attorneys told me to stop checking the internet for information because it would just worry me and to leave it to them. The bottom line here is that I wanted to reaffirm my mortgage and stated this at the 341 hearing. I didn't realize you had to actually sign an agreement for this to happen. I called my attorneys after I realized what should have happened and they told me they never think it is in the best interest to sign a reaffirmation on a home because the mortgage company will never come after it anyway if the loan is kept current. I've never been late with a payment. They acted like I was crazy to even worry about these things and reminded me that they told me to stop reading about it on the internet.

Since then I have always received a bill from my mortgage company (my house is an FHA loan-I don't know if that has any bearing on any of this) that has a disclaimer stating the bill is being sent for informational purposes only and is not an attempt to collect, etc. It is also on my credit report as discharged.

My questions are as follows:

1) Will they ever come after it even if I remain current? Could they wait years until there's equity in the home and then foreclose?

2) I've read that there are some ares of the country where keeping the house without a reaffirmation agreement has been protected by the Federal Court. Is this true, and if it is, is Northern Georgia one of those courts?

3) I just got married and will be changing my name. I'm afraid to even change it with them because I don't even like to flag my situation, am I crazy?
Also, I wanted to Quit Claim half of it to my husband but this would really be flagging it- am I right to worry about that?
Should I even consider doing that?

Thank you for your time,

Julia

Jonathan Ginsberg responds:  Julia, here is how I would analyze your situation. Bankruptcy Code Section 521 is entitled "Debtor's Duties" and includes a requirement that you as the debtor must file a statement of intention with regard to property you wish to retain or surrender. Section 521(a)(6) provides that a Chapter 7 debtor must actually enter a reaffirmation agreement for a personal property secured creditor.

The Code is silent regarding a real property secured creditor.

By not reaffirming your home mortgage, I believe you could make an argument that you no longer have personal liability under that loan. Given that the mortgage company is sending you bills "for informational purposes only" it would appear that they recognize the discharge of personal liability as well.

I believe that they would still have a lien against the property – just not against you personally. This means, in theory, that if the house burned down and there was no insurance, they could not come after you personally.

Because you no longer have personal responsibility for paying this debt, your credit report will not reflect the benefit of regular payment.

I know several lawyers who regularly counsel their clients not to enter into residential reaffirmation agreements for the express purpose of eliminating personal liability. Personally, I think that the credit restoration benefits outweigh the risk of personal liability on a mortgage.

I think that the mortgage company would have a hard time trying to foreclose against you, say, 10 years from now based on a failure to reaffirm. There is a doctrine in law called "laches" which says that a party cannot sit on its rights for an extended period of time, then choose to exercise those rights later on. Here, it would hardly seem equitable for a mortgage company to do so. I think it is very unlikely that this would happen.

However, laches is a doctrine of equity and the last place you want to be is in court, paying a lawyer to argue on the basis of equity. At best you would be out several thousand dollars in legal fees and at worst, you lose.

I can't really tell you what would happen if you tried to refinance or quitclaim. This uncertainty factor is why I prefer to reaffirm. You might want to look at trying to refinance for the purpose of getting your mortgage situation back to "normal." Or, you could take your chances with a name change or quitclaim to your husband – as long as you are current with the payments, I think it is very unlikely that you would have any problem. I would at least talk to a mortgage broker first, just in case you had to move quickly to refinance.

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