Can I Refinance a Mortgage That Was Discharged in Bankruptcy?

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Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I filed bankruptcy in 2009. One of the debts discharged in the bankruptcy was a mortgage with Wells Fargo. Upon the advice of my lawyer, I did not reaffirm the mortgage in the bankruptcy. I kept my house, and I have stayed current on my mortgage.

I just asked Wells Fargo to refinance my mortgage at a lower rate. It told me that it cannot refinance the mortgage because I did not affirm the loan in the bankruptcy. It also told me that no bank will refinance the loan, for the same reason.

Should my lawyer have advised me to reaffirm the loan? Is there anything I can do? 

Shirley

 

Dear Shirley,

What Wells Fargo told you is partially right, and partially wrong. If the only issue is that you did not reaffirm the home loan in your bankruptcy, you will be able to refinance your loan with a different lender. Your lawyer was not remiss in advising you not to try to reaffirm the mortgage.

What Is Reaffirmation in Bankruptcy?

Most types of debts are wiped out in Chapter 7 bankruptcy. If you want to keep a particular debt, however, you can reaffirm it. Essentially you sign an agreement with the lender that waives the discharge of the debt. (Learn more about how reaffirmation works in bankruptcy.)

The effect of reaffirming a mortgage is that if you later default on the loan and the lender forecloses, you will be liable for a deficiency (the difference between what you owe and the value of your home). If you don’t reaffirm your mortgage in bankruptcy and later default, the lender cannot go after you for a deficiency. (Learn why reaffirming a mortgage is almost always a bad idea.)

Refinancing a Discharged Loan

If a debt is discharged in bankruptcy, the lender is prohibited from trying to  collect on that debt. The lender cannot sue you, call you, or send you a bill or mortgage statement.

When you refinance a discharged mortgage loan with the same lender who currently holds the mortgage, the proceeds of the refinance go back to that lender to repay the loan balance. This violates the bankruptcy discharge and that’s why Wells Fargo won’t refinance your mortgage. However, this  should not prevent other lenders from refinancing your mortgage.

It’s unfortunate that Wells Fargo was not able to explain the law correctly, or clearly.

Should You Have Reaffirmed Your Mortgage?

But should your lawyer have recommended or tried to get your mortgage reaffirmed? Most likely not.

In bankruptcy, a reaffirmation agreement must be approved by either

  • the bankruptcy judge, or
  • your bankruptcy lawyer.

Bankruptcy court approval. Most bankruptcy judges will not approve mortgage reaffirmations, reasoning that a debtor can keep the house without reaffirming as long as he or she makes timely payments. This makes the reaffirmation an unnecessary liability. Often the only reason in favor of reaffirming is to reestablish a good payment history. (Without a reaffirmation agreement, your future payments probably will not appear on your credit report.) Most bankruptcy judges feel that building future credit is not a sufficient reason to burden a debtor with mortgage liability.

Lawyer approval. If the judge won’t sign off on the reaffirmation, then it won’t be valid unless your lawyer signs a legal declaration stating that the reaffirmed debt will not impose an undue hardship on you or your dependents. Lawyers are very hesitant to sign such a document because they don’t know what their own responsibility will be if you default. Lawyers also reason that if judges won’t sign these agreements, then they shouldn’t either.

The end result: Mortgages are almost never reaffirmed in bankruptcy.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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How Explicit Must a Request for Religious Accommodation Be?

AUS Supreme Courtbercrombie & Fitch is the subject of a religious discrimination lawsuit, after refusing to hire a young Muslim woman who wore a hijab – a religious headscarf – to her interview. In 2008, 17-year-old Samantha Elauf applied for a sales job with the famous retailer at one of its locations in Tulsa, Oklahoma. The store manager thought that Elauf was a good candidate for the position, but wasn’t sure if she could work for the store wearing the hijab. The store manager asked the district manager if a Muslim applicant could wear a hijab at work. The district manager replied that the store could not make any exceptions to its strict “look policy,” which did not permit headwear of any kind. Abercrombie did not discuss the policy with Elauf before rejecting her. The case has made its way up to the United States Supreme Court, which is scheduled to hear oral arguments this Wednesday.

Under Title VII of the Civil Rights Act, it’s clear that employers must provide reasonable accommodations to employees based on their religious beliefs, unless it would create an undue hardship (for more information, see our article on religious accommodation in the workplace). In general, the employee must notify the employer of a need for accommodation before the employer is required to act. But what if the employer knows of the need for accommodation, but the information wasn’t explicitly provided by the employee?

That’s the question that is at the center of this dispute. According to Abercrombie, under Title VII of the Civil Rights Act, the burden is on the applicant to request an accommodation for his or her religious beliefs. Employers are not expected to be mind-readers, and what’s more, employers are not allowed to ask employees about their religious beliefs in interviews.

However, according to EEOC, Abercrombie store managers knew that Elauf wore the hijab for religious reasons, which imposed a duty on Abercrombie to start a discussion about reasonable accommodation. At the very least, Abercrombie should have informed Elauf of the dress code. After all, how would Elauf know to request an accommodation if she was unaware that  headwear was prohibited by company policy?

The Supreme Court’s decision could provide some much needed clarification on just how far employees must go to request religious accommodations. The Court is scheduled to issue a decision in late spring or early summer.

Walk Right In, Sit Right Down!

IRS announced, recently, a limited test to determine if an appointment-based service approach might help reduce taxpayer wait times during a time of severe budget cuts.

“My hope is that this test increases the level of customer service that we can provide while minimizing needless burden on taxpayers,” says Commissioner Koskinen.

The test locations available by appointment are:

  • Atlanta, GA
  • Austin, TX
  • Birmingham, AL
  • Chicago, IL
  • Denver, CO
  • Fresno, CA
  • Hartford CN
  • Plantation, FL
  • San Antonio, TX
  • Seattle, WA

Check out www.irs.gov for more info, including how to make an appointment.

Parking Spot Disputes Too Common a Source of Violence

CarKeys_ iStockNo final word yet on whether the recent Chapel Hill, North Carolina killings of three young Muslims of Arab descent was a religiously motivated hate crime, but it’s definitely a sad reminder of the fevered disputes that can arise over neighborhood parking spots.

According to a report in the Washington Post, “A preliminary investigation revealed that Hicks had previously clashed with his victims — husband and wife Deah Barakat and Yusor Mohammad Abu-Salha and Abu-Salha’s sister Razan — over parking spots in front of the apartment complex where they lived.”

Parking lot disputes between neighbors that turn deadly appear regularly in the U.S. news headlines. Take, for instance, “N.J. man gets 10 years for shooting man 4 times over parking spot,” from Newark in February, 2015; “Father slain in front of young son, caught up in feud between neighbors,” from Baltimore in January, 2015; and “Mom Watches Son Get Shot After Parking Space Argument & Reportedly Delivers Serious Reprisal,” from New York in May of 2014.

Those reports don’t even take us back as far as 2013! And they don’t include the all-too-many cases where someone gets shot over a dispute that wasn’t between neighbors but was, say, over a parking space at a restaurant, gas station, or Home Depot.

I need hardly mention that the law doesn’t give anyone a right to defend their parking space to the death. But in case anyone is curious as to who has rights to a neighborhood parking spot in the first place, here’s a basic rundown.

  • In a condo, apartment, or community run by a homeowners’ association, parking spots may be “assigned,” or even individually rented, in which case only one person has a right to park there.
  • On a public street, no one has ownership rights, not even to the spot in front of their house. (See Nolo’s Q&A, “Does my neighbor “own” a parking spot on a public street?“.)

Of course, there will always be neighbors who violate the laws or community rules, or simply do obnoxious things, like park their third car in front of your house and leave it there for weeks at a time. In light of the passions that can obviously arise over such transgressions, it might be wisest, if you’re the one who’s bothered by a neighbor’s parking habits, to request action from the authorities — a landlord, a homeowners’ association, or the municipal parking authorities (who will often ticket or tow a car that has been in one place for too long).

IRS Simplifies Compliance with New Repair Regs

Some good Friday the 13th news came forth from IRS last week:  simplification for smaller taxpayers’ compliance with the final “tangible property” regulations.  The new procedure allows small businesses to change a method of accounting under the final “tangible property” regs on a prospective basis for the first taxable year beginning on or after January 1, 2014, including waiving the requirement to complete and file a Form 3115 for small taxpayers who choose to use this simplified procedure for 2014.

See Rev Proc 2015-20 for the details.