Bankruptcy expert Leon Bayer answers real-life questions.
I filed Chapter 7 bankruptcy in California the spring of 2013. I have a first and second mortgage on my home. Although it was, and still is, underwater, I want to keep it. My lawyer said I didn’t need to do anything in the bankruptcy other than continue making payments on both loans.
My mortgage payments have not been appearing on my credit report. And my mortgage lender recently stopped sending monthly mortgage statements. When I called, the lender told me that because I didn’t reaffirm the debt in my bankruptcy, it cannot send mortgage statements or report my payments to the credit bureaus.
The lender said that the only way to remedy this is to reopen my bankruptcy and reaffirm the loan. Did my lawyer mess up?
Your lawyer did nothing wrong. Here’s why.
Courts Don’t Like Home Loan Reaffirmations in Bankruptcy
When you sign a reaffirmation agreement in bankruptcy, you agree to resume personal liability on a debt that the bankruptcy would have otherwise wiped out.
In California, most bankruptcy judges routinely refuse to approve the reaffirmation of mortgages. Bankruptcy judges don’t want people to saddle themselves with debt loads that were set to be discharged in bankruptcy. Most judges believe that it’s not in anyone’s best interest to reaffirm a mortgage. For the most part, reaffirmation agreements are unnecessary if you want to keep your home – if you keep paying your loan on time, you can keep the home.
If you don’t reaffirm, your payments won’t appear on your credit report. But the courts are more concerned with keeping everyone out of future debt trouble than with helping them get back into it.
Why It’s Usually Not a Good Idea to Reaffirm Your Mortgage
The danger of reaffirming is that if you later change your mind about keeping the house, or fall behind on payments and lose your home to foreclosure, you’ll be on the hook for a deficiency.
What’s a deficiency? If your home is underwater and you lose it to foreclosure, the difference between the sale proceeds from the foreclosure and what you still owe on your mortgages is called the deficiency. (Get details on how deficiencies work.)
In most situations, California law does not allow a mortgage lender to come after you for a deficiency on a first mortgage of your residence (but there are exceptions). Not so for the second mortgage. The mortgage lender can sue you to recover the deficiency and then once it gets a judgment, garnish your wages, levy your bank account, and more. (Learn more in Deficiency Judgments After Foreclosure in California.)
Your bankruptcy wiped out your personal liability on both the first and second mortgages – so the lender cannot come after you for a deficiency if you later lose the home to foreclosure. It would not have been in your best interest to reaffirm those loans in the bankruptcy, because then you would be liable for a deficiency. Of course, it would have been in your mortgage company’s best interest for you to reaffirm.
Your Lender Is Holding Your Mortgage Statements Hostage to Force You to Reaffirm
You say your mortgage company recently stopped sending you statements. If it couldn’t send statements because you didn’t reaffirm the mortgage, then why was it able to send statements from the spring or 2013 up until now? Obviously, your lender can send statements, if it chooses to.
And thanks to a new federal law, your mortgage lender might be required to send you periodical mortgage statements. There are exceptions to this new rule though. (To learn more, see Nolo’s article The Periodic Statement Rule: Monthly Mortgage Statement Requirements.)
What Can You Do?
Your mortgage company has stopped sending statements in order to coerce you into reaffirming your loan. Nice people, huh?
I suggest you send a letter to your mortgage company referring to the periodic statement rule and requesting that it comply with the rule and start sending mortgage statements. You can tell the company that if it doesn’t comply with the rule, you’ll submit a complaint with the Consumer Financial Protection Bureau.
If that fails, talk to a lawyer.
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.