Discharge and Reaffirmation of Mortgage Loan Indebtedness

If a Chapter 7 debtor fails to reaffirm his obligation on his mortgage during the pendency of his bankruptcy case, his mortgage lender may refuse to refinance his mortgage loan post-bankruptcy.

The lender’s refusal to refinance usually stems from two concerns. First, any postpetition agreement to repay a prepetition debt may be unenforceable.  To be enforceable, a debtor’s agreement to repay an otherwise dischargeable debt must be made prior to discharge and must conform with the requirements set forth in the Bankruptcy Code. Bankruptcy courts have found that lenders violate the discharge injunction when they enter into agreements with debtors to repay discharged mortgage debt.

Second, the lender wants to avoid making any attempt to collect a pre-petition debt as a personal liability to avoid violating the discharge injunction. On a mortgage loan, the secured lender’s mortgage lien survives the bankruptcy but the debtor is no longer personally liable.  If the debtor defaults, the lender can foreclose its lien but cannot seek a deficiency judgment against the debtor.

11 U.S.C. Section 524(f) provides that a debtor may voluntarily repay a discharged debt even if the debt was not reaffirmed. Courts have held that voluntary payment must be free from a lender’s influence.  When a debtor signs new loan documents, the debtor will likely believe payments are required. Therefore, courts are unlikely to find that Section 524(f) renders a refinance of a discharged debt enforceable.

Reopening a closed bankruptcy case to reaffirm a mortgage debt is unlikely to be successful. 11 U.S.C. Section 524(c)(1) provides that reaffirmation agreements made after the entry of discharge are invalid.  Therefore, courts are unlikely to approve such agreements.

One viable option open to debtors is to refinance with a different lender. The debtor will likely have to obtain a payment history from his current lender as proof of creditworthiness. This option may not assist every debtor who is trying to refinance his mortgage loan but it remains the only option available at this time.

For more information on debtor-creditor issues and bankruptcy law, please contact Charles Smith or Nicole Hughes at 712-325-9000.

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