Any exploration of this topic requires an understanding of reaffirmation agreements. Under New York bankruptcy law (In re Boodrow) a debtor does not have to sign a Reaffirmation Agreement for a mortgage on real estate. This is a good thing (especially when dealing with second or third mortgages), since a signed Reaffirmation Agreement causes you to remain personally liable for the mortgage debt after bankruptcy, and for any resulting deficiency judgment determined to be due after a foreclosure of the “reaffirmed” mortgage.
Even if you did not reaffirm your mortgage (which we would not, in most circumstances, advise you to do anyway) in your bankruptcy case, there is absolutely no prohibition against your lender offering you a HAMP mortgage modification after receiving your Chapter 7 Discharge.
The HAMP Handbook for Servicers of Non-GSE Mortgages, version 4.0 sets forth that “Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP.”
In addition, if you did not reaffirm your mortgage debt, the following language must be inserted in the Home Affordable Modification Agreement: “I was discharged in a Chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based upon this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement.”
Borrowers in an active Chapter 7 or Chapter 13 bankruptcy case are eligible for HAMP consideration. In addition, if you are in a HAMP trial period plan and subsequently file bankruptcy, you may not be denied a HAMP modification due to the bankruptcy filing.
In 2009, the Southern District of New York adopted a Loss Mitigation Program, where the modification process is put on a timeline and “monitored” by the Bankruptcy Judge through intermittent status conferences. Debtors can choose to participate in this process, or pursue a modification on their own outside of bankruptcy.
If your mortgage modification agreement was entered into prior to your Chapter 7 bankruptcy filing:
If your modification agreement is entered into after your Chapter 7 Discharge:
If your mortgage modification is entered into while your bankruptcy case is pending:
A loan modification does not re-establish liability on a loan that is (or was) discharged in bankruptcy. The modification changes the terms of the loan, but a new loan is not being created, and the debtor is not agreeing to once again take on personal liability for the loan. The only instance where personal liability on a modified loan survives a bankruptcy is if it was reaffirmed during the bankruptcy. Contrast this with a post-bankruptcy mortgage refinance, where (1) an entirely new loan is being created (after bankruptcy), and (2) you would have personal liability on the payment obligation.
It appears that certain lenders are now claiming that they cannot agree to a mortgage modification because the homeowner did not reaffirm their loan in bankruptcy. As noted above there is no “rule” establishing this; in fact, quite the opposite is true. Such assertions are simply the internal company policy of the particular lender, but they are causing some people to wonder whether they should have reaffirmed their mortgage during their bankruptcy. These lenders are suggesting that “they would have been open to considering a modification, had only a reaffirmation agreement been signed.”
While this sounds somewhat disingenuous, given the fact that nothing bars them from entering into a HAMP modification, it sidesteps the real issue at hand, where the stakes are fairly high and two distinct factors must be considered. On the one hand, a reaffirmed mortgage creates the certainty that you will be saddled with future personal liability on the note (generally to the tune of several hundred thousand dollars). On the other hand, there is the possibility that the lender might offer a modification in the future.
The issue ultimately boils down to: Is maintaining a general hope for a possible future modification worth anchoring yourself to hundreds of thousands of dollars worth of non-dischargeable mortgage debt?
If you need help with a mortgage modification before or after filing for bankruptcy, contact our legal team at Hayward, Parker & O’Leary for dedicated assistance. We serve clients in Middletown, Newburgh, Poughkeepsie and beyond.