During the bankruptcy process, most or all of your debt can be discharged, including your home loan. Once a home loan has been discharged, there is no legal obligation to continue making payments on it. However, continuing to make payments on it any how will allow you to keep the home, rather than having the lender foreclose on it, forcing you to move.
If you should reaffirm the loan or not is an entirely different question which we would need to go over with you in person.
An option that is available to people who have filed for bankruptcy is to have certain debts reaffirmed, meaning that they are now legally enforceable debts.
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Why would someone choose to reaffirm a home loan? Even in payments towards the loan are made on time every month, a loan that has not been reaffirmed does not get reported to the credit agencies, and the payments do nothing to improve the borrowers credit. On the other hand, it is a big risk in the event that the borrow falls behind on payments again, and loses the house through foreclosure.
In regards to refinancing, which can get you a better interest rate, and lower monthly payments, very few banks will be willing to refinance a home loan that has not been reaffirmed after a bankruptcy. At this point there are several possible options.
First, even though the bankruptcy case is closed and the time period to file the reaffirmation agreement has passed, you may still be able to file a motion with the court to reopen your bankruptcy case and file the reaffirmation agreement. This is currently a very common process, and while it’s not strictly by the books, the California courts seem to be very lenient in that regard.
It’s important to understand that reopening the case and reaffirming the loan will re-establish a personal liability on that mortgage loan, and because a reaffirmation agreement is a legally enforceable contract, the borrower is then responsible for repaying all or part of a debt that otherwise had been discharged by bankruptcy. In other words, the bankruptcy removes your liability, and a reaffirmation re-establishes it.
There’s a rather contradiction to this entire process, for those that are looking closely. Assuming that the homeowner is not able to convince the lender to refinance, but is able to find a different bank that is willing to refinance a loan, even though it has not been reaffirmed after bankruptcy, the borrower is now liable on the new loan. Which means that if the original lender, who was not willing to refinance without the borrower having liability on the loan, were to approve the refinancing of the loan, the borrower would then be liable anyhow.
At this point, once the loan has been reaffirmed, a potential risk presents itself. Once the lender approves the reaffirmation agreement, which re-establishes the borrower’s liability on a previously discharged debt, the lender can then decide the borrowed does not qualify for a refinance. Which then leaves the borrower in a position where he or she may not be able to afford the monthly payments on the house. The lender can then sue for a deficiency balance, and possibly even foreclose. The borrower can fight back by filing a bad-faith defense against the lender, but that will be a time consuming and expensive legal battle.
California Bankruptcy Attorney
If you would like more information regarding bankruptcy in California, please visit our California Bankruptcy Page or contact us today. No two bankruptcies are the same, and the details of your case matter. Together we can help you protect your assets and navigate the complicated California bankruptcy process.
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We help bankruptcy clients in the following counties:
- Los Angeles County
- San Fernando Valley
- Orange County
- San Bernardino County
- Riverside County
- Ventura County
- Santa Barbara County
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.