From time to time, I come across situations with clients who have filed a Chapter 7 case, have little or no equity in their home, and are stuck under a crushing Second mortgage loan. In just about every case, I advise the client to bypass a reaffirmation agreement on a Second mortgage. The client has to option to continue to pay the 2nd mortgage post-bankruptcy even if no reaffirmation agreement is signed. The only “negative” consequence in that scenario is that the 2nd mortgage will no longer be reported as “active” after the bankruptcy discharge order is issued.
Keep in mind that a Lien on collateral, without any further action filed in the bankruptcy court, ALWAYS survives the bankruptcy discharge. So legally, the Debtor in the above-instance is discharged from any personal liability, while at the same time the lien on the property remains. If the debtor wants to keep paying the 2nd mortgage down, it will be released once it is paid off under the terms of the Security Agreement ( the 2nd part of the transactional loan documents which consist of the Promissory Note and Security Agreement).
There is often confusion with what is happening with respect to 2nd mortgages in bankruptcy cases. The following is a post at the legal website http://www.avvo.com, and my response to the gentleman's post. Although the intent of the response was humor, I was trying to be direct with the gentleman so he would see that the declining of a reaffirmation agreement in his Ch 7 case actually saved his butt in his present circumstances. It appears that the only attorney giving him bad advice is the lawyer at the title company whom I would bet $100.00 has never handled a bankruptcy case. Here is the exchange from http://www.avvo.com:
Quoted Text: ” I Filed for bankruptcy back in 2009. This included medical bills, credit cards and a 2nd home mortgage. When we spoke to our attorney, he said “stop paying all bills expect your primary mortgage” which we did not include in the bankruptcy. That being said, we discontinued paying the 2nd mortgage and we stopped receiving bills/statements from them. Now, fast forward 7 years and we are selling our home. The bank and our attorney state that the 2nd mortgage was not included in the bankruptcy and now there is a lien on my house. So, I can't sell my house until I paid off a loan from 7 years ago that has now gained interest!!! Spoke to the lawyer and of course he says he never told us that. What recourse do I have? It's my word against his? Any help or direction would be greatly appreciated.”
Response by Attorney Kevin Ryan: Here's the most honest statement you will read today: you have no case. It would have been worse if the lawyer advised you to reaffirm the second mortgage, because you would still be personally liable on the Promissory Note. You are actually in a position to do a short sale, with no exposure to being personally liable for anything post-sale on the 2nd mortgage. Also, the Second mortgage lender's losses on a short sale are not taxable to you ( again, assuming you did not reaffirm the loan). The only action you should take if you are a reasonable person is to send the lawyer who handled your case a Thank You card. ( let me know if you did that so I know Hell just froze over! )
In all candor, it does not appear from your post that the lawyer gave you faulty advice.” end quoted text.
In all cases, you should ask your bankruptcy attorney to explain the pros and cons of reaffirming any debt. This is particularly important in the case of a 2nd mortgage or home equity line of credit. In most cases, it works out better for the Debtor to bypass reaffirmation of the debt, which leaves the Debtor the option to choose to continue to make the payments on the 2nd mortgage while being protected from a future default due to any number of unforeseen circumstances.
If you have questions about reaffirming a debt and do not have a current attorney… Call me. I'll BE there for you. Bankruptcy Helpline: 251-431-6012