When you file for bankruptcy protection, you, as the Debtor, are required to list every debt you owe. That’s right, EVERY debt. Even if you want to keep paying the debt, the bankruptcy trustee, and the Bankruptcy Court, need to know which companies you owe. But, wait, you say, I don’t want to “include” my house, or my car. I want to keep them!! You may be able to keep your house and your car. But whether you keep either don’t in a Chapter 7 case depend on whether they are listed and “included” in a bankruptcy case.
Let’s break this down. A person who files a Chapter 7 Bankruptcy Petition is required to “disclose” , i.e. tell the court everything he or she owns (Assets) and every company that is owed (Debts). It’s like a balance sheet for people. So, when you file Bankruptcy Petition, everything is included. Most people think of including a debt in bankruptcy as saying which debt you’d want to eliminate. But, in reality, listing a debt does not automatically mean the debt is eliminated. It’s just part of the balance sheet that is the Bankruptcy Petition.
Going further, there are some debts that are linked to certain assets (“Secured Debts” in legal terminology). Two good examples of secured debts are Mortgages and Auto Loans. (What the debt is Secured by is called “Collateral”) In the case of the Mortgage, the loan is Secured by a house, and for an Auto Loan, the loan is Secured by a car. For these loans, certain legal requirements have to be met, such as recording the loan with a governmental agency in a certain way. (That’s called a “lien”) And, the bankruptcy does not affect the lien on the house or car. It only affects, or cancels out the filer’s personal liability for the debt itself. So, it is logical that if you want to keep your house or car, you’d have to keep paying for it, just as if you didn’t file for bankruptcy protection. Think of this, would it make sense to be able to keep your house without paying for it, even though you have a mortgage? Of course not!
These secured debts are included in a Bankruptcy Petition. But, the filer has a choice about what to do with the Collateral: to pay and keep, to reaffirm (sign an paper saying that you are legally responsible to pay the debt regardless of what happens to the Collateral) or to surrender (give back to the lender) the property. In the case of a house, in Illinois, most courts have allowed people to keep their property without signing the reaffirmation agreement. There are certain advantages to reaffirming a mortgage, such as being sure to get statements and having the loan payments reported to credit agencies. Disadvantages to reaffirming are mainly that if the filer falls behind in the payments and the lender forecloses, the filer can be held liable for the whole mortgage balance after the sale price is credited. With the large amount of money at stake, most bankruptcy attorneys, including myself, do not recommend that the Debtor sign a reaffirmation for a home mortgage.
Then, several months or years after clients file a Bankruptcy case, the client calls the lender to try to refinance their home loan. The lender tells the Debtor that they will not refinance the loan, and falsely, that they should have reaffirmed on their mortgage, that it is their lawyer’s fault. What is going on?! The lenders make up policies that don’t allow them to refinance their own loans if the loan wasn’t reaffirmed. Maybe they do this because they don’t like the fact that people keep their homes without being liable on the loans? They then ask the customer to have their attorney reopen their case to file a reaffirmation agreement. This cannot be done. This makes the clients upset with their attorneys for no reason!
What is the solution? A Debtor does NOT have to refinance their loans with the same lender. Go to an independent mortgage broker a few years after your Chapter 7 case is Discharged (completed) and shop for lenders who do. Make your mortgage payments ON TIME, EVERY MONTH, and get a copy of that history to show the new lender. That will go a long way to help you refinance.
I’ve been helping people get through bankruptcy and beyond, and this is just one of the many issues that comes up very often. If you have questions, be sure to call. We have free consultations, so that you can hear about any issues that may come up in your case.
Daniel J. Winter
Offices in Chicago, Gurnee, Oak Lawn, and Skokie, Illinois