Many people who own homes in California can file Chapter 7 Bankruptcy without losing their home. This is mainly due to the generous exemption laws that allow homeowners the ability to protect $300k to $600k of equity in their homes from liquidation.
Most homeowners who file bankruptcy have a mortgage balance attached to their home. If the homeowner can stay current with their mortgage payments, and can exempt their home from liquidation, then they should have no problem keeping their home.
However, there are some issues that happen after the bankruptcy is filed. The two most common are
- homeowners who have trouble refinancing the mortgage with their lender after receiving a Chapter 7 Discharge; and
- lenders who won’t report timely mortgage payments after the discharge.
Refining Your Mortgage After receiving a Chapter 7 Discharge
After filing bankruptcy, many homeowners down the road will attempt to refinance their mortgages. However, almost always, when they ask their current mortgage lender for a refinance, their lender will tell them that they cannot refinance because they did not reaffirm their debt when they filed bankruptcy. Due to this, homeowners will contact their attorney three years later demanding the attorney to refinance the mortgage.
First, it is rare for a mortgage to be reaffirmed in California. Without going to deep into the agreements, they basically make a homeowner legally liable for the mortgage as if a bankruptcy was never filed. However, attorneys do not advise homeowners to enter into a reaffirmation agreement, and Judge’s normally don’t grant them because homeowners can continue making the payments after filing Chapter 7 to keep the home without entering into the agreement. Therefore, there is really no reason to make homeowners legally liable for a large mortgage loan.
But My Lender Won’t Refinance My Mortgage Without a Reaffirmation
For whatever reason, the current mortgage lender will almost always tell homeowners that they cannot refinance their home without the reaffirmation agreement. The reason is that they probably do not want to violate the bankruptcy discharge. However, this does not stop a homeowner from refinancing. The good news is that there is no requirement to refinance using the same lender. There are thousands of lenders that a homeowner can choose from. More importantly, not all lenders provide the same rates. Therefore, homeowners should be researching between these different lenders to find the best rate. It is unlikely that no other lenders can provide the same rate as the current lender.
The Lender Won’t Report My Payments to the Credit Agencies Without the Reaffirmation Agreement
It is not always helpful to your credit to have the lender report your payments to the credit agencies. Keep in mind that they would also report the large mortgage balance, missed payments, and any other negative items that might bring your score down. When you apply for credit, will the bank prefer to lend to someone with a large mortgage balance, or someone that does not have a mortgage at all on their credit report.
In any case, if a homeowner must have their payments reported, then they can file disputes with the reporting agencies, and provide documentation of their timely payments. This will be on kept file with the reporting agencies.