If I Don’t Reaffirm My Mortgage Note, Is My House at Risk?

This past February, my colleague and fellow Bankruptcy Law Network blogger Brian Methner wrote a helpful summary about reaffirming a debt in Chapter 7. What happens, however, if a debt is not reaffirmed?

I recently received an email from a lady named Lisa who lives in Titusville, Florida who reports that she filed a Chapter 7 back in August, 2005. She entered into a reaffirmation agreement with her car lender, but no reaffirmation was ever entered into with her mortgage lender. Now, she says

My mortgage company continues to bill me, but with the bankruptcy disclaimer, saying it’s not an attempt to collect a debt. I’m never late on my payment, but this has me worried. Is there anything the mortgage company can do to me?

As a practical matter, I do not believe that Lisa or her home is at risk - as long as she continues to send in her regular mortgage payment. Although Lisa’s personal liability to pay the mortgage obligation is gone, her property is still subject to a lien in favor of the mortgage lender.

Most mortgage obligations are comprised of two parts. As a borrower, you sign a promissory note whereby you agree to be personally responsible for the monthly installment payment. You also execute a deed to secure debt meaning that as title owner of your house you are pledging the real estate as collateral for the loan.

Subject to any objections, your Chapter 7 discharge serves to eliminate your personal obligation under the promissory note. However, your Chapter 7 discharge does not eliminate the bank’s security interest (or lien) against the real estate.

In Lisa’s case, she did not reaffirm her personal obligation, so her personal liability to pay under the promissory note has been eliminated, or discharged. That is why the mortgage lender bills her with a bankruptcy disclaimer saying that the bill is not an attempt to collect a (discharged) debt.

If Lisa should stop paying the note, the mortgage company could foreclose on the property but Lisa’s personal credit would not be affected. On the other hand, because Lisa has no personal obligation to pay the mortgage note, her payments do not serve to restore her credit.

Does Lisa have any risk? Arguably, when Lisa filed bankruptcy, she triggered a default clause in both the promissory note and the security agreement. In theory, the mortgage lender could declare the note in default and proceed with foreclosure.

In reality, most mortgage lenders would much rather have regular payments than another foreclosed property in their inventory. Further, there is a doctrine in law called “laches” which means that if a party sits on its rights for too long, it may be estopped from enforcing those rights.

As a practical matter, therefore, Lisa’s house is most likely not at risk as long as she makes the payments. At some point in the future, I would advise Lisa to consider refinancing her mortgage so she can gain the significant benefit to rebuilding her credit that would arise from making regular mortgage payments. Refinancing would also eliminate whatever risk does exist that the mortgage company would try to start foreclosure based on the default triggered by the bankruptcy filing.

Finally, I would also note that not every mortgage company will agree to a reaffirmation - some mortgage lenders will not enter into reaffirmation agreements despite a Chapter 7 lawyer’s best efforts to put one in place.