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Refinance or Loan Modification After Bankruptcy

I’m Eric Lanigan with Lanigan and Lanigan attorneys in Winter Park. Want to talk for a minute about a question that comes up a great deal these days and that is if a person has finished a bankruptcy a Chapter 7 bankruptcy and now they want to seek a modification of their home mortgage and lets say that this is a home mortgage that they did not reaffirm the debt in their bankruptcy. So technically they have been discharged from the debt obligation but of course the bank still holds a mortgage lien on the property.

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They’re continuing to make payments so they’re not going into foreclosure but they want to see about modifying the loan maybe getting a lower payment even though they’re voluntarily making it and the question I’m constantly asked is, “if I enter into a modification agreement am I creating a legal obligation to pay the bank back. In other words am I reinstituting a legal obligation.”

Do NOT Reaffirm the Debt

And the answer is simply no. For instance, in a manual that deals with the Home Affordable Mortgage Plan, one of the government plans, the government specifically says that you are not reaffirming the debt or reinstituting the liability. One thing we recommend in any type of HAMP modification that we include this specific sentence and I’m going to quote it, “I was discharged in a Chapter 7 bankruptcy proceeding subsequent to the execution to the loan documents. Based upon this representation the lender agrees that I will not have personal liability on the debt pursuant to this agreement.”

So that’s being very explicit that there is not personal liability in fact language similar to that probably ought to be added to any loan modification agreement and if the lender acknowledges or agrees that the loan modification agreement is not recreating the debt liability there shouldn’t be any objection to that sentence being in there. And if they do object to it, they’re giving you a pretty good clue of what they think the legal ramifications of this whole thing is going to be.

Bankruptcy Law: Reaffirmation Agreement

The reason that the modification agreement does not reaffirm the debt or recreate the debt, because under bankruptcy law there is only one way to reaffirm a secured debt and that is to enter into a reaffirmation agreement. Have it filed with and approved by the court during the course of your bankruptcy proceeding. Most bankruptcy lawyers are of the position that if you didn’t do that then it really doesn’t matter what you sign after the bankruptcy is closed.

I would be more cautious than that because what I found many times is that you may be technically right, but four or five years down the road, you may spend five or ten thousand dollars proving that you’re technically right. Whereas if you put that type of language in there that I referred to a moment ago the matter is resolved now, and it’s not a matter of well I’ll prove it if I have to because proving anything in court is always an expensive proposition.

Is It a Modification or Reinancing? Be Clear

One of the other things you need to take into consideration is is it a loan modification or is it a refinancing. Because Regardless of what the title to the document says, if in all those pages of the print that you need a magnifying glass to read the agreement is in substance a refinancing of the property and not a modification of the original loan, then you are creating a new legal obligation when you sign that document. So don’t rely on the title the law will always apply substance over form. Titles don’t necessarily dictate what something is as a matter of substance.

Now one of the other questions that comes up is, well does the bank have to engage in a modification conversation with me and to they have to offer me the same type of modification that they would offer to someone who hasn’t gone through bankruptcy, well the answer to that is that there is no law on that point. Other than what I mentioned about the HAMP program a minute ago. On an individual loan, it can be up to the individual lenders to decide at what point and time they want to consider a modification.

Easier to Modify Loans

From our own experience here we’re constantly involved in modifying loans that have been discharged in bankruptcy in fact we often find it much easier to modify those loans because the bank is over the idea that they have this big legal obligation hanging over their head they recognize the fact that if it’s been discharged in bankruptcy they don’t have that so the conversation really now is about what the property is worth, not what you owe because you don’t owe anything. So there is no law on that point.

Keep in mind, you can get a modification where people are getting them all the time it does not in and of itself create a new legal obligation or reinstitution of the obligation that was discharged, but make sure you’re actually doing a loan modification and not a refinancing and the best way to do that is have a lawyer knowledgeable in the subject review the agreement before you sign it.

Again I’m Eric Lanigan, of Lanigan and Lanigan in Winter Park, Florida.

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