Say that you have a fixed rate second mortgage. The borrower filed Chapter 7 bankruptcy on 7/31/13 and has not yet reaffirmed her bankruptcy status on the house. (Apparently it’s not uncommon for legal counsel to recommend not reaffirming.) The loan matured on 9/30/13 and the bankruptcy has since been discharged. Therefore we are unable to renew or collect on the loan.

To complicate the matter further:

- The customer wishes to remain in the home.
- She continues to pay her regular (fixed) payment amount as agreed before and after her bankruptcy.
- She is unable to obtain a loan anywhere else

One option is to foreclose on the property and evict the customer. (Which we’d rather not do.)

Another option: Charge the loan off and continue to accept the payments. (Although we’d rather not charge it off.)

Third option: ?????

Anybody care to offer any advice?

Thanks.

You really need to consulting with your legal counsel as this is not a compliance or regulatory issue. However, if the Chapter 7 was discharged and the borrower did not reaffirm the second lien, then I believe you have lost any ability to sue the borrower for payment (foreclosure).

Thanks for the response. I realized that it's not really a compliance issue, but was hoping that someone might put a different light on the dilemma.

I'll let the lenders and lawyers decide what to do.

I think in that case (Ch 7, doesn't re-affirm) you lose the right to go after the homeowner individually, but you can still force the foreclosure. We had a somewhat similar situation and were able to do this.
There may have been other particulars that made the situation different though.

Oh, that could be. I'm not an attorney and did not sleep at a Holiday Inn Express last night. I was just going from vague recollections. My rule of thumb remains, for any actions taken involving a consumer that has or is going through a bankruptcy, the only place for advice is from your own legal counsel.

I agree with Randy. You need to talk to your attorney now.

Since the debt was officially discharged under the bankruptcy you have been accepting payments on a loan you technically have no legal authority to be collecting since the borrower did not reaffirm. It is very possible under any legal action you could be required to refund all payments collected after the debt was discharged absent a reaffirmation agreement.

What you are dealing with is what is referred to as the "ride through" whereby the consumer indicates intent to reaffirm but the court does not approve the reaffirmation. The debtor is no longer personally liable for the debt and, as long as the debtor makes the payments, pays taxes and insurance, etc., the bank can't foreclose. You do need to talk with local counsel to see if the ride through is followed in your BK district.

Did she reaffirm first mortgage? Were both mortgages even listed in the BK schedule of debts? Dan is right, you might have to refund any payments you accepted after the filing and before the discharge. Those are payments that belong to all the creditors and you received a preference. Not sure they could make you give back post-discharge payments. Agree that if your debt was discharged in the BK, you cannot foreclose as your debt was extinguished. As it is then technically an uncollectible debt, I would charge off and any payments treated as recoveries.