My husband and I filed Chapter 7. Our primary residence was supposed to be excluded from the bankruptcy, but 2 years later we realized it had been included. How do I fix this and what issues would this cause should I decide to sell the property?

Can you exclude a mortgage from the bankruptcy?

In a word, no.  You can never exclude a mortgage or any other debt from the bankruptcy.  All debts must be listed and when you file bankruptcy you sign a document stating that you have, under penalties of perjury, listed all of your debts.

What people mean when they want to exclude a debt from bankruptcy is that they want to continue to pay the debt and keep in good standing with the creditor.  Typically, debtors wish to keep their mortgage and car loans out of the bankruptcy process.

Reaffirmation Agreements are legal agreements that are filed in Chapter 7 bankruptcy cases to essentially pull out a debt from the bankruptcy discharge.  The agreement is signed by the debtors, the creditor, the debtor’s attorney and is approved or disallowed by the bankruptcy judge.  Once approved by the bankruptcy court, a reaffirmation agreement removes the debt from the bankruptcy discharge.

If a Reaffirmation Agreement is not filed, is that fixable later?

The bad news is that this problem is not fixable.  Once a Chapter 7 case closes it is impossible to file a Reaffirmation Agreement, even if the case is reopened.  Although you may keep a home even if a reaffirmation agreement is not filed, the bank will no no longer report to the credit bureaus if the loan is paid on time.  That can cause dramatic problems when you attempt to refinance a mortgage loan when interest rates drop.  Debtors find it extremely difficult to refinance a mortgage loan that is not reaffirmed.

Is my bankruptcy lawyer at fault for not filing a reaffirmation agreement?

Although some lawyers may be at fault, the majority of the problem lies with the mortgage company.  Most banks simply do not offer reaffirmation agreements to their customers unless the customer demand the agreement.  We request that the bank send our clients a reaffirmation agreement in every single case we handle, but it seems like we receive agreements in less than 25% of the cases unless the client consistently calls the mortgage lender for the agreement. Reaffirmation agreements are voluntary.  Neither the bankruptcy lawyer nor the bankruptcy court can force the bank to offer an agreement.

Does this problem occur in Chapter 13?

This problem does not occur in chapter 13 since reaffirmation agreements are only used in chapter 7 cases. In a chapter 13 case the mortgage loan is reinstated at the end of the case so this problem never occurs when a debtor makes all required payments.

Can I sell my home if I do not reaffirm the mortgage?

Yes, you can sell the home even if the mortgage loan was not reaffirmed.  You may also keep the home and pay off the mortgage with the normal monthly payment even if the loan is not reaffirmed.  A reaffirmation agreement has only one benefit: continued credit reporting.  There really is no other benefit to reaffirming a mortgage loan.   However, that good credit reporting is darn important when refinancing the mortgage or when trying to buy a new home without the prior mortgage payments being reported.  Most clients prefer to reaffirm the mortgage.

For more information on this topic, contact our Omaha bankruptcy attorneys or Lincoln bankruptcy attorneys.

Image courtesy of Flickr and Wonderlane.

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