You have worked hard, made a down payment, and for many years you have been paying on your home. However, due to certain events, you have racked up medical bills, credit card debt, or owe friends and family money. While you continue to make payments on your home, you fall behind in your other obligations. The debt begins to pile up and the interest rates make it impossible for a home owner, like yourself, to get out from the heaping amount of debt. You start to examine your options – refinancing your home or file for bankruptcy. You decide to refinance your home and hopefully obtain a lower interest rate, which in turn frees up money to pay the other unsecured debt. Even after obtaining refinancing, you are still unable to meet your obligation. Can you file for bankruptcy now and keep your home?
Many homeowners face this very issue and they turn to their bankruptcy attorney for assistance. The bankruptcy attorney is going to need some good information from the homeowner to determine whether he or she qualifies for bankruptcy relief, and whether he or she will be able to keep their home after bankruptcy.
There are two devices to essentially refinance a mortgage – mortgage modification and mortgage refinance. Mortgage modification is an agreement with a home owner’s current mortgage servicer to alter the existing terms of the home owner’s mortgage contract, which allows the homeowner to pay less every month or reduce his or her interest-rate in exchange for increasing the term of repayments. Notably, a modification is not a “new” loan, just an agreement to new terms on the old mortgage loan.
On the other hand, a mortgage refinancing is a brand new loan. When a home owner refinances a mortgage, the home owner is taking out a “new loan” at new terms and in most cases it is with an entirely different lender. From a mechanical perspective, the old mortgage is paid off by the refinance, and a new mortgage is held and recorded by the refinancing lender. A “satisfaction” of the old mortgage is also recorded. Attorneys should be aware when the new mortgage is recorded and the satisfaction is recorded. The timing of those events is critical when the home owner is filing for bankruptcy.
What happens if the homeowner files for Chapter 7 relief before the refinanced mortgage has been properly recorded?
- The automatic stay stops “perfection of liens” from happening. This means that the new mortgage may not be recorded with the county record by the refinance lender. See 11 U.S.C. 362.
- The value of assets in bankruptcy. This means that the home owner now has filed a Chapter 7 bankruptcy owning a home with full equity (as opposed to a home that may be worth less than the value of the mortgage lien against it, with no equity that needs to be exempted or protected to allow you to keep it) that may not be exemptible (protected) from liquidation in the Chapter 7, depending on the home’s fair-market value. In other words, the home owner could lose his or her house to the asset liquidation powers of the Chapter 7 Trustee assigned to her case.
What happens if the mortgage is recorded within the 90 day preference period?
A bankruptcy attorney is well-advised that any transfer in the 90 day period before filing for Chapter 7 bankruptcy, while the homeowner is legally insolvent, is presumed to be fraudulent under the Bankruptcy Code. The Trustee has the ability to seize and liquidate property currently in the home owner’s possession, and may also “avoid” (undo) the transfer that removed property from the possession within certain time-periods prior to the bankruptcy’s filing. The bottom line is even if you wait until after the new mortgage has been recorded, you are still in danger of a Trustee attempting to avoid the mortgage if you file your Chapter 7 within 90 days of its recording as the grant of a lien on property is a form of legal “transfer.”
Disclosing all information regarding assets, liabilities, income and expenses will allow your bankruptcy lawyer to give you the best advice possible.