A Mortgage Not Reaffirmed & Not On Your Credit Report
You may be reading this because your mortgage company has told you that they cannot (or will not) report your mortgage payment history on your credit report because you did not reaffirm your mortgage in your Chapter 7 case. This is a common issue. This is normally a concern when you have made all your payments and you want credit for the good payment history on your credit report.
Why Not Reaffirming a Mortgage Can Be An Issue
When you finance the purchase of a home, you normally sign a (1) Promissory Note that states how much your borrowed and the terms of repayment, and (2) Deed of Trust that indicates the creditor has a lien on the home and that they can foreclose (take the home) if you fall into default on payments (or lack of insurance, etc.).
When you receive a discharge in Chapter 7, you receive a discharge of the Promissory Note (debt) obligation. So, while the creditor can still foreclose by virtue of the Deed of Trust (lien) if you do not make payment on the Note, they cannot hold you personally responsible/liable for any unpaid part of the debt either before or after foreclosure.
How This Impacts Your Credit Report
Your credit report shows your payment history for debts you personally owe. As noted above, when you receive a discharge of the debt, you no longer personally owe the debt. As a result, your credit report will not show your payment history for payments made (or not made) after bankruptcy was filed. It is as simple as that. You no longer personally owe the debt; your credit report will no longer report activity on the debt you no longer owe. (It will not show payments made OR missed.)
This is not a decision made by the credit reporting agencies (CRA). Instead, your mortgage company simply quits reporting your post-bankruptcy payment history to them. The mortgage creditor quits reporting because courts have punished mortgage creditors for reporting payments missed after filing under the theory that doing so is a prohibited collection effort. The mortgage creditor’s last report to the CRA is likely that the balance due is “discharged in bankruptcy.”
A debtor in bankruptcy can “get around” this credit report issue by “reaffirming” the mortgage debt. A Reaffirmation Agreement is a document signed by the debtor and the mortgage creditor that agrees that the debt is not discharged in the bankruptcy. To be effective, Reaffirmation Agreements must be filed with the bankruptcy court before entry of the Discharge Order (which occurs 60 days after the initial 341 meeting).
In much of the country, a debtor is personally obligated on the balance due on a mortgage debt after foreclosure. In other words, if a mortgage creditor forecloses and sells a home for $150K and the debt was $250K, the former-homeowner still owes $100K on the debt! As a result, the Bankruptcy Code does not require a homeowner to reaffirm a mortgage debt to keep the home. All they have to do is keep making the mortgage payment. As a result, most debtors choose not to reaffirm a mortgage debt; instead, they just choose to keep making payments. As a further result, most mortgage companies do not even ask debtors if they want to reaffirm a mortgage debt. Some mortgage creditors have rejected a debtor’s request to reaffirm the debt. Because a debtor can keep a home by just making payments (called the “ride through” option), some Judges have even rejected reaffirmation agreements.
Does The Court Have to Approve Mortgage Reaffirmation?
The Bankruptcy Code provides the following:
“The bankruptcy court must approve your reaffirmation agreement as consistent with your best interests, except that no court approval is required if your reaffirmation agreement is for a consumer debt secured by a mortgage, deed of trust, security deed, or other lien on your real property, like your home.” See, 11 USC 524 (k)(3)(J) (emphasis added)
No, the court does not have to sign off on or approve of a Reaffirmation Agreement of a consumer home loan for it to be effective and enforceable.
We tell all of our clients with a mortgage about this issue. We give all such clients a document entitled: “Real Property – Bankruptcy Impact” and another entitled: “Reaffirmation Agreement Options – First Mortgage.” In both documents we tell our clients that if they do not reaffirm the mortgage that future payments will not be reported on their credit report. Most of our clients choose not to reaffirm their mortgage debt and, if they want to keep the home, to just keep making the mortgage payments.
What Can You Do If You Did Not Reaffirm Your Mortgage?
After bankruptcy, many clients later seek to incur debt such as a new home loan or, maybe, a refinance of the existing mortgage debt discharged in the Chapter 7. Most mortgage lenders obtain a mortgage payment history from a credit report. Obtaining a new loan can be a problem if your mortgage creditor is not reporting post-bankruptcy payment activity to the credit reporting agencies.
A debtor might try to resolve this by obtaining a payment history directly from their mortgage creditor and providing this history to the prospective lender. One client did this and the new lender did a “rapid rescore” taking into account this information. They obtained the new loan. I am not sure how common this is, but it did work. Beyond that, if a lender wants to lend you money, it seems to me that they should accept proof of payment outside of a credit report. If your prospective lender won’t work with you even though you can prove you have made all post-bankruptcy payments on time, maybe it is time to find a new lender.
A debtor might also send their mortgage creditor a letter stating that (1) they want the mortgage creditor to report the good and bad payment history and (2) the debtor does not consider the mere act of reporting the payment history to be a prohibited act to collect the debt. There are many cases that support this position. The debtor might even assert that failing to report the payment history constitutes harassment. If you are going to do this, you should do it right after your case is complete.
A debtor might also “dispute” the information in the credit report if it does not show the payment history. In this scenario, a debtor would send a brief statement to the credit reporting agency disputing the accuracy of the reported payment history, indicate they are current on payments, and assert that the only reason the “on time” payment history is not shown is because the mortgage was not reaffirmed in the Chapter 7. See, 15 USC § 1681i of the Fair Credit Reporting Act (procedure in case of disputed accuracy). Thereafter, every time a credit report is issued, your dispute is sent with the credit report. If nothing else, your dispute is conveyed to the party receiving the credit report.
Finally, another potential solution to this problem may be for a debtor to use a credit report service like PRBC (Payment Reporting Builds Credit). With organizations like PRBC, consumers create an account to track their history of payments to creditors, including unreaffirmed mortgages. Further, the National Credit Reporting Association (NCRA), the National Association of Mortgage Brokers (NAMB), the Mortgage Guaranty Insurance Corporation (MGIC) and Fair Issac (FICO) have agreements with PRBC to assist homeowners to report their mortgage payments. As a result, such a service may help a debtor provide the necessary mortgage payment history when applying for a future loan.
Can You Just Reopen Your Bankruptcy And Reaffirm The Mortgage?
Some clients ask if they can reopen their closed bankruptcy case and reaffirm the debt. In short, this is not possible. To do so, a debtor’s Discharge Order would have to be “vacated” (undone) because, you will recall, a Reaffirmation Agreement must be filed before entry of the discharge. The Bankruptcy Code simply does not allow a debtor to vacate a Discharge Order to reaffirm a debt. (However, it is possible that jurisdiction outside of Washington/Oregon may have a different option.)
There is no law that says you cannot refinance or modify a mortgage that is not reaffirmed in bankruptcy. Some lenders want to see the payment history on your credit report because that is how choose to calculate whether you qualify. That is their prerogative. However, not all lenders are this rigid. Sometimes you just have to be persistent and check with multiple lenders including local credit unions. Also, when pushed, some lenders will get approval to use a payment history direct from the mortgage creditor. Frankly, if you qualify for a home loan, I expect there to be more and more lending options arriving to help make this a non-issue for most qualified borrowers.
I would love to hear about your experience in these matters, especially if you found a lender that is less concerned about having your payment history on your credit report. I will work to collect and post here prospective lenders that are flexible when it comes to payments histories absent from credit reports.
I hope you have found this helpful in dealing with this stressful subject. Otherwise, if you have any questions or comments on this subject, please let me know. I would be happy to help.