A mortgage can provide a strong, positive reference on credit reports and boost your credit scores. But sometimes lenders refuse to report those payments. What do consumers do then? Our reader Omar wrote:
“When my wife and I went bankrupt two years ago our attorney failed to recommit to our mortgage lender. Our problem is that our lender will not report our current payments to the credit bureau. I do not want or cannot afford any new credit, I would like for our lender to report our current payments to them to the credit bureaus.”
Apparently, Omar did not “reaffirm” his mortgage after his bankruptcy and, as a result, the lender is not reporting any payment history after he filed. But this problem is probably not due to a failure on the part of his bankruptcy attorney; in fact, his attorney may be acting in his best interest. Instead, the lender may be using the credit reporting issue as leverage to get the borrower to give up valuable protection he gained by filing.
That’s because when consumers file Chapter 7 bankruptcy and wipe out most or all of their debts, their personal liability for the remaining debt on the home loan is discharged as well, unless they “reaffirm” the debt.
Bankrupt debtors who don’t reaffirm don’t automatically lose their home. They can continue to make their payments on their loans and stay in their homes as long as they remain current. When they pay off their loans, the lender’s lien against the property will be satisfied and they will own their homes free and clear.
The advantage of not reaffirming mortgages is that homeowners who can’t keep up with the payments in the future won’t be personally responsible for the remaining debt. In other words, they can walk away, if necessary. This is an important protection for the many homeowners who, when they file, have very little equity in their homes or remain underwater.
What does this have to do with whether the loan is reported after bankruptcy? While lenders claim that reporting payments to the credit reporting agencies may cause them to run afoul of bankruptcy laws, California bankruptcy attorney Cathy Moran believes that’s a smokescreen, and that lenders are just trying to get debtors to agree to liability for the debt: “There are two clubs they hold over debtors’ heads to get them to reaffirm: 1. We won’t report post bankruptcy payments if you don’t reaffirm, and 2. We won’t refinance your loan because you didn’t reaffirm it. I can’t find any logic or law that supports those (positions).”
Mortgage reaffirmations are not an issue in Chapter 13 cases, says Moran, because long-term obligations are not discharged.
Another problem facing consumers who file Chapter 7 bankruptcy and fail to reaffirm is the fact that some lenders will no longer send statements to those borrowers, and/or will suspend their access to online account management tools. Our reader Mary shared her experience:
“We filed bankruptcy and was discharged 4 years ago. I got to keep the house and my car. I signed a reaffirmation agreement for the car but never received one for the mortgage. My mortgage was sold shortly after and now the new company will not give me access to their website to make payments or even see anything having to do with my mortgage. I have asked for statements to be sent and they are not doing that along with not reporting any of my payments for 4 years … What can I do?”
This is not an isolated problem, according to Moran. Again, lenders generally say they are unable to report the debt without violating the discharge injunction, the provision in bankruptcy that prevents creditors from trying to collect a debt that has been discharged.
To get around this problem, Moran says that sometimes the borrower will “enter into a stipulation with the creditor agreeing that (sending statements) does not violate the automatic stay. Sometimes we send them a letter saying they want to receive statements. Absent that, the borrower may just have to write down the payment information and take responsibility for making the payment.” The latter approach can be especially problematic in situations where a borrower has an adjustable-rate mortgage and the terms change.
Going back to Omar’s original concern that he wants his mortgage to be reported, he may be better off forfeiting that credit reference in exchange for shielding him from the potential liability that reaffirming the debt would expose. While he doesn’t want to take on additional credit, it would be smart for him to get a secured credit card to help rebuild his credit instead.
Debtors experiencing this problem may also want to complain to the Consumer Financial Protection Bureau, which Moran says may address this issue in the future by issuing guidance to lenders.
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