Your Money: Messing with a home loan during bankruptcy is a perilous game (2024)

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If you don't pay what you've promised, your finances could be in a world of hurt.

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Q. I filed personal bankruptcy for the second time, and the last time was to avoid lawsuits. My mortgage and home equity line of credit were never reaffirmed by my lawyer, but I have not missed any payments. I was discharged on Feb. 25, 2013. My questions are: 1) Can I reaffirm without a lawyer and how would I do this? I was told by the bank that the case needs to be re-opened first. 2) Can I just pay the mortgage and not the HELOC and how would this affect ownership once the mortgage is paid off? Both debts are with Citibank.
— Hoping for the best

A. For the uninitiated, a reaffirmation in a bankruptcy means the creditor and the debtor have agreed that a debt will be paid, even if the debt could have been discharged as part of the bankruptcy.

It’s commonly used when a debtor wants to hold onto an asset, like a house or a car.

Before you make any moves, you should decide if it’s your best interests to reaffirm your mortgage and HELOC, said Ilissa Churgin Hook, an attorney with Hook and Fatovich in Wayne.

She said it sounds like you filed a Chapter 7 the first time.

"If so, your prior discharge — in your first bankruptcy case — extinguished your personal liability on the note(s) which you signed in connection with the mortgage and HELOC," Hook said. "This means that if you default on these loans in the future, Citibank cannot sue you personally."

However, she said, a mortgage lien against real property survives a Chapter 7 discharge. Therefore, even though Citibank cannot sue you personally, it can foreclose on the property and take back its collateral — your home — if you default on the mortgages.

Hook said assuming that you can reaffirm the mortgage and HELOC, the reaffirmation would reinstate your personal liability on the note(s).

"There is a school of thought that says a consumer debtor should not reaffirm mortgages," she said. "As long as you remain current with your payments, the mortgage company has no right to foreclose on your home, so why put yourself personally back on the hook?"

Hook said if you just pay the mortgage and not the HELOC, Citi can still start a foreclosure on your home based on your default on the HELOC, assuming that it properly perfected its lien in connection with the HELOC.

She said as a junior lien holder, even a judgment creditor can commence a foreclosure proceeding. But it must pay all superior lien holders in full before it can realize any proceeds of the foreclosure sale.

"In your case, Citibank holds both mortgages on your property, so it would be paying itself, and may have more incentive to foreclose a junior lien," Hook said.

Assuming you decide you still want to reaffirm, she said you’d need to file a motion seeking an "Order of the Bankruptcy Court" to reopen your prior case, and the decision to reopen is discretionary with the court. If the court says yes, you would then need to enter into a reaffirmation agreement with Citibank.

"Normally, a reaffirmation agreement must be approved by the court prior to the entry of a discharge," Hook said. "However, some Judges will allow a consent order to be entered between the parties to allow a post-discharge reaffirmation agreement.:

She said you can move to reopen your case and seek to reaffirm without an attorney, but most judges will hold a hearing to make sure that a debtor fully understands the proposed agreement. She said most judges will waive the requirement of a court hearing when the debtor is represented by counsel.

If money is an issue, take note that it will cost you $260 to file a motion to reopen a Chapter 7.

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