Post-Bankruptcy Mortgage Modification

A client contacted me regarding a potential home mortgage loan modification. The client had filed a Chapter 7 bankruptcy two years ago and received a discharge of all of her debts, including the mortgage loan debt. She wanted to pursue a loan modification under the federal government Home Affordable Modification Program, the “HAMP” program. Her concern was that by agreeing to a modification of the mortgage loan now, she would become personally liable for the mortgage debt that had been discharged in her bankruptcy.

If you file a consumer bankruptcy, you have the option to reaffirm (reinstate) a debt that would otherwise be discharged in the bankruptcy. By reaffirming a debt in bankruptcy, you remain personally liable for the debt after the bankruptcy, which means that if you later default on the debt, the creditor can sue you and recover the money owed through garnishment or other action. In general, bankruptcy lawyers do not recommend clients reaffirm debts since the point of bankruptcy is to shed the personal liability for the debts.

But what if, like my client, you didn’t reaffirm a mortgage debt in bankruptcy and later want to modify the loan. Does the mortgage modification reinstate the personal liability for the mortgage loan debt?

Even if you did not reaffirm your mortgage in your bankruptcy, you can work with your lender on a HAMP mortgage modification post bankruptcy, and the modification does not revive the personal liability for the discharged debt. The current HAMP Handbook, version 4.5 states that “Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP.” In addition, the following language must be included in the mortgage modification agreement: “I was discharged in a Chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based on this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement.”  Furthermore, Section 524 of the U.S. bankruptcy code prevents a debtor and a creditor from entering into any reinstatement agreement after bankruptcy for a debt that was discharged in bankruptcy.

A HAMP mortgage modification does not create a new loan  It changes the terms of the mortgage loan, and you are not agreeing to again be personal liable for the debt. (The only instance where personal liability on a modified loan survives bankruptcy is if you reaffirmed it during the bankruptcy.)

Understand that a loan modification is entirely different from a post-bankruptcy mortgage refinance, where an entirely new loan is being created after the bankruptcy. In that situation, you would have personal liability on the loan because it is a new debt that arose after the bankruptcy.

The HAMP morgage modification program is scheduled to expire December 31, 2016.