Law Office of Timothy E. Wilfong, LLC

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Law Office of Timothy E. Wilfong, LLC

20 S. Main Street, Phoenixville, PA 19460

Bankruptcy and Mortgages on Personal Residences
How does filing Chapter 7 Bankruptcy affect a mortgage on a personal residence?

Protect your Credit Score

Law Office of Timothy Wilfong

21 South Main Street

Phoenixville, PA 19460


How does filing Chapter 7 Bankruptcy affect a mortgage on a personal residence?

Bankruptcy Affect on Mortgage & Note for Homeowners:  For homeowners with a mortgage, the agreement with your bank lender consists of two separate legal contracts.  The first contract is called a “Home Mortgage Lien” which acts as a secured lien against your real estate. This means if you default on your agreement then the bank can sell your real estate in a sheriff's sale.  The second contract in your agreement with the bank is the “Mortgage Note,” which is essentially an agreement that you will personally guarantee the loan (i.e. unsecured personal liability similar to a credit card).  As a result, if your home is foreclosed or sold short and the proceeds from the sheriff’s sale do not cover the loan amount, then the bank can sue you personally for the difference or issue you a 1099-C (for forgiveness of debt) that you may need to include as income on your tax return.


When you receive a discharge in Chapter 7 bankruptcy your liability from “Mortgage Note” is discharged.  Hence, the bank cannot sue you personally for defaulting on the agreement because the note is considered unsecured debt (normally most unsecured debt is discharged in bankruptcy).  However, the secured lien from “Home Mortgage Agreement” still survives the bankruptcy. Obviously, you must continue to make your monthly mortgage payments in order to keep your house after you have filed bankruptcy.  If you are not able to make your mortgage payment after your bankruptcy is closed then the bank still has the right to foreclose on the property.


Sometimes your mortgage company will request, or you may choose, to enter into a “Reaffirmation Agreement” to reinstate personal liability (Mortgage Note). In fact, this is a choice on the Statement of Intention which is filed with the court.  Entering into a “Reaffirmation Agreement” reinstates your personal liability for the “Mortgage Note.”  Some mortgage lenders will refuse to report your timely monthly payments on your credit report after the bankruptcy is closed, or refuse enter into a loan refinance agreement with in the future you unless you had entered into a “Reaffirmation Agreement.” 


In addition, some lenders will refuse to accept payments through automatic bank withdrawals (“ACH”) or online payments and you will either have to pay the mortgage payment over the phone or by check.  On the other hand, some lenders will allow you to make ACH or online payments after you sign an authorization.  Next, most lenders after the bankruptcy is closed will not refinance the mortgage, unless you had entered into a reaffirmation agreement.  As result, you must refinance the mortgage with another bank and request the current bank to send you a payment summary to show that your mortgage payment is current.  You may have to submit the payment summary to the credit bureaus so they can reflect that the mortgage is current when refinancing with the second bank.  However, the only clear benefit to entering into a reaffirmation agreement for your home loan is that the bank should continue to report on-time payments to the credit bureaus, which will improve your credit score.


If you are interested in entering into a “Reaffirmation Agreement” please let me know.  You are not required to enter into a reaffirmation agreement.  The court must approve the “Reaffirmation agreement” and you must attend the hearing.  I charge an additional $350.00 for a reaffirmation agreement.  Unless you request otherwise, we will notify the court in the Statement of Intention that you plan to “pay and retain the collateral” for your home residence and not reaffirm the mortgage note.  In other words, we will not automatically seek to enter into a reaffirmation agreement on your behalf and you must proactively request that we take action in order to enter into a reaffirmation agreement. 


Please call for a free, no obligation, initial consultation with a bankruptcy lawyer to evaluate your specific financial circumstances to see if it makes sense for you to file for Bankruptcy at (610) 935-5555.  To ask a question or schedule an appointment please click here.

Law Office of

Timothy E. Wilfong, LLC

20 S. Main Street

Phoenixville, PA 19460

Phone-(610) 935-5555

Fax-(610) 680-3910