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  • Robert Weed

Does bankruptcy still protect me if I get a loan modification?

Here’s an email I got yesterday.

“Dear Mr. Weed,

“Just an update.  I did receive my clearance and thank you for your help.  I have a new question for you.  My mortgage on my house was included in my bankruptcy.  I have been paying it for the last year.  They recently changed my rate and raised my monthly payment by $1000 a month.  They offered me a refinance package that would only raise my payments by $400 a month.

“Here is my question.  If I accept the refinanced mortgage, am I still covered by the bankruptcy, or is this a brand new loan and would no longer be covered by my bankruptcy from 3 years ago. ”

The answer is good news.  The bankruptcy does still protect you.  As long as you do NOT sign a reaffirmation for the mortgage during your case (one lawyer says reaffirming a mortgage is “nuts”), then the law still protects you with that lender for as long as you own that house.

(It also protects you from any new company or debt collector who later takes over that loan.)

You can pay for three or four years; and then decide to move out and owe them nothing.  You can get a loan modification, pay for a while, and then change your mind and move out and still owe them nothing.

You can sign in blood that you promise to keep paying; and then change your mind and move out and you are still protected.

For how long? People ask me.  Until the house is paid for.  Once the house is paid for, you can’t give it back to the mortgage company. Why?  Once the house is paid for, there’s no mortgage company to give it back to.

(This is an improvement that came into the law in 1978.  Under the Bankruptcy Act of 1898, a new promise brought back the old debt.

(Now when you get back to good credit, if you refinance the loan with a new mortgage company–maybe to get a better interest rate–then you have a new loan.  And you are back on the hook.)

If you do change your mind and move out, make sure you keep paying the HOA.  After bankruptcy, you still owe the HOA for as long as you are the owner of the house.

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