Bankruptcy discharge of mortgage debt does not release lien on property and payments on mortgage loan may not benefit credit history.
Q: We successfully signed a loan modification with our lender two years ago. It took forever to get the loan modification.
The problem is that our lender (one of the so-called “big box” lenders) continues to misreport my mortgage as ‘Included in Bankruptcy’ showing a zero balance, no mortgage history and therefore giving us no credit for the payments we have made on time on the loan modification.
Our Chapter 7 bankruptcy discharge date was October 2009. My credit score with Equifax is 580 and O was recently turned down for a car loan. I’ve complained to my lender, filed a dispute with the credit reporting bureaus and filed a complaint with the FTC and with the Office of the Comptroller of the Currency.
I am so angry that I’m just about ready to walk away from this house. It seems like we’ve done everything we have had to do since our bankruptcy but now two years later, my credit score is still ruined!
I’d like to refinance to get away from this lender, but my mortgage balance is about $372,000 and the house is worth around $230,000. I’m way underwater with my mortgage, which means my refinancing options are extremely limited.
I keep being told by other financial advisors that I should hand back the keys with a deed in lieu of and start really with a clean slate. The problem is that I work at a bank in the mortgage division and feel like it would seriously jeopardize my job and my future licensing. I know how good credit is needed for me to even continue my employment or get another job in the banking industry, so getting this fixed is very important to my future.
I filed for bankruptcy in 2009 when my son was killed in a car accident while serving in the US Air Force and had to go on bereavement leave and had no income. Four months after my son’s death, my husband suffered an injury when he fell of a roof and was almost killed. It took him more than sixteen months of rehabilitation to get back to work. If these incidents hadn’t happened, I would not be in the position I’m in now.
What should I do?
A: You certainly have many extenuating circumstances and we’re sorry for the loss of your son and the injury your husband suffered.
Since you are in the mortgage industry, you should know that your bankruptcy discharged the debt you personally owed to the bank. Having discharged that debt obligation with you didn’t get rid of the lien on the home. The bank continues to have the ability to foreclose on the home should the bank not get any mortgage payments on the home.
While you may not be personally obligated on the loan that was discharged, that might have changed with your loan modification. It would be interesting to know if your loan modification documents now make you personally liable for the loan. If they did revive you’re the debt that was owed, the bank might get into trouble for that.
It may be that your loan modification created new loan terms but that those loan terms are not personal obligations to you. If that’s the case, the bank has noted on your credit file that the loan was written off in their books when it came to you and that you didn’t have and no longer have a personal obligation to repay the debt.
The payments you are making to the lender allow you to continue to live in the home. If you had equity in the home, when you sold or refinanced the home, the bank would be repaid. Now, however, you have no equity in the home and your options would be to sell the home in a short sale or a deed-in-lieu of foreclosure.
Given what you mentioned in the letter, a short sale or deed-in-lieu shouldn’t do anything to your credit if it is true that the bank has written off the loan. If the loan is not truly “yours,” the bank can’t really do anything further to your credit history or credit score. The bankruptcy has done that already.
If we then focus on your bankruptcy, that event caused the greatest shock to your credit history and credit score. Bankruptcy will generally hurt your credit score by several hundred points. It will take you a couple of years of a good payment history to start to recover from the bankruptcy shock to your credit score. And, yes, if you are paying on a debt that you no longer are required to repay, you probably won’t get credit for those payments. The same is true if a friend or relative paid your monthly mortgage payment. That relative wouldn’t see any impact on his or her credit score for the payments made on your mortgage.
What will really boost your credit score is on time payments of all of your other monthly recurring payments, including credit card bills, and a better use of the amount of credit you use on credit cards to the total amount of available credit you have on those cards.
With that information in mind, and knowing that you are in the mortgage lending industry, we’re surprised that you would want to refinance this home. The value of the home is way below what is owed on the debt to the lender. Since the value is about half of what is owed the lender, it would seem almost impossible to find a lender that would be willing to refinance your current loan. Only if your current lender decided to write off half of the amount that is owed would you be able to refinance with a new lender.
You own the home. Your bankruptcy seems like it did not remove your name off the title to the home or transfer title of the home to your lender in any way. But your ownership of the home is in name only and you have no equity in the home. You’ve spoken to financial advisors and they have told you that you should walk away from the home and get a new start.
It may be that these financial advisors are giving you sound advice. You filed for bankruptcy in 2009 to get a clean break from the many problems you faced with your family in the prior year or so. When the bankruptcy was finalized, you could have chosen to move on with your life and leave your current home. You might still be able to do that.
However, if your current living arrangement suits you and you want to stay in your home, you can continue to make payments to the lender and know that those payments aren’t increasing your equity in the home, aren’t going towards restoring your credit history, and that living in the home is more like renting the home as you will probably never see the value of the home double to a level that would be enough to pay off the balance owed on the home’s debt.
Finally, if you were to look for a new job and a prospective employer pulled your credit history, they would see that your mortgage debt had been zeroed out. While we’re not sure whether a subsequent deed-in-lieu or short sale of the home would even get reported on your credit, it would be worth it for you to investigate the terms of your loan modification and have your bankruptcy attorney or other qualified advisor review your documents and situation to confirm where you stand with your lender.
If you have a good relationship with other people in the mortgage industry that review credit files, you might ask them whether any further action with the home will affect your credit history given the information you find about your loan modification.