Until recently, many homeowners who filed for relief under the US Bankruptcy Code and received a discharge found themselves unable to refinance or modify the mortgage on their homestead properties. An individual who files for relief under the US Bankruptcy Code receives a discharge of all debts they do not agree to continue paying (reaffirmation agreement), and this discharge serves as an injunction against creditors, preventing them from collecting on the debt.
However, these creditors can accept payments voluntarily made by the debtor. The normal practice in these bankruptcy cases is for the debtor that wishes to retain his residential property to continue making payments to the creditor without the need for a reaffirmation agreement to be executed by the parties and approved by the court.
What does this mean for the debtor?
The effect of this was that the debtor would no longer be personally liable for the mortgage debt but the creditor would not foreclose on the property because the debtor was voluntarily making payments. This worked well, until debtors tried to take advantage of the lower mortgage rates by refinancing or modifying the debt (use the FHA reverse mortgage calculator to double-check) and get know what are the mortgage rates in Minnesota; for when they contacted their mortgage lender, they were informed that the lender could not modify/refinance the debt because the same was discharged in the Bankruptcy case, and the discharge injunction prevented the lender from negotiating with the debtor.
In order to allow these debtors to modify/refinance their debts, the US Bankruptcy Court, Middle District of Florida issued Administrative Order No. FLMB-2015-9 on November 16, 2015. This Administrative Order grants relief from the discharge injunction to a secured creditor for the purpose of negotiating and entering into a refinance or modification agreement. This order only applies to mortgages regarding homestead properties, and when the request for the refinance or modification was initiated by the Debtor.
What happens after you reaffirm or modify a mortgage agreement?
If the debtor and the creditor enter into a reaffirmation or modification agreement, the debtor may become personally liable for the entire amount owed under the new (refinanced or modified) loan, regardless of the discharge previously received.
This Administrative Order grants the debtors the benefit of taking advantage of lower interest rates by refinancing or modifying their mortgage debts, however it also eliminates the discharge of the debtor’s personal liability. Therefore, it is important that before signing any refinance or modification agreements, debtors consult with an attorney and weigh the pros and cons of their decision to modify or refinance their mortgage debt.
Do you have questions about your home and bankruptcy? A qualified bankruptcy attorney can be very helpful with this process. If you need additional information or assistance contact Attorney Evelyn J. Pabon Figueroa at (407) 647-7887. You can view the Bankruptcy services CPLSA, P.A. offers here.