When applying for a new mortgage or a mortgage refinance after a Chapter 7 or Chapter 13 bankruptcy in Michigan, it is not uncommon to be asked whether your house was included in your bankruptcy.
This is a question that often brings with it a tidal wave of confusion. Did you include your house in your bankruptcy? What was it that your bankruptcy lawyer told you way back when you started that bankruptcy process? What was it you signed?
In a panic, you call the bankruptcy lawyer who represented you in your Chapter 7 or Chapter 13 to ask whether or not you did include the house.
Your now-former bankruptcy attorney tells you not to panic. You are, it turns out, asking the wrong question.
All Assets Are Always Included In a Bankruptcy
You are asking the wrong question because it is a question being put to you by a customer service representative working for a mortgage servicer.
These people are probably very nice to their grandmothers—but they don’t know anything about bankruptcy or how it works.
The truth is that all assets and property that you own or have a claim to are always included in a Chapter 7 or Chapter 13 bankruptcy. All debts that you owe are similarly included in a bankruptcy.
The question that the mortgage lender means to ask is whether or not you discharged your mortgage payment obligation or whether you signed a reaffirmation agreement with regard to the mortgage.
Even this question, however, is nonsense. We’ll explain why below. But, first, why is all property included in your Chapter 7 or Chapter 13 bankruptcy? Why are all debts?
Property and The Bankruptcy Estate
Everything you own or have a claim to is automatically included in something called the Bankruptcy Estate the moment you file either a Chapter 7 or Chapter 13 bankruptcy.
The Bankruptcy Estate is a legal construct. It is an imaginary “house,” much like a probate estate, created by force of law.
The force of law in question is the US Bankruptcy Code in this case, rather than Michigan’s probate laws. In either case, such legal Estates exist to give jurisdiction to a court overseeing the disposition of a person’s assets during a legal proceeding.
When you die without a will, that legal proceeding is, obviously, the probate process, which determines whether or not any of your assets can or should be liquidated for the benefit of the creditors you had when you died.
When you voluntarily file for bankruptcy, you are likewise submitting yourself and your assets to a (Federal, in this case) legal process with jurisdiction to determine whether creditors can be compensated in full or in part for the debts that you owe them based upon the value of your assets.
The Bankruptcy Estate in Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, the assets of your Bankruptcy Estate are subject to being seized and liquidated to generate a pool of funds to be distributed directly to your creditors by an individual known as the Chapter 7 Trustee.
Most people filing for Chapter 7, however, do not actually lose any assets.
This is because the US Bankruptcy Code provides a basket of so-called “exemptions” which allow certain types of property up to certain dollar value amounts to be exempted, or removed, from the Bankruptcy Estate.
If a piece of property is fully exempted, it is essentially entirely removed from the Estate. The Chapter 7 Trustee has no authority to seize it and sell it off.
The exemptions are actually fairly robust. Most typical households do not include any property that cannot be fully exempted one way or another.
Further, if the property is collateral for a secured loan—such as a mortgage—and the amount owed on the loan is greater than the value of the property, then you have no actual equity in that property.
It is “underwater.” Only equity value has market value. Only equity value need be exempted and protected from a Chapter 7 Trustee’s liquidation power.
If you had equity in your home when you filed your Chapter 7 bankruptcy, it needed to be exempted. If you’re still living in it now, after the bankruptcy, you must have succeeded in doing so, or you would be living elsewhere.
Whether it is exempted or not does not mean that the house was not “included” in your Chapter 7.
The real question is whether you surrendered or not. And, if you did not, if you reaffirmed the mortgage debt.
These questions are discussed below.
The Bankruptcy Estate in Chapter 13 Bankruptcy
First, the Bankruptcy Estate sweeps property into a Chapter 13 bankruptcy as well. However, in a Chapter 13 bankruptcy, no property is ever seized or liquidated as it is in a Chapter 7 bankruptcy.
This is because a Chapter 13 is not a “liquidation bankruptcy” as is Chapter 7. Instead, it is a “reorganization bankruptcy” in which you prioritize the payment of secured and other “priority” debts over non-priority unsecured debts.
Thus, in a Chapter 13, you can prioritize the payment of overdue, secured mortgage payments over payments to unsecured credit card and other such debt.
Chapter 13 is the form of bankruptcy you would file in order to save a home from foreclosure.
Chapter 13 bankruptcy allows you to save your home from foreclosure, pay off priority tax debts or child support arrearages with fixed monthly payments paid through the Bankruptcy Court by way of a Chapter 13 Trustee. You make these payments for a fixed number of months.
Whatever unsecured debt balances are unpaid at the end of that time-period are totally discharged without the need for further payment, just as they are in a Chapter 7 bankruptcy.
Because you are making payments toward your debt in a Chapter 13, there is no need for an asset liquidation mechanism. (In a Chapter 7, you make no such payments. Asset liquidation is the only way creditors can be compensated.)
Nevertheless, the Bankruptcy Estate is in force during your Chapter 13 process just the same. All of your assets are included in your Chapter 13 Bankruptcy Estate to ensure that make a monthly payment that accounts for the value of your assets.
The Bankruptcy Estate is also useful in Chapter 13 for your protection. While you cure mortgage arrearages over as long as 5 years in the process, if any mortgage or other creditor should attempt to foreclose on your home or seize other property, it is acting not only against your interest but the Estate’s.
A creditor can be sanctioned for doing that sort of thing in Chapter 13.
You and your bankruptcy lawyer will still go through the process of listing and exempting all of your assets in a Chapter 13. Any non-exempt or partially exempted assets will not be seized, however.
Instead, their dollar value of the non-exempt property will constitute a minimum amount of money that your unsecured creditors must be paid through the Chapter 13 payment plan. This may result in a higher required plan payment.
As with the Chapter 7 bankruptcy, the real question for your new mortgage lender is not really “Was the mortgage included in my bankruptcy?” but, rather, “Did I surrender the house and discharge the mortgage?”
Inclusion of Debts in Bankruptcy
Just as all assets must be included in a bankruptcy, so must all debts.
This doesn’t mean that all debts are discharged in bankruptcy.
It is well-known that some types of unsecured debts are, in fact, non-dischargeable. Examples include child support arrearages and, in most cases in Michigan and elsewhere within the jurisdiction of the Sixth Circuit Court of Appeals, student loans.
The question, now, is what, really, does “included” mean?
Legally speaking, in a bankruptcy context, it means absolutely nothing. All debts must be disclosed in and listed in your Chapter 7 or Chapter 13 bankruptcy petition documents that are filed with the US Bankruptcy Court.
Does that mean they’re “included?” The non-dischargeable child support payment must be listed. Is it “included?”
Yes, of course. It’s “included.” But it’s not discharged.
If, either in a Chapter 7 or Chapter 13 bankruptcy, you surrendered your underwater or foreclosing home and discharged the related mortgage loan balance, this is really what the mortgage lender means by “included.”
If you surrendered a home and discharged a mortgage in a bankruptcy, this could negatively impact future mortgage lending or refinancing prospects—at least in the short-term.
If you did not, it may be that your new mortgage lender will want copies of the portions of your bankruptcy petition that clarify that: Schedule D, the Statement of Intention (Chapter 7 only), the Chapter 13 Plan, etcetera.
Chapter 7 Bankruptcy Mortgage Reaffirmation
If what your mortgage lender asks is whether you reaffirmed your mortgage in your prior bankruptcy, something entirely different is meant.
The debt reaffirmation process is a feature of Chapter 7 bankruptcy only. If you filed a Chapter 13 bankruptcy, it does not apply to you.
Reaffirmation causes a secured debt in Chapter 7 to “survive” the discharge. That is, like child support or student loan obligations, a reaffirmed debt is not discharged. If you reaffirm a car loan or a mortgage obligation in Chapter 7, you will be required to continue making payments on that debt after the Chapter 7 concludes.
If you don’t, you’ll face a repossession, seizure, replevin, or foreclosure action and possible collections of a “deficiency” debt after the property is auctioned off just as if you had never filed bankruptcy at all.
Car loan reaffirmation is outside the scope of this article. Specific rules apply to vehicle loan reaffirmation obligations.
As to mortgage loans, very few bankruptcy lawyers will ever advise you to reaffirm a mortgage in Chapter 7 bankruptcy.
If you continue making payments on a mortgage, you cannot be foreclosed. Period. You are protected from wrongful foreclosure under a myriad of Michigan state and Federal laws outside of bankruptcy. Not to mention the terms of your mortgage contract, which almost certainly is premised upon the Fannie Mae-Freddie Mac Standard Mortgage instrument form. (The specifics of this form contract are well-known to every experienced bankruptcy and real estate lawyer in the US.)
Unless the Chapter 7 Trustee liquidates your home, you cannot lose it in a Chapter 7 if you are current with your payments and stay current during and after your bankruptcy.
Reaffirming your mortgage debt is pointless.
However, if you do not, your mortgage servicer may report it as “Closed, discharged in bankruptcy” to your credit bureaus. This will require you to manually report your timely mortgage payments moving forward if you want them reflected in your credit reporting.
This also is a poor reason to put yourself back on the hook for what is likely your most sizeable debt.
If you don’t reaffirm a mortgage and later (even years later!) find yourself unable to make your mortgage payments or wishing to relocate when the home may be underwater, you can simply pack up and go. No need for a further bankruptcy or short sale, or any other creditor negotiated remedy.
This is a huge legal benefit, the loss of which can undermine the dollar value of an entire Chapter 7 bankruptcy.
That being the case, the vast majority of bankruptcy lawyers in Michigan and elsewhere will not advise you to reaffirm your mortgage.
It is, however, ultimately, your choice. If you’re not sure whether you did or didn’t reaffirm your mortgage, contact your bankruptcy lawyer to inquire.
It won’t be the lawyer’s favorite question of the day, as it is often asked. Mortgage lenders love to insinuate that your bankruptcy lawyer did you wrong in not reaffirming your mortgage, when, in fact, they’ve done you a favor.
Nevertheless, you should not be afraid to ask. Even after your retainer with your lawyer is expired, fielding a question of that sort is basic customer service to which you are entitled.
At the end of the day, if your lender denies your mortgage application because you did not reaffirm your mortgage in a prior Chapter 7, that is not because of “the law.”
That is because of that lender’s own internal policy. Shop for a new mortgage somewhere else.
Including Your Home In Bankruptcy: The Bottom Line
The bottom line is that treatment of real estate and mortgage debt in bankruptcy is a highly complex area—especially if you are behind in your payments.
If you are considering bankruptcy but are concerned about your home, your mortgage, or your ability to obtain a new mortgage after bankruptcy, the best step you can take is to retain a bankruptcy attorney with a high level of experience.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has assisted thousands of Metro Detroit homeowners with Chapter 7 and Chapter 13 bankruptcy for over 30 years.
Contact us now to schedule your free initial consultation.