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BANKRUPTCY UPDATE Credit Reporting and Reaffirmation Agreements

Posted By USFN, Tuesday, February 4, 2014
Updated: Monday, October 12, 2015

February 4, 2014


by Deanna Lee Westfall
The Castle Law Group, LLC
USFN Member (Colorado, Wyoming)

Recently, home mortgage reaffirmation agreements have come up in a new light. Although generally disfavored by courts as an act to impose a soon-to-be discharged personal obligation against the debtor, courts are now considering what the benefits are of a reaffirmation agreement. Specifically, courts are asking whether debtors should be allowed to reaffirm a debt after a discharge in order to request credit reporting from their mortgage servicer. Alternatively, courts are looking at ways to encourage or require credit reporting post-discharge on current loans, even without a signed reaffirmation agreement. The issue is whether failing to credit report impairs the promised “fresh start” of bankruptcy. See, e.g., In re Mahoney, 368 B.R. 579 (Bankr. W.D. Tex. 2007).

In response to debtor requests for credit reporting post-discharge, one bankruptcy court in Tennessee is allowing cases to be reopened for the limited purpose of filing a reaffirmation agreement, without requiring the usual fee for reopening cases. While creative, the Tennessee approach appears to be contrary to the Bankruptcy Code’s requirement that reaffirmation agreements be filed prior to entry of the discharge in order to be effective. The Tennessee approach also fails to ensure that credit reporting recommences. A mortgage servicer may still choose not to credit report out of an abundance of caution that the late-filed reaffirmation agreement appears to be an attempt to re-impose personal liability after the discharge, thereby running afoul of the discharge injunction.

The matter arises in Chapter 7 cases in which the debtor receives a discharge of personal liability on the note, while the lien attached to the property remains enforceable solely against the property. Thus, in order to maintain the property, the debtor must make regular monthly mortgage payments.

Although Section 521 of the Bankruptcy Code and the Official Form Statement of Intentions provide that the borrower shall reaffirm, redeem, or surrender the collateral on secured debts, debtors often simply “stay and pay” or ride through the bankruptcy without doing any of the three enumerated options. This leaves the debtor and creditor in a unique situation post-bankruptcy. The debtor does not owe a debt and, thus, the mortgage servicer would not typically report.

Recently, courts have been asking why servicers do not credit report on loans that pass through bankruptcy under the “stay and pay” scenario. In other words, if the debtor was current throughout their bankruptcy and remained current, why is there no credit reporting by the servicer to assist the borrower in rebuilding credit? Alternatively, the courts appear to be asking whether creditors may report only on current loans but not on defaulted loans post-petition. Reporting on post-petition defaults could be interpreted as interfering with the debtor’s discharge by negatively reporting on a defaulted debt.

A furnisher, as creditors are known under the Fair Credit Reporting Act, is primarily charged with reporting accurate information. There is no requirement to report, but what is reported must be accurate. In the absence of a reaffirmation agreement, filed within the timelines set by the Bankruptcy Code, is it accurate to report payments? Stated differently, is there a debt owed by the individual upon which the creditor can report? These questions point back to a possible reconsideration by the bankruptcy courts of the general distaste for reaffirmation agreements.

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