Chapter 7 Bankruptcy after Refinancing: Timing Is Everything
Modification or Refinance?
You own your home, you like your home, you want to keep your home—but you just have too much credit card debt. Or medical debt. Or have suffered some other financial blow unrelated to your home that has you seeking the counsel of a bankruptcy lawyer. You’re not interested in “bankrupting” your home … It is not your main problem. In fact, you just had your mortgage payment modified to make it a little more reasonable and manageable on a monthly basis.
Or did you?
Did you modify your existing mortgage agreement, or did you actually refinance the mortgage?
If you aren’t sure, a Chapter 7 bankruptcy can be a perilous path to walk, and your bankruptcy lawyer is going to need some good information from you about what exactly you did with your mortgage—and when you did it.
Mortgage Modification vs. Mortgage Refinance: What’s the Difference, and Why Does It Matter?
A mortgage modification is an agreement with your mortgage servicer to alter the existing terms of your existing mortgage note contract, to allow you to pay less every month or to reduce your interest-rate in exchange for increasing the term of repayment, or in some other fashion. A modification is not a “new” loan, just an agreement to new terms on the old home mortgage loan.
A mortgage refinancing is, on the other hand, a brand, new loan. When you refinance a mortgage, you are taking out a new loan at new terms with a new account-number with, in many cases, an entirely different lender. The old mortgage is paid off by the refinance, and a new mortgage held by the refinancing lender is recorded as a lien against your home on your county’s register of deeds. A “satisfaction” of the old mortgage is also recorded, sometimes immediately after it has been paid off by the new refinancing loan, sometimes not. Sometimes the new mortgage is recorded before the satisfaction of the old mortgage is recorded. It just depends upon the speed of process or internal efficiency of either lender, which, in the mortgage industry, is never something that should be counted upon.
And therein lies the problem.
Chapter 7 Bankruptcy After Refinancing: Timing the Chapter 7 Filing Right
That is, there is a potential complication in the timing of the filing of your Chapter 7 bankruptcy related to the recording of that new mortgage lien, particularly if the satisfaction of the old mortgage has been efficiently and quickly filed.
You may have completed the refinancing transaction, and the new lender may have cut the check paying off the old mortgage on July 1—but the new lender may not bother recording the new mortgage for 3, 4, 5, or, in some cases, even 6 or more months after the old one has been satisfied.
So imagine that, having received a summons & complaint for a collections lawsuit on some old credit card debt, you file a Chapter 7 bankruptcy on August 1 to stop the lawsuit with the “automatic stay against collections” injunction that clicks into place that moment you file a bankruptcy. (The automatic stay prevents any creditor from engaging in any activity that constitutes a collection attempt for pre-filing debt.)
What happens if you file the Chapter 7 unaware that the new, refinanced mortgage has not been properly recorded?
- The automatic stay also stops “perfection of liens” from happening. This means that the new mortgage may not be recorded with the county record by the refinance lender.
- You have valued your assets as of the date of Chapter 7 filing. This means that you now have filed a Chapter 7 bankruptcy owning a home with full equity (as opposed to a home that may be worth less than the value of the mortgage lien against it, with no equity that needs to be exempted or protected to allow you to keep it) that may not be exemptible (protected) from liquidation in the Chapter 7, depending on the home’s fair-market value. In other words, you could lose your house to the asset liquidation powers of the Chapter 7 Trustee assigned to your case. (Click here to read more about how you assets are protected, or not, in Chapter 7 bankruptcy.)
In addition, there is a 90-day “preference” look-back period available to the Chapter 7 Trustee or creditors stretching backward from the date of filing. Any “transfer” you make in that 90-day period of time prior to filing your Chapter 7 bankruptcy case while you are legally insolvent (i.e., value of debts outweighs value of assets) is presumed to be fraudulent under the US Bankruptcy Code.
The Chapter 7 Trustee has not only the ability to seize and liquidate property currently in your possession at the time of a Chapter 7 filing but also “avoiding” (undoing) transfers that removed property from your possession within certain time-periods prior to the bankruptcy’s filing.
So, even if you wait until after the new mortgage has been recorded, you are still in danger of a Trustee attempting to avoid the mortgage if you file your Chapter 7 within 90 days of its recording as the grant of a lien on property is a form of legal “transfer.”
Further, if you received any cash-in-pocket from the refinance, it must also be fully and properly accounted for and exempted in the Chapter 7 to be protected.
Chapter 7 Bankruptcy After Refinancing: The Bottom-Line
The bottom line if you have refinanced recently and are considering filing a Chapter 7 bankruptcy is that you need to work with an experienced bankruptcy attorney to time your filing properly.
If your attorney requests recorded deeds and mortgages for your real properties, you will understand why this documentation is being requested, and you will want to just go ahead and retrieve from the county register and provide to your attorney everything that is being requested without pushing back or expecting that the leg-work requested of your by your attorney is for your own good. It’s not your attorney’s house, after all: it’s yours.
If your attorney DOES NOT ask you follow-up questions about the “modification” you believe you recently obtained or request that you obtain recorded deed and mortgage and other documentation related to the transaction, you will want to be sure you are dealing with a lawyer who specializes in and fully understands the bankruptcy process and the particular provisions of the Bankruptcy Code related to the avoidance of transfers and the concept of preferential transfers.
If you did not yourself know what a “preference” was before reading this article, you should certainly not attempt to file a Chapter 7 without a lawyer or with the assistance of an ill-informed, non-attorney “bankruptcy petition preparer.”
At the end of the day, you may need to wait 91 or more days from the date your new mortgage was recorded, depending upon your lawyer’s specific advice and your specific facts. But the most valuable asset that most people own is the home that they live in, and risking it to save a buck on attorney fees or to hurry to file a Chapter 7 because of a $5,000 or $10,000 credit card collections lawsuit is simply not worth it.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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