Even if Not on the Mortgage Note, You Can Still Cure a Claim Against Your Property in Chapter 13 Bankruptcy
First: Some Important Information about Liability in Mortgage Purchases …
The situation in which a homeowner might find themselves faced with foreclosure without actually being a signatory on the mortgage note being accelerated is not a common situation necessarily, but it does happen.
Why would it?
There are many reasons why a married couple or other cohabitating couple might decide to purchase a home and obligate only one of the two prospective homeowners personally. In any purchase of real property in Michigan, there are 3 different legal instruments involved: the title to the home; the mortgage; and the mortgage note. It is entirely possible (and relatively common) for two names to appear on the title and the mortgage but only one name to appear on the mortgage note.
The mortgage note is the contract that you sign when you purchase a home that obligates you personally to pay $X per month every month for a 10-30 years, or however long the term of purchase may be. If you were to file Chapter 7 or Chapter 13 bankruptcy and surrender the house, it is this personal obligation which is actually discharged in the bankruptcy. After a foreclosure, the difference between the foreclosure sheriff’s sale price and the remaining balance owed on this mortgage note constitutes the “deficiency debt” that the mortgage servicer (or it subsequent assignee or purchaser of the note/debt) can pursue you to collect. (Escaping such deficiency debt liability is the motivation for many a bankruptcy filed since the mortgage crisis began.)
The mortgage itself is the instrument which allows the lender to use the home being purchased as a collateral securing your obligations under the mortgage note. That is, if you don’t make your payments, the lender gets to take its collateral back. This is the foreclosure process. It is the legal process under Michigan or other state lay by which the foreclosing lender re-takes title to the property.
If you are filing a Chapter 7 or Chapter 13 bankruptcy to surrender a home or to discharge a deficiency debt after a foreclosure (or badly negotiated short sale), only the person whose name appears on the mortgage note needs to bother filing the bankruptcy. Bankruptcy aside, only the person whose name appears on the note can be pursued for collections if things go south after the home purchase.
The lender’s claim against the house/collateral by way of the mortgage instrument is an “in rem” claim (claim against property), while the lender’s claim against the borrower on the mortgage note is “in personam” claim (claim against the person).
So Why Would You Ever Need a Chapter 13 Bankruptcy in this Sort of Situation?
Given all of this, it has not been uncommon for a couple (married or unmarried) to purchase a home and decide to put only 1 name on the mortgage note. Or for a single homeowner to marry and quit-claim to him- or herself and new spouse “as a couple” the title to the property after marriage. Or, in some cases, one of two jointly owning homeowners to take out a mortgage or home equity line of credit and offer the house as collateral long after the initial purchase.
So what’s the problem?
Of course, every mortgage relationship becomes problematic if payments become deficient. This situation offers an additional level of complexity, however, if the partner whose name lies on the mortgage note dies or fails to make payments after a divorce if the divorce judgment awards the home to the other partner, or in other sorts of factual scenarios in which the partner holding the personal liability to the lender is out of the picture for whatever reason.
Death in particular, can often constitute a “default” in the language of many mortgage notes, allowing the lender to instantly accelerate and begin foreclosure.
If the surviving partner and homeowner wishes to keep the house, what do you do?
There are many non-bankruptcy steps to take before deciding to file a Chapter 13 bankruptcy to deal with the situation. If the lender is willing, you can potentially negotiate an assumption of the mortgage note, a refinancing of the mortgage and note, or other negotiated agreement to retain the property and continue the payments even though the surviving partner may not have been party to the original mortgage note contract.
The downside to any negotiation, however, is that you need 2 willing parties to enter the conversation. What if the lender is unwilling to negotiate anything favorable?
That is when a Chapter 13 bankruptcy becomes an excellent solution to the dilemma.
“Claim” vs. “Debt” in Bankruptcy
The U.S. Supreme Court in a case called Johnson v. Home State Bank (501 U.S. 78) has made clear the difference between a “claim” and a “debt” in bankruptcy. The debt is the actual money you owe to a creditor, while a claim is the right that a creditor has against you or your property. In other words, a “claim” in bankruptcy needn’t simply be a claim against you personally. In other words, a “claim” and a “debt” are not necessarily the same thing. The Supreme Court decreed in Johnson that Congress intended the meaning of the word “claim” to be broadly defined and to include an in rem claim against property as well as an in personam claim against a person (for collection of a money debt). It decreed that a Chapter 13 bankruptcy is a process intended to cure “claims,” including those with no in personam liability attached (the debtor in Johnson had previously discharged his personal liability for a mortgage via a prior Chapter 7 bankruptcy).
The Sixth Circuit Court of Appeals, the holdings of which are authoritative upon bankruptcy cases filed in Michigan, has followed the Johnson ruling in this regard as well.
A Chapter 13 “reorganization” (or payment plan) bankruptcy allows a filing debtor to halt all collections processes (including foreclosures) upon filing and then to cure mortgage payment or other arrearages over a period of 3-5 years with 0% interest. Thus, Chapter 13 is the sort of bankruptcy to file if you want to save a home from foreclosure.
Negotiation with the creditor about whether or not there will be a cure is not a difficulty in Chapter 13 as it is outside of Chapter 13. A creditor cannot refuse to accept payment from the Chapter 13 Trustee, although some negotiation of interest to be paid or other details may occur.
You may also modify secured claims in Chapter 13. In this sort of situation, a modification rather than a simple arrearage-cure, which leaves ongoing mortgage payments once the deficiency is cured and the Chapter 13 is over to be made timely on a monthly basis until the mortgage note is fully paid by the homeowner, is likely necessary as there remains the problem of the debtor/homeowner’s name not persisting on the mortgage note contract.
A modification comes in many forms, but, generally, it will involve proposing repayment of the full, accelerated note in no more than 60 months with potentially some interest involved.
Thus, the question at the end of the day is affordability: can you afford to make the monthly payments necessary to pay off the mortgage in 60 or fewer months? The answer to that question will depend on your individual case and your individual financial resources.
Stopping Foreclosure with Chapter 13 Bankruptcy: The Bottom-Line
The bottom-line is that a Chapter 13 bankruptcy will stop a foreclosure and allow you to cure or modify the secured claim against your property, even if you have no personal liability at all and could otherwise just let the lender take the house and walk away free and clear of any fear of collections. But affordability will be the bottom-line question that you will need to discuss with an experienced bankruptcy attorney.
No Chapter 13 bankruptcy should be attempted without experienced legal counsel guiding you, and no Chapter 13 involving any sort of interaction with a foreclosure-minded mortgage servicer should be considered.
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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