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Mortgage and Chapter 7 Bankruptcy Question

“I bought a house with my ex-boyfriend, we both signed the promissory note and mortgage. Unfortunately, a few years later, we broke up and he deeded his half of the house to me, so I own the house 100%.  I am current on my mortgage payments, but have not refinanced or paid off the loan. I just got notice that my ex recently filed a Chapter 7 bankruptcy.  How will this affect my house?”

This question comes to us from one of our Crushing Debt Podcast listeners. Please keep the questions coming so we can continue to create valuable content.  

We discussed before, both in the blog and on the podcast, that the bank is not a part of your relationship, so they’re not a part of your breakup / divorce.  The relationship between borrower and bank (I.e. Promissory note and mortgage) is contractual, so in order to get rid of a loan, when you get rid of property, the loan must be paid off, either by selling the house or by refinancing to eliminate the departing “significant other.”  Deeding the property from one co-owner to the other has NO impact on the promissory note and mortgage (and actually may be a violation of the mortgage’s “due on sale” clause).

In addition, when one borrower files bankruptcy and gets a discharge, the co-borrower / non-filing borrower is then solely responsible to repay the debt.  Thus in a situation above, where the non-owner files bankruptcy, he would no longer be obligated to pay on the note or mortgage, but the property owner would still be liable to the bank.

One hurdle this raises is that the creditor (the mortgage company) is unable to take any action against the borrower, co-borrower, or property while the co-borrower is in bankruptcy because of the automatic bankruptcy stay under Section 362 of the bankruptcy code.

The non-owner / borrower could reaffirm the obligation (thus being liable for it again, which goes against the reason for filing bankruptcy in the first place), or the bank can move for relief from the bankruptcy stay. Absent one of those options, the best idea for the homeowner / borrower who has not filed bankruptcy is to:

  1. Call the bank and talk to them about options;
  2. Continue making payments to the bank (although because of the automatic stay, the bank may stop sending mortgage statements); 
  3. Check credit to make sure the bankruptcy does not appear to have been filed by the non-filing borrower;
  4. Contact the bank or a mortgage originator to see if the loan can be refinanced to make the property owner the sole borrower as to the property.

If you find yourself in a situation where a former co-owner of your property has filed for bankruptcy (or if you get any notice from the bankruptcy court and you haven’t filed bankruptcy), please contact us for a free consultation.

For more information on notes, mortgages, or real property, please subscribe to the Crushing Debt Podcast, on iTunes, Stitcher, and GooglePlay. If you prefer, please contact us to schedule a free initial consultation to discuss your options at 727-261-0224 or email me directly at shawn@yesnerlaw.com.

Shawn M. Yesner, Esq., is the host of the Crushing Debt Podcast and founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate the financial bullies in their lives. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.

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