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Florida readers may be interested to know that there’s a rather complicated hitch that can occur for homeowners who kept their home in the bankruptcy process. The homeowner discovers that despite their intention to re-affirm the loan, it was discharged as part of the bankruptcy, so banks turn them down for refinancing because they don’t have a loan. Of course, there’s still a lien on the property, and if it isn’t paid, the mortgage holder will foreclose on the property.

First of all, a Chapter 7 bankruptcy won’t remove a mortgage lien because that would mean that the homeowner owned the house free and clear without actually paying the loan off. So, there is an obligation for the mortgage to be paid; it’s just that the payments aren’t being reported on the homeowner’s credit. It’s always possible to explain the situation to another lender and see if that company is willing to work on a refinance in these circumstances.

If those efforts fail, it may be possible to re-open the individual’s bankruptcy case and re-affirm the loan. This will again make the homeowner liable for the mortgage. If the individual happens to live in a state that allows for lenders to pursue homeowners for post-foreclosure balances, this could be a bad decision. It can also be a problem if the request to reaffirm is granted by the court, but the refinance is denied by the lender and the homeowner can’t afford the payments.

Post-bankruptcy issues can be difficult to handle individually. In the case of a mortgage, it may be wise to allow a bankruptcy attorney to review the case. An attorney may be able to explain state law and recommend a course of action that may allow the home to be refinanced at a reasonable interest rate.

Source: Fox Business, “Kept Home After Bankruptcy, Can I Refi?”, Justin Harelik, October 11, 2013