Should a “Stay & Pay” Homeowner Consider a Mortgage Refinance?

By Kenneth Lenz, Board Certified Consumer Bankruptcy Attorney
stay and pay

I recently received an email from a web site visitor who asked an interesting question about his responsibilities to his mortgage company.  This gentleman had filed a Chapter 7 and received a discharge four years ago but did not reaffirm his mortgage.  He had remained in his house and continued to make his mortgage payments and his mortgage company had accepted those payments (this is what bankruptcy attorneys call “stay and pay”).

Now the mortgage company has approached him about refinancing the outstanding balance and reducing this balance from $250,000 to $150,000.   His question for me:  should he agree to this refinance?

In my view the question of whether or not to refinance is the same question that a homeowner or prospective homeowner would ask when considering a mortgage.  At this point, this gentleman has no personal liability to pay the mortgage company anything – his personal obligation (through his promissory note) was discharged in his Chapter 7.   If he accepts the lender’s proposal, he will again assume personal liability for his mortgage, which is often not a good idea .  Doing so would also restart credit reporting by the mortgage lender – a good thing if he makes his payments on time.

It would be interesting to know if this refinance offer, which shaves $100,000 from the outstanding principal balance, is a consequence of the “stay and pay.”  Would the mortgage company make such a generous offer to a borrower who did reaffirm in Chapter 7?

If my web site reader declines to refinance, he presumably will continue to reside in his home and make on-going mortgage payments.  What rights and obligations does he have under a stay and pay?

First, he will not have any personal liability on the mortgage note.  As a general rule, mortgage obligations must be in writing – it is my understanding that in most jurisdictions, a borrower cannot become obligated to a mortgage lender simply by making payments (i.e. an implied contract).

Second, he will have to absorb some risk – every mortgage note that I have ever read makes bankruptcy a default condition – in other words, the bankruptcy filing gives the lender the right to accelerate the note and start foreclosure proceedings.   I think that his lender would be unlikely to declare a default and the borrower might be able to delay or prevent a foreclosure four years after the bankruptcy/default under any one of several legal theories. 

It appears to me that in this case the mortgage company is offering my reader a sweet deal, and one he should consider if he anticipates that he will be able to pay his mortgage and if he believes that the property value will not fall below the reduced balance on the note.  I would also recommend to my reader that he retain counsel to review the terms of the refinance note to more fully protect his interests.

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