When an individual goes through a Chapter 7 bankruptcy the amount owed on a mortgage note on her residence is discharged. However, the security interest the mortgage creates remains in affect. This means that the mortgage company can not force a debtor to make any payments on a mortgage after a bankruptcy filing, however the creditor may foreclose on the property and take possession, if the debtor does not make the mortgage payments. In most cases, if the debtor wants to keep the house, she continues to make the payments, the mortgage company continues to accept the money and everything works out fine.
A problem sometimes arises though, with borrowers attempting to refinance the mortgage several years after the bankruptcy. Mortgage companies in this situation are reluctant to refinance a debt that is discharged, because it is illegal for them to take action to collect on a discharged debt. Thus they often deny the refinance application to a customer, who has never missed a payment, and who would otherwise be a good candidate for the program.
Unfortunately there is not necessarily an easy solution to this problem. The situation would be solved, if the debtor reaffirmed the mortgage debt; however, this can only be done before the bankruptcy discharge. At the time the bankruptcy is pending though her bankruptcy lawyer may advise against reaffirming the mortgage, because of the personal liability that might create, if a foreclosure does take place. The problem might be avoidable by going to another lender, since the new bank would not be a creditor on the discharged debt, and would not have to worry about violating the law here. As a practical matter though a new lender can be less likely to approve the refinancing than the original lender.
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