Burned by Private Mortgage on Property?

Dear Bankruptcy Adviser,

My mother-in-law recently passed away. Several years prior to her death, she sold a piece of real estate property and took back a recorded mortgage and promissory note as collateral. The purchaser made payments for a couple of years, fell behind and then recently filed Chapter 7 bankruptcy. My mother-in-law was listed as a secured creditor on the filing, and the purchaser indicated he wanted to reaffirm the debt.

Even though the filing called for a reaffirmation, no document exists stating the debt has been reaffirmed. The debtor has made no payment since filing the petition. What are my options?

-Donald

Dear Donald,

I don't get questions from creditors too often, and when I do, the question is usually about a friend getting burned after lending money to another friend only to find out the other person filed bankruptcy. It seems as if your mother-in-law may have created a private-party deal where she was the one supplying the mortgage and not a bank. She was essentially the lender in this situation.

I will also assume your mother-in-law properly recorded the mortgage loan. If she did not, then you may have to prove she was the legal owner of the property.

Assuming your family is the legal owner, the key to this question is to point out that failing to reaffirm the loan does not mean you lose the property. Reaffirming the loan only allows you to re-establish the terms of the promissory note. Reaffirming those terms allows you to sue the purchaser for failing to pay. Since the note was not reaffirmed during the bankruptcy, your family cannot sue him for failing to pay.

You can still foreclose on the property. You are just like any mortgage lender. Most mortgage lenders don't bother making a property owner reaffirm the mortgage loan because the lender knows it can always foreclose on the property if payments are not made.

In short, the bankruptcy filing protects the purchaser from being sued for failure to pay, but it does not give the purchaser the right to keep the property free and clear.

I also will assume that your family would prefer to be paid rather than foreclosing on the property. Hopefully, you can reach an agreement with the purchaser to resume payments and get caught up on the delinquent payments.

You can send the purchaser a letter requesting an update on his or her intentions to pay on the loan. I would advise you have an attorney draft the letter. Since you can't sue the purchaser, you also have to carefully state that you are only requesting information regarding the purchaser's intent. If he does refuse to pay, you will then likely need someone experienced with the foreclosure process in your state, so you can get your property back.

Good luck, and hopefully you can resolve this without spending too much on an attorney.

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