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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34395
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I took out a second mortgage with my partner at the time.

Customer Question

I took out a second mortgage with my partner at the time. When he filed for bankruptcy, the primary mortgage which was held in both of our names was excluded from the bankruptcy. The second mortgage was not and I was not successful in assuming the loan thru the mortgage company. I continued to make payments and have done so for approximately three years. The loan was subsequently sold to another servicer and I continue to make payments. The first lender reported the debt to the credit bureaus as "charged off as bad debt." The first lender has now filed for bankruptcy. Evidently, the new servicer of the loan does not report to the credit bureau and there is no indication on my credit that I am repaying the loan.
I am currently attempting to buy a new home and I am having trouble securing a mortgage loan because of the adverse statement on my credit. My credit report is perfect otherwise and my score in the mid-700s. The mortgage company is going to dispute the adverse report in hopes that the original lender will not respond since it is in bankruptcy. I am feeling so stressed over this as I have plenty of funds and make plenty of money to afford my new home.
Do I have any recourse?
Submitted: 1 year ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 1 year ago.
Hello,

When you say that the first loan was excluded from the bankruptcy, that would mean that it was reaffirmed. Otherwise, excluded or not, if this was a Chapter 7, then the debt would have been discharged against your partner.

If the first lender decided that the debt was uncollectible, then the charge off is valid against all co-borrowers, which presumably would include you.

The idea that by disputing the charge off, you may be able to eliminate it if the lender doesn't respond, is actually a pretty clever idea. The credit reporting agencies must delete the entry if the lender doesn't respond within 30 days.

But, if the lender does respond, then the credit reporting agencies will be required to maintain the negative entry, because the Fair Credit Reporting Act (FCRA) requires accurate reporting from furnishers of information. The only recourse that you would have would be to somehow settle the account with the lender, at which point it would no longer be a charge off.

Please let me know if I can be of further assistance.
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34395
Experience: Attorney and Real Estate Broker -- Retired (mostly)
socrateaser and other Bankruptcy Law Specialists are ready to help you
Customer: replied 1 year ago.

The first loan (the primary mortgage loan) was not affected by the bankruptcy. The second loan (mortgage) was included in the bankruptcy and I contacted the lender to let them know I wished to continue paying on the debt, which I have been doing. However, this isn't reflected in my credit report since the loan was sold to a different servicer which doesn't report to the credit reporting agencies evidently.


If I were to pay the balance of the loan, it seems it would still remain on my credit report.

Expert:  socrateaser replied 1 year ago.

Whoops, sorry. You asked another question. Please give me a minute to review. I'll be right back.

Expert:  socrateaser replied 1 year ago.
I need some additional info from you:

1. Was this a Chapter 7 or a Chapter 13 bankruptcy?

2. Did your partner sign a reaffirmation agreement concerning the 2nd loan which was filed with the bankruptcy court?

Thanks in advance.
Customer: replied 1 year ago.

1. Chapter 13


2. Not that I am aware of. I do know that the loan was not included as part of his repayment plan.

Expert:  socrateaser replied 1 year ago.
If the loan was not part of the repayment plan, then it wasn't discharged, because in a Chapter 13, any debt not provided for in the bankruptcy plan survives the Chapter 13 discharge order.

So, the first loan is still collectible, assuming that the lender sells the debt to a debt collector -- which could happen in the lender's bankruptcy.

If your name was on the first mortgage, then the lender can report it. And, since it wasn't part of the bankruptcy, there was never any injunction to prevent the lender from continuing to report it negatively on your credit report.

The only way that you could get it removed completely, other than to wait out the seven year statute of limitations on FCRA reporting, would be to contact the original lender and see if they have sold the debt. If they haven't, then you could offer to pay $X in exchange for a "release" from further liability, which would include a "recital" in the release agreement that you were always paid in full and timely paid on the loan.

I have done this before with an auto loan, but not with a mortgage. However, there is nothing special about a mortgage that would prevent the lender from doing this transaction. If the lender were to agree, and you received the release with the recital, then you could submit that to the credit reporting agency, and they would be required to delete the negative entries, because the lender will have admitted that you were always paid in full and timely paid.

That's the only thing I can come up with that may work. But, if the debt is already sold to a third party debt collector, then that would terminate the lender's negotiating powers, and you will be stuck with the negative entry until the seven years expires. 15 U.S.C. 1681c(a)(2).

Hope this helps.
Customer: replied 1 year ago.
I continued to make payments on the loan while my ex was in bankruptcy. The original lender sold the loan and I have continued to make payments to them. The problem is the original lender reported the loan as a charge off despite the fact that I have continued to make payments.
Expert:  socrateaser replied 1 year ago.
Are you saying that the first loan is not in default (you are paid current and timely)?
Customer: replied 1 year ago.
The first mortgage was refinanced in my name. It's the second mortgage that is the problem. I have been making payments on the first and second mortgage all along. I just noticed a section in the Chapter 13 Plan paperwork that says "Property to be surrendered to a secured creditor" and then it lists the information regarding the second mortgage.
Expert:  socrateaser replied 1 year ago.
I'm really confused. This is the first time you've indicated that you refinanced the first loan.

Are you saying that after the first loan was refinanced, that the lender who was paid off, reported its paid off loan as charged off?
Customer: replied 1 year ago.
I'm sorry. I realize now I didn't communicate the issue very clearly. Before the bankruptcy was filed, I refinanced the first mortgage in my name. There are no issues with the first mortgage. The second mortgage remained in both names and represents the problem. Despite tryijg to assume the debt in my name alone and continuing to make payments on the second mortgage, it was sold to a collector and reported as a charge off. I continue to pay the loan amount to the new servicer.
Expert:  socrateaser replied 1 year ago.
At the time that the second loan was charged off, was it paid current (all payments made timely, or if not, then paid late with late charges also paid)?
Customer: replied 1 year ago.
Yes
Expert:  socrateaser replied 1 year ago.

Okay, so if I understand correctly, then this is simply an error by the first lender, which I presume from your previous explanation, is now in Chapter 11 or 7 bankruptcy.

Since this claim began before the bankruptcy was filed, you can't sue the lender. You would have to file a proof of claim with the bankruptcy and allege some amount of monetary damages against the first lender, caused by the incorrect credit report entry. Using that proof of claim and evidence of your prior account statements from the lender, you could dispute the negative entry with the credit reporting agencies. If they don't remove the negative entry, then while you cannot sue the lender, you can sue the credit reporting agencies. So you do have recourse.

Hopefully, none of this will be necessary, because if you have the necessary account statements, you will be able to prove to the agency that you were paid current and timely, the lender won't respond to the credit reporting agency's request for information -- and the debt will be removed from your credit report.

I think that covers the issue.

 

Hope this helps.

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