When several years passed since the bankruptcy, my client thought he’d caught and controlled the old and the inaccurate credit reporting.
Four years after the discharge was entered, a mortgage servicer has just begun reporting a hugely negative report on a mortgage loan cut off by foreclosure and wiped out by bankruptcy.
And my client discovered this when he applied for a new home loan.
Worse yet, the reporting servicer didn’t service the loan when it was discharged. So, it’s unclear why the old servicer is handing off servicing on a discharged debt.
The likely choices are incompetence and greed.
So, let’s review the law that applies here.
Junior liens destroyed by foreclosure
The zombie loan was a line of credit on my client’s California home. During the bankruptcy case, the mortgage lender, whose lien was senior, got relief from the automatic stay, and foreclosed.
That foreclosure wiped out the junior lien: the foreclosing creditor got title to the home free of the deed of trust that secured the junior lien.
Outside of bankruptcy, the borrower’s obligation to pay survived, but the debt was now unsecured.
Right to payment wiped out by discharge
Because the former homeowner was in bankruptcy, when he completed his case and got a discharge, his personal obligation to pay the line of credit was erased.
If he had continued to own the property, the lien on his home would have survived the bankruptcy as debt attached to the property, only.
But the foreclosure killed the junior lien.
For all purposes, then, my client owes nothing on this loan.
Debt rising from the dead
Like a bad horror movie, the twice-dead debt has reared its head on a credit report.
A brand new servicer reports to Experian that my client is 33 payments behind on the loan. No mention in the trade line of foreclosure or bankruptcy.
Just a nasty blot on the report and a big time negative if you want a loan to buy a new home.
Servicer will pay
My job is to clean up the credit report and hopefully to inflict some consequences on the institutions that mindlessly injure consumers.
I expect lots of finger pointing: at least three sevicers have been involved just since the bankruptcy case was filed. The loan is almost 9 years old.
My client hopes that resolution comes before interest rates go up.
Keep checking that list
The moral of this story is to continue checking your credit report regularly for instances, like this, of zombie debt.
In a world of big data, debt-buying, and default servicing, you can’t count on discharged debt remaining dead.
Use annualcreditreport.com to get your report. The guys touting “free” aren’t really free.
I campaign for a lazer focus on personal balance sheets, not more borrowing, as the true measure of financial health.
Our obsession obsession with credit reports and credit scores, is unhealthy and off target. But neither credit reports nor credit scores are going away soon.
Be vigilant, well in advance of needing a loan.
Check my list of other to-do’s to maximize a bankruptcy discharge: http://goo.gl/1fqbl
Image courtesy of Recon Cycles.