FACT: This article has nothing to do with the zombie fiction currently populating bookstore shelves.
FACT: I am not an attorney; I do not provide legal counsel. In addition to being an expert witness, I am an expert credit advisor as well as an expert on refinancing home loans following Chapter 7 Bankruptcy and while in Chapter 13 Bankruptcy.
What is a Zombie Mortgage?
Zombie Mortgage Notes are the Promissory Note(s) of home mortgages which have been Discharged in Chapter 7 Bankruptcy and continue to be paid (or not) on a purely voluntary basis by the debtor. In many cases, I see folks paying both the Discharged 1st mortgage as well as the Discharged 2nd mortgage. I am prompted to expand on this subject due to the number of recent callers who do not understand that the Note(s) was(were) legally nullified. Regular readers’ likely recall that I first wrote of this phenomenon in December of 2010 in an article titled Living Underwater After Bankruptcy.
Zombie Notes Do Not Credit Report
Given that the Note is, umh… dead, the credit reporting agencies have nothing to report. There is no credit instrument against which the creditor can report. And, this is a biggie, if the Discharged mortgage servicer were to report the mortgage as still paying late, that could be considered as attempting to collect a Discharged debt. This is a big legal no, and no or no. Should you discover such on a valid credit report, you may wish to consult your bankruptcy attorney for a referral to a consumer protection attorney.
Can A Zombie Note Be Refinanced?
Yes. However this depends on several limiting factors which are discussed in my blog titled Refinance After Chapter 7?.
Question – Can this be done by any licensed, bonded and insured mortgage loan originator?
Answer – Not realistically. You need a specialist. This will require a highly seasoned lender who knows how to document, package and process a Zombie Note for a rate/term refinance loan approval. There are no cash-out refinances of Zombie Notes.
Living With A Zombie Note
Those in Zombie Note situations must really like love where they live. There are no home improvement loan opportunities available. If there is no equity, there is no opportunity to refinance, so you should truly prize your current monthly housing payment. An ordinary sale will be difficult if not impossible so, in effect, one is frozen into their present location and housing. For some, this works. For others, it is merely prolonging the end of a cycle, and avoiding the opportunity of gaining a new beginning. And perhaps it is simply about keeping up the “image”, as though no one else in the country is in trouble financially. Good grief.
Caution: One of the highest needs is to make sure the personal property, real property and liability are insured against loss. Openly discuss your situation with your insurance agent. Understand you may need a specialty insurance agent due to the particulars of living with a Zombie Mortgage.
Zombie Note Equals “Renting” Without Benefit Of A Landlord
In many cases, one choosing to live with a Zombie Mortgage has, in effect, become a tenant without the benefit of a landlord. Should the water heater need replaced the resident is responsible for all upkeep and maintenance as an out of pocket expense. How would you feel about replacing the HVAC system to benefit the bank or the next owner?
A Fresh Start – How Now?
So now we know, the rest of the mortgage (the Deed of Trust) still needs to be reckoned with. It is still attached to the property, and requires legal resolution before one can begin mortgage credit recovery. The longer it takes for the foreclosure or short sale to occur, the longer it takes for your credit to heal. There may come a time, so to speak, to remove the life support system of voluntary payments on Zombie Notes and allow the natural financial/legal actions to occur.James Spray, CNE, FICO Pro | October 1, 2011 CO LMO 100008715 | NMLS 257365 |
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.