Should You Reaffirm a Mortgage in Bankruptcy?

 

Reaffirming a debt in bankruptcy means that you continue to be obligated on the debt as if you hadn’t sought bankruptcy protection.  Debtors sometimes reaffirm their car loans because there are special bankruptcy code provisions that require them to do so. 

 

However, this requirement does not apply to real estate.  Debtors do not have to reaffirm a mortgage debt.

 

 

Generally, there is no reason to reaffirm a mortgage obligation unless the mortgagee has agreed to modify one or more of the mortgage terms so that keeping the mortgage is much, much more beneficial.

 

Possible changes could include a lower interest rate, a lower monthly payment, placing arrears on the back end, deeming a default as cured, etc.

 

However, if your payments are current, there is usually no tangible benefit to reaffirm a mortgage loan.  The only possible benefit is that the mortgage company will continue to report your stream of future on-time payments (assuming that you make them) to the credit reporting agencies.

 

Most lenders will stop such reporting to credit reporting agencies once a bankruptcy is filed, even if the homeowner continues to make monthly payments, a process commonly referred to as retain and pay.  Of course, the downside to reporting payments is that if you are late, you will hurt your credit score.

 

Also remember that if you reaffirm the mortgage and can’t make the payments, the mortgage company can and likely will sue you for money.  They cannot sue you for money if you refuse to reaffirm.

 

Reaffirming a mortgage debt requires a comprehensive multi-page reaffirmation agreement that must be filed with the court.  The reaffirmation agreement also requires the debtor’s bankruptcy attorney to indicate that he or she has read the agreement and that it does not impose any undue hardship on the client.

 

Some attorneys, for good reason, will not sign this.  In addition, some judges will not permit a debtor to reaffirm a mortgage loan unless the debtor is incurring some kind of valuable benefit for doing so.

 

 

Keep in mind that Chapter 7 bankruptcy has the effect of discharging a debtor’s financial obligation to pay the mortgage.  That means that if the debtor stops paying the mortgage, the most the mortgagee can do is foreclose on the home and take it back.  If there is a bankruptcy discharge, then the mortgagee can never pursue the mortgagor for any money, even if there is a large deficiency.

 

Eliminating personal recourse on the mortgage is a very powerful tool that many of my clients can later fall back on if they no longer desire to keep their home.  Having the ability to strategically default on a mortgage is very valuable.

 

In my practice, I rarely see mortgage lenders who are willing to change the terms of a first mortgage.  Therefore, there are very few instances where reaffirming a mortgage is advisable.

 

Incidentally, I regularly receive “proposed” reaffirmation agreements from mortgage companies all the time.  Some arrive by overnight mail; some by e-mail marked urgent.  It upsets me when I see this because I think there are inexperienced bankruptcy attorneys out there who feel that the reaffirmation agreement, which just arrived by Federal Express, must be signed. 

 

I have never seen an unsolicited reaffirmation that offers any benefit, and they all get quickly filed in my circular filing bin.