Should a Chapter 7 Debtor Reaffirm on a Home Mortgage?

There are two assets that the majority of Debtors filing bankruptcy under Chapter 7 want to keep if they can:  their car and their home.  While they want to wipe out (discharge) their unsecured debts, they are willing to keep paying their car loans and home mortgages.  And the lenders on both are also eager for the Debtors to keep paying them and keep the collateral, so long as the Debtors are current on those loans. Lenders may prepare contracts to re-commit the Debtor to the terms of the original loan agreement and send them to the Debtor’s attorney for signature by both the Debtor and the attorney, and eventual filing with the Bankruptcy Court.  The Court will approve them, so long as continuing to pay is not an “undue hardship” on the Debtor, meaning that there is enough income left over to make those payments after other monthly living expenses are paid.  These contracts are known as “reaffirmation agreements” or, for short, “reaffs”.

The important thing for a Debtor to understand is that entering into a reaff removes this Lender from the protection of the bankruptcy discharge.  If the Debtor cannot continue to make the payments on the car or house, the Lender can not only take back its collateral, but the reaff gives the Lender the right to go after the Debtor personally for any portion of the balance owed that the sale of the collateral doesn’t cover.  Therefore, entering into a reaffirmation agreement actually benefits the Lender more than the Debtor.

Obviously, if you do not intend to keep the collateral, you’ll have no need to enter into a reaff.  You will simply surrender the car or house and will have no other financial responsibility for it.

Car lenders usually do require Debtors who intend to keep their vehicles to enter into reaffs, upon the threat of repossession if they don’t.  This is supported by the law in some states such as Ohio, primarily due to the fact that cars, being on wheels, are easily movable and may “disappear” when the Debtor is behind on payments.

Mortgage reaffs have become much less common over the past several years.  They are not required the way they are for car loans because houses tend to stay where they are planted.  Most homeowners just keep paying their monthly mortgage payments and keep their homes (if they want to) without the mortgage lender even suggesting a reaff.  The biggest advantage to a Debtor in not reaffirming on a mortgage is not being bound by the mortgage if finances get tight in the years following a bankruptcy.  If the Debtor can no longer make the mortgage payments sometime in the future, and has to walk away from the house, he can do so without being personally responsible for the balance of the mortgage after the house is foreclosed and sold.  On the other hand, with a fully executed and filed reaffirmation agreement on record, the Lender can take a personal judgment for the deficiency against the former Debtor, and try to execute on it by garnishment, bank attachment, lien on other property, or any other means of collection on a judgment.  In that situation, the chapter 7 bankruptcy, which got the Debtor relieved from maybe $35,000 in credit card debt, has now permanently anchored that Debtor to much more debt by way of the reaffirmed mortgage.  So what good did the Chapter 7 do in that case?

The only benefit to a reaffirmation agreement from the Debtor’s side of it is that the mortgage lender will generally continue to report the monthly payments to the credit bureau.  Sometimes, Lenders won’t report that regular mortgage payments are being made without a reaff, and it may be difficult in that instance to refinance the mortgage loan.  Some Lenders claim that they can’t modify an applicant’s mortgage because they didn’t enter into a reaff.  There really is no such rule.  But some Lenders routinely take that position in the basis that their debtors won’t know any better.  On the other hand, a good argument can be made that the same lender would be reporting any late or missed payments to the credit bureau, so lack of any reporting means the monthly payments are being made timely.

And Debtors can be absolutely assured that so long as they keep paying their mortgage payments regularly, the lender cannot file a foreclosure or otherwise force them out of their home. It can’t happen.

If a mortgage lender sends me a reaffirmation agreement regarding one of my clients, I will inform my client of it, explain what it is, and send them a copy of it.  I also explain my opinion of reaffs on houses, but leave the final decision to them.  If they feel more comfortable signing on with the Lender despite the risk that they could end up seriously in debt again if they have a financial setback, then I’m not going to stop them from entering into it.  However, at this point, I continue to believe that the reaffirmation agreement on a mortgage benefits primarily the lender with little benefit flowing to the Debtor.

If you have any additional questions about reaffirmation agreements, be sure to contact our office to speak with one of our experienced bankruptcy attorneys.

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