Bankruptcy and Reaffirmation Agreements

One of the most difficult concepts for debtors to grasp in Chapter 7 bankruptcy is when they need to sign a reaffirmation in bankruptcy, in particular a mortgage reaffirmation.

If I receive a question on this subject it is usually something like can I keep my house if I don sign a reaffirmation agreement? However, more often than not, it not a question I receive, but rather a definitive statement such as I want to sign a reaffirmation agreement so I can keep my house. I also get an offspring of that comment, which goes something like this: but I wont own the house anymore if I don’t reaffirm the mortgage.

If you reaffirm a debt you are placing yourself in the same, or a worse, position with respect to the debt than you were in before you filed bankruptcy.
1. You must pay a debt that you are not legally obligated to pay;
2. If you default, the property securing the debt may be repossessed and you may be subject to a deficiency judgment;
3. If you default, your wages, bank account, or property may be garnished;
4. If you default, your credit will be further damaged;
5. And most importantly, you have now tied yourself to the house and must sell it or satisfy the mortgage to move away, whereas if you had not signed the reaffirmation, then you would have had the freedom to pick up and move whenever you wanted since there was no note obligation to tie you down.

Aside from a rare minority ruling on this subject, the debtor can be assured that he/she does not need to reaffirm the mortgage to stay in the home. What the debtor must do to stay in the home is to continue to pay on the mortgage. However, this is true whether or not the debtor filed bankruptcy or not. The bankruptcy debtor should in fact be well acquainted with this concept, as the foreclosure notice the debtor might have received prior to filing bankruptcy would attest to.

In other words, the debtor who does sign a reaffirmation agreement but continues to fall behind in payments is in a much more grave threat of foreclosure after bankruptcy than the debtor who did not reaffirm, but made timely ongoing mortgage payments since the bankruptcy case was filed. With a signed reaffirmation agreement, the creditor can not only take the house back, but also ding the debtors post bankruptcy credit and pursue the debtor for a deficiency balance.

So are there times when a debtor would want to reaffirm a mortgage? Although I would argue the debtor almost never needs to reaffirm the mortgage, there are times when the debtor can somewhat comfortably reaffirm the mortgage. Where the mortgage payment is reasonable and the debtor has some equity in the home, the debtor might certainly want to reaffirm the mortgage, as timely payments can help rebuild the debtor credit.

Now should the debtor reaffirm a car note? This one is a little different for a variety of reasons and why reaffirm a car note should be much more common than reaffirming a mortgage. Unlike a home, which is considered real property, a car is personal property. The code is much more clear that personal property liens must be reaffirmed for the debtor to retain the property under federal bankruptcy law. That being said, many states have ipso facto clauses that prevent a creditor from repossessing a car that the debtor is current on payments even in the absence of a note. Additionally, even in states where the creditor can pick up a vehicle in which the debtor is timely on payments due to the fact the debtor did not reaffirm, some car lenders will not pick up the vehicle as long as the debtor continues to make timely payments.

Finally, it is important to remember that one of the primary goals of Chapter 7 bankruptcy for a debtor should be to emerge with as few debts after bankruptcy as possible. Therefore, whereas reaffirm a car note is often for many debtors only obligating themselves to $5,000 or so worth of debt, that makes signing that reaffirmation agreement a lot less risky than reaffirming that $250,000 mortgage.

It is also important to note that reaffirmation agreements must be filed with the bankruptcy court before the date of your chapter 7 discharge or else they are not binding. Finally, reaffirmation agreements are not part of chapter 13 bankruptcy, as the debtor in that chapter retains all of his/her assets in exchange for working out a repayment plan with creditors.