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Posted by: Erik Clark
Signing Reaffirmation Agreements: A Good Idea?
Your mortgage lender is demanding that you “reaffirm” a mortgage note on your residence in your bankruptcy case. Should you agree to do so?
First the basics: There are two parts to your agreement with the mortgage lender regarding your residence. The first part is the note, your promise to repay the amount of money you borrowed from the lender. The second part is the mortgage document. The mortgage, which is recorded at the local Registry of Deeds, provides the security for your promise to prepay the money you borrowed. Simply put, the lenders “security” is the ability to foreclose on your home by operation of the covenants contained in the mortgage.
What happens in Bankruptcy?
The note, the promise to repay the money that you borrowed, is discharged by operation of the Bankruptcy Code. The covenants in the mortgage remain. As a practical result while you do not owe the money you borrowed, based on the promises in the mortgage, if you do not continue making monthly payments, the lender will begin foreclosure proceedings.
It should came as no surprise that lenders do not like this situation because the promise to pay contained in the note is gone and the lender has lost the ability to collect a deficiency if the house is sold at a foreclosure auction for less than the amount of the loan. The only course of action available to the lender is to accept the amount of money that the house brings at auction.
What is a Reaffirmation Agreement and how does it work?
A Reaffirmation Agreement is simply a restatement of your original promise to pay the amount owed contained in the note. This document gives back the benefit of a bankruptcy discharge as it pertains to the promise to pay contained in the note. These Agreements must be in writing and filed in the Court in which your case is pending. If your bankruptcy attorney, with an appropriate certification, signs the document the Court may approve the Reaffirmation Agreement without a hearing. If your attorney does not sign the document, or you do not have an attorney in the case, the Court will usually schedule a hearing and the Bankruptcy judge will decide if the Agreement will be approved. The lender must not accept any payments under the Agreement unless it is approved.
Should you sign a Reaffirmation Agreement?
Not without the advice of competent counsel. The only negative impact of the lack of a Reaffirmation Agreement is that he lender no longer has the obligation to report your voluntary payments to the three major credit bureaus. It could be argued that this hinders the recovery of your credit score post bankruptcy. Since there are many other things that can be done to build back a decent credit score after bankruptcy, you should seriously consider other issues before your sign a Reaffirmation Agreement. If you do not have equity in your real estate it might not be a good idea to reaffirm the debt. It is also not a good idea to reaffirm the debt if you might have difficulty making mortgage payments in the future.
The mortgage lender may offer to reduce the interest rate on the loan or otherwise make the terms more favorable in an effort to induce you to sign a Reaffirmation Agreement. Consider these new terms but discuss the matter with experienced counsel before you act.
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.