Did I Reaffirm a Mortgage in my Bankruptcy? If You're Not Sure, Probably Not.
"Did You Reaffirm a Mortgage in Your Chapter 7 Bankruptcy?" --- An Increasingly Common Question in Post-Bankruptcy Mortgage Modification Applications
A reaffirmation agreement is an agreement that is struck during a bankruptcy process between the filing debtor and one of his or her creditors. The reaffirmation agreement must be signed by you (the debtor), your bankruptcy attorney if there is not what is called "undue hardship" (no or negative income left over at the end of the month after your basic household expenses are deducted from your monthly average income as listed on the bankruptcy petition), and the creditor. There must also be a court order in place approving the reaffirmation agreement for it to be valid and legally binding. Reaffirmation agreements are provided by creditors to your bankruptcy attorney, must be signed by you and your attorney (who will be legally unable to sign if there is a "presumption of undue hardship" in your case, meaning that your expenses outweigh your income as described in your bankruptcy petition), and then returned to the creditor, who must then file it. If your attorney has not signed it and there is a presumption of undue hardship, the bankruptcy court in the Eastern District of Michigan will schedule automatically a hearing you will need to attend in order to explain to the judge why you think the reaffirmation agreement should be approved. Your attorney will likely charge you extra fees as they are required by the court to attend these separate hearings as well. Why reaffirm a mortgage in bankruptcy? The concern is this: without a reaffirmation agreement, you are not bound to your debt after a Chapter 7 bankruptcy. If you wish to walk away from your home, you can do so without the need for a short sale or any other kind of transaction alleviating your responsibility further. In other words, the Chapter 7 bankruptcy has discharged your obligation to make payments on the mortgage note, which is the contract obliging you to make such payments. After a Chapter 7, if you have not "reaffirmed" the mortgage note debt, you are only making payments voluntarily if you keep your house. Why you generally will not want to reaffirm a mortgage debt in bankruptcy in Michigan is that Michigan state law (the bankruptcy process is governed by Federal law) already protects you from foreclosure if you are making your payments on time every month. Your home cannot be foreclosed if your payments are current. Period. In or out of bankruptcy. Thus, many, if not most, bankruptcy attorneys will not sign or file a reaffirmation agreement for a mortgage debt in Michigan. The reaffirmation agreement offers no increased protection from foreclosure for you---and it also anchors you to the house, negating the benefit of the bankruptcy in the first place as your mortgage debt likely far outweighs the balance of all of your other debt combined. If your circumstances do not improve after the Chapter 7, you will not be able to "walk away" from the home without being pursued for collection on the deficiency debt (the difference between what the house "sells" for in a short sale or foreclosure sheriff's sale). In that instance, your Chapter 7 bankruptcy, which might have been filed to discharge $30,000 in credit card debt has now anchored you permanently to $50,000, $100,000 or more debt by way of the reaffirmed mortgage. What good did the Chapter 7 really do you in that case?
Did I Reaffirm a Mortgage in Bankruptcy? What If I Didn't?
The only benefit of a reaffirmation agreement is that your mortgage creditor will generally continue to report your monthly payments positively to the credit bureaus. Without a reaffirmation agreement in place, the mortgage debt, even if you are paying for and keeping the house, will be reported simply as "discharged in bankruptcy," along with the rest of your discharged debts. Is that really worth tens of thousands of dollars in non-dischargeable, post-bankruptcy liability? The Hilla Law Firm suggests that it is not. Further, there is no obligation under the Federal Bankruptcy Code or the Federal Fair Credit Reporting Act (FCRA) for creditors to positively report anything at all. They are only under duty to fairly report negative credit instances ... There is no guarantee whatsoever that any creditor will ever report anything positive to your credit reports. However, as noted above, where most post-Chapter 7 individuals end up asking the question regarding whether they've reaffirmed a mortgage or not is when, after the bankruptcy, they apply for a mortgage modification. Clients of The Hilla Law Firm, PLLC will always know the answer to this question if they are asked it by their mortgage servicer because our clients are always kept well-informed and in the loop on every process and stage of their bankruptcy proceedings by our office. If there was a reaffirmation agreement offered by a mortgage servicer (most do not bother to offer one since few sign them), it will have been fully discussed and the course of action to not reaffirm, if we so advise, will have been fully explored both verbally and in writing. Whether there is a signed reaffirmation agreement returned to a creditor or not, our clients will have a copy of it in their possession before their case concludes. In other cases, however, clients may not be so sure. Not all bankruptcy lawyers are so careful with client communications. Some people who have been through a bankruptcy have no idea whether they have reaffirmed their mortgage note obligation or not. In that case, we must look at the docket report of their bankruptcy case to determine whether a reaffirmation agreement was filed or not and, if so, whether it was a valid reaffirmation agreement. The question arises, typically, when a mortgage servicer claims that they cannot modify an applicant's mortgage because they did not reaffirm a mortgage in bankruptcy. There is no such "rule" if a servicer so suggests this, to be clear. It is a bogus excuse, a matter of internal company policy only. But it is one which some major mortgage servicer routinely make, and it is one which we at The Hilla Law Firm, PLLC warn our clients of in advance at the time that we advise them not to reaffirm a mortgage.
Did I Reaffirm a Mortgage in Bankruptcy? How Do I Know?
Reaffirmation agreements for real property mortgages, in short, are valid without a court order approving if:
- The debtor was represented by an attorney;
- The debtor's income is greater than their monthly expenses as represented on their petition schedules;
- The debtor and debtor's attorney and the creditor involved all signed the reaffirmation agreement prior to filing.
If not all of these pieces are in place, a specific court order approving the reaffirmation agreement is required for it to be valid. A general statement made by you on the document within your bankruptcy petition known as the "Statement of Intention" that you plan to reaffirm a mortgage debt is not a reaffirmation agreement. If these circumstances are true, a debtor has filed a valid reaffirmation agreement and will be bound to that mortgage note liability. In such cases, a modification negotiation may be more difficult to obtain because the creditor understands that you have the legal obligation to pay. If you do not sign it, on the other hand, a servicer may also deny a modification request, as noted, simply because you haven't reaffirmed. You cannot predict the internal corporate policy of any individual mortgage servicer, and the costs of anchoring yourself to what will be, without the bankruptcy discharge protecting you, potentially an impossible debt for you to deal with should your circumstances improve be carefully considered. General hope for a future modification and general concern for your ongoing credit is likely not going to be worth tens or hundreds of thousands of dollars' worth of non-dischargeable debt. There is no guarantee that your credit will reflect any positive reporting under law in any case (although it is certain not reflect ongoing payments positively without the reaffirmation agreement). It is nearly always a bad idea to reaffirm a mortgage in a Chapter 7 bankruptcy. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.