A reaffirmation agreement is where you agree to pay a debt even though it’s been discharged. By signing a reaffirmation agreement, you make it as if the bankruptcy never happened with respect to that debt. The reason people reaffirm is that they want to keep whatever it is they are purchasing, and in order to do so, the bank that holds the loan requires a reaffirmation agreement. The reason the bank requires a reaffirmation agreement is so that in case the debtor later defaults on the loan following her bankruptcy, not only can the bank repossess the collateral (usually a car), it can also sue the debtor for any deficiency that remains after sale of the collateral. Without a reaffirmation agreement, the personal liability for the loan would be discharged by the bankruptcy and the debtor would only be at risk of losing the collateral.
Reaffirming a Mortgage
The question often arises whether you should reaffirm a mortgage loan. In general, the answer is “no, don’t reaffirm if you are current.” You’re not required to reaffirm. The Bankruptcy Code has a loophole, if you want to call it that, when it comes to mortgages. It says that if you want to keep personal property that is collateral for a debt, you must reaffirm within 45 days. If you don’t reaffirm you are required to surrender (give back) the property. Personal property is anything that isn’t real property, such as cars, jewelry, stocks and bonds, furniture, etc. Real property is land and houses. The Code is silent about reaffirming loans secured by real property and the cases indicate that a debtor doesn’t have to either reaffirm or surrender as long as she’s current on her payments. She can continue to make the payments without reaffirming. In bankruptcy parlance, this is called a ride-through, meaning you ride the debt through the bankruptcy.
If a debtor isn’t current on the mortgage payments, it’s a different story. Often, a delinquent mortgage is the cause of a Chapter 13, and the delinquency is addressed in the Chapter 13 Plan. In a Chapter 7, however, there is no provision within the bankruptcy for bringing the payments current. In that case, the bank can commence foreclosure as soon as the bankruptcy is over unless it’s brought current in the meantime. That requires a separate agreement between the debtor and the bank, which almost always includes reaffirming the debt.
Advantage to not Reaffirming
The advantage to not reaffirming is that if something happens in the future and the debtor can no longer afford the mortgage payment, she can just walk away from the house. If there is any equity in the house, that will be lost but the debtor can walk away and let the bank deal with the house. The discharge will protect against any deficiency if the bank sells the house at a loss.
If you have questions about reaffirming in a particular case, contact us here, or call or text (801) 413-3708, or email firstname.lastname@example.org.