Bankruptcy debtors should not
sign reaffirmation agreements on second mortgage loans.
You do not
sign the reaffirmation agreement to own the house.
By
signing a reaffirmation agreement, you agree to assume the personal liability that your bankruptcy would otherwise discharge.
If
you sign a reaffirmation agreement, you take that personal liability back on and allow the creditor to sue you for any deficiency if you default on the loan.
It bears repeating: YOU DO NOT HAVE TO
SIGN A REAFFIRMATION AGREEMENT TO KEEP YOUR HOUSE.
If the debtor defaults on payments after
signing a reaffirmation agreement, the creditor will have the right to sue for a deficiency judgment.
In most states, debtors will be required to
sign a reaffirmation agreement if they wish to keep their car.
Whether to
sign a reaffirmation agreement is a serious decision, and the state in which you live is a factor.
Clients should understand that second mortgage companies can not foreclose on its mortgage simply because a bankruptcy debtor chooses not to
sign a reaffirmation agreement.
So there's no good reason to
sign a reaffirmation agreement on a first mortgage, and as a practical matter a bankruptcy debtor with a first mortgage will usually not see a reaffirmation agreement proposed.
But that person - the client who does not
sign a reaffirmation agreement - only has one car payment.
If the client has
signed a reaffirmation agreement, the client will be legally responsible for the deficiency between the loan balance as of the time the car was repossessed, together with the costs of repossession (tow - truck, storage, etc.) and the sales price of the vehicle when the vehicle is sold at an auction.
That's the problem with
signing reaffirmation agreements: there's a possibility that by doing so, clients will be creating extremely expensive obligations for something that almost every adult needs: a functional car.
And since filing a bankruptcy case, or filing to
sign a reaffirmation agreement following the filing of a bankruptcy case is not grounds for a mortgage lender to start a foreclosure, the non-signing client really doesn't face the same risks that a non-signing client does with a car loan.
And the vehicle is going to be repossessed whether or not the client has
signed a reaffirmation agreement.
In an earlier blog I discussed the pros and cons of
signing reaffirmation agreements for first mortgages.
In my opinion, the client should never
sign a reaffirmation agreement for a «junior» mortgage - either a second mortgage or a home equity line of credit.
For example, to keep a car the debtor may choose to redeem the debt (pay the secured creditor the value of the collateral in exchange for a release by the creditor of their lien) or reaffirm the debt (
sign a reaffirmation agreement and continue to make car payments).
Gone was the choice to continue to make payments without
signing a reaffirmation agreement.
Signing a reaffirmation agreement should not be done as a routine matter.
If you want to keep the car, most (but not all) lenders require the debtor
sign a reaffirmation agreement.
Reaffirm your car debt If you have an auto loan for which you are still making payments on, be sure that
you sign a reaffirmation agreement with the auto lender.
If you intend on surrendering your car, do not
sign a reaffirmation agreement.
On the other hand, if
you signed a reaffirmation agreement without the knowledge of your lawyer and the bankruptcy court and the items were actually discharged, you may have a legal case that you do not have pay the creditor.
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.
Signing Reaffirmation Agreements: A Good Idea?
Not exact matches
Most lenders won't report your payments to the Credit Reporting Agencies if a
reaffirmation agreement wasn't
signed.
On the other hand, if there is a
reaffirmation agreement signed by the debtors and approved by the Bankruptcy Court, and the borrower / debtor makes timely payment, the loan will be reported to be in good standing.
If a clients
signs a first mortgage
reaffirmation agreement and later defaults on the mortgage loan, the lender will still foreclose, but assuming that the lender forecloses by advertisement (and almost all mortgages are foreclosed this way in Minnesota), the debtor need not worry about having to pay a deficiency if the home sells for less than the mortgage balance.
Once the
reaffirmation agreement is
signed, you are back on the hook for the loan.
You, therefore, have waived your legal rights for bankruptcy protection by
signing off on a
reaffirmation agreement.
All
reaffirmation agreements must be
signed by a bankruptcy court representative to be legal and binding if a debtor has filed for bankruptcy.
That is why a lawyer has to
sign off on the
reaffirmation agreement.
If your bankruptcy attorney, with an appropriate certification,
signs the document the Court may approve the
Reaffirmation Agreement without a hearing.