Are you filing bankruptcy? Is your mortgage lender insisting that you sign a reaffirmation agreement for your residence? Should you reaffirm your mortgage note?
Is Signing a Reaffirmation Agreement a Good Idea?
Your agreement with your mortgage lender includes two parts: the note that is your promise to repay the borrowed funds and the mortgage document. The mortgage is filed with the local Registry of Deeds and provides the security for your repayment promise. The lender basically “secures” the funds they loaned for the home’s purchase with their ability to foreclose on the home by operation of the covenants contained in the mortgage document.
What Happens to the Note and Mortgage Documents in Bankruptcy?
When you file bankruptcy, the note (or promise to repay the money borrowed from the mortgage lender) is discharged through Bankruptcy Code. The covenants included in the mortgage documents remain intact. The result is that the bankruptcy filer no longer owes the money borrowed to purchase the home. Still, due to promises included in the mortgage documents, lenders can foreclose on the property when no monthly payments are received. Lenders do not like this scenario because, without the promise to pay in the note, they lose the ability to collect a deficiency if the foreclosure auction results in a sale price below the full amount owed. The lender can foreclose and sell the house at auction, but they risk losing money because their only course of action is to accept money from the auction sale price even if it is below value or below the amount owed on the property.
In order to protect and keep the house you may enter into a Reaffirmation Agreement which means that even though you could have discharged (i.e., wiped out) that debt, you none-the-less agree to not wipe out that debt; you will pay and keep the house!
Why Do Lenders Want You to Sign a Reaffirmation Agreement?
A Reaffirmation Agreement is a restatement of the original promise included in the note, a promise to pay the amount owed. The Reaffirmation Agreement keeps the promise to pay in place, so the debt associated with the mortgage is not discharged in bankruptcy. Reaffirmation Agreements must be in writing and filed in the Court where the associated bankruptcy case is pending. Before the lender may accept any payments under the agreement, the Reaffirmation Agreement must be approved by the Court. If your bankruptcy attorney signs the document, it may be approved without a hearing, but it may be necessary to attend a hearing before a Reaffirmation Agreement is approved.
Should You Sign that Reaffirmation Agreement?
If you are filing bankruptcy and your mortgage lender is urging you to sign a Reaffirmation Agreement, remember that almost all the benefits of doing so are for the lender. Discuss the situation with an experienced bankruptcy attorney before signing anything. One negative impact for the bankruptcy petitioner of not signing a Reaffirmation Agreement is that the mortgage lender is no longer obligated to report any voluntary payments to the credit bureaus. Another negative about not signing a reaffirmation has been, in some past cases a lender will not entertain a loan modification on a debt in which a debtor has retained the property and is paying on it. Unless you have significant equity in your real estate, you should probably think twice about signing a Reaffirmation Agreement. It’s also not a good idea to sign the agreement if you will have difficulty making your mortgage payments in the future.
If you have questions about signing a Reaffirmation Agreement during bankruptcy, we can help. Find out how to get a fresh start by filing bankruptcy. Get in touch with Kenneth C. Rannick P.C., Tennessee, and Georgia bankruptcy attorney as soon as possible.