Should You Reaffirm Your Mortgage?

Written by Charleston Bankruptcy Lawyer, Russell A. DeMott

Reaffirmation agreements and the law surrounding can be downright confusing.  In fact, the law on this topic is so bizarre that it reminds me of the saying, “truth is stranger than fiction.”

Some background

Prior to continuing to read this post, you need to do a bit of homework if you really want to understand reaffirmation agreements.  To wrap your brain around this craziness, read my four-part post on reaffirmation agreements.  You can get to those posts by clicking here.

I’ve also written several posts on reaffirmation agreements for Bankruptcy Law Network, another blog.  You can read “Bankruptcy Reaffirmation Agreement: ‘Let them Eat Steel’ (Part One) and (Part Two), as well as “Advice for Creditors on Reaffirmation Agreements.”

Have you come up for air yet?

Once you’ve read these posts and come up for air, we’re ready to discuss reaffirmation of mortgages.

First, you need to understand that your mortgage lender can’t do anything to you just because you refuse to reaffirm your mortgage.  The law here in the District of South Carolina is clear on this.  (See In re Wilson, C/A No. 07-00668-dd (D.S.C. 2007)).  This means that reaffirmation only applies to personal property–in most cases motor vehicles–not real estate.

Second, this is a good thing for debtors, especially those with second mortgages.

Why Is this Good for Debtors?

Reaffirmation agreements–if approved by the court–mean that the debtor remains personally liable for the debt.  As to that debt, it’s just like the debtor never filed bankruptcy.  So if the debtor later (a year or two after bankruptcy, let’s say) can’t pay his mortgage, he’d be responsible for the deficiency.  Typically, there is no deficiency on the first mortgage because the lender bids in what’s owing and takes the property back.  But second mortgages are “stripped off” at foreclosure because there isn’t enough value to pay the second mortgage.  (Think of a house that’s worth $100,000 with first mortgage for $100,000 and second mortgage for $30,000, for example.)  That second mortgage turns into a big unsecured debt–essentially like a $30,000 VISA card debt.  Yuk.

So if you reaffirm that second mortgage, you have a real problem if you later can’t make the mortgage payments.  Furthermore, even on the first mortgage, you’ll have problems.  You may have a deficiency–although that’s unlikely–and you will certainly have a foreclosure on your credit report.  And that’s a huge problem.

Okay, so I don’t want to reaffirm my mortgage.  Is there a downside to not doing so?

Yes.  Here’s the one downside, and it’s not that big of a deal.  Since bankruptcy discharges your liability for debts, any discharged debts are not reported to the credit bureaus.  That’s normally a good thing.  That VISA card you couldn’t pay is now off the radar.  But so are your on-time mortgage payments.

There’s a possible “fix” for this

Let’s say you filed bankruptcy three years ago, and continued to make your mortgage payment like clockwork.  You now want to sell your home and buy another.  You need a mortgage.

You could make a “Qualified Written Request” (“QWR”) under the Real Estate Settlement Procedures Act (“RESPA”).  That request requires your lender to provide you with an accounting of all the mortgage payments you’ve made.  This, in turn, allows you to prove that you have been making timely mortgage payments.  You can even ask that this accounting be attached to your credit reports.

But what if I want to reaffirm my mortgage anyway?

Well, then you’re nuts.  The other problem you have (as if being nuts isn’t a big enough problem!) is that the court would probably never enter it.  The bankruptcy judge would also think you had an idiot for a lawyer.  You and your lawyer would be given the “hairy eyeball” from the judge, and then the reaffirmation agreement would just be denied anyway. Very unpleasant and a waste of time.

The only exception I can think of is if the lender offered to modify the loan (lower the rate or change the payment schedule).  However, I’ve never seen that happen.  This would be a mortgage modification and those are–almost always–under the HAMP (“Home Affordable Modification Program”) or HAFA (“Home Alternatives to Foreclosure Act”).

The bottom line: reaffirmation agreements only apply to personal property, not real estate, and that’s a good thing for debtors.