In addition to consumer bankruptcy, my firm does a lot of non-bankruptcy debt relief work for Michigan consumers, some of whom have already filed a Chapter 7 bankruptcy with other law firms. Largely, these clients are attempting to save a home through a mortgage modification or other non-bankruptcy negotiation. The first question we have for these clients is: did you reaffirm your mortgage note obligation in your bankruptcy?
A reaffirmation agreement, as I have written about many times before on this blog, 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. Depending upon the circumstances, there must also be a court order in place approving the reaffirmation agreement for it to be valid and legally binding.
It is that set of “circumstances” that causes confusion among post-bankruptcy mortgage modification and other clients that we see. The concern is this: without a reaffirmation agreement, you are not bound to your debt after a Chapter 7 bankrutpcy. 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; the bankruptcy has discharged your liability to make payments on the mortgage note, which is the contract obliging you to make such payments.
Most bankruptcy attorneys will not sign or file a reaffirmation agreement for a mortgage debt in Michigan (or virtually anywhere else in the United States that I am aware of). This is because, if you wish to keep your house and are current on your payments and can remain current on your payments, you cannot be foreclosed upon. Some bankruptcy attorneys—myself included—consider it to be very bad legal advice for a debtor’s attorney to advise, sign, and file such a reaffirmation agreement as there simply is no need for one and as not filing a reaffirmation agreement preserves the filing homeowner’s ability to walk away from the property free and clear if their circumstances do not improve, post-bankruptcy.
Most mortgage modification and other clients we see who have been through a bankruptcy, however, 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.
Reaffirmation agreements for real property mortgages, in short, are valid on their faces without need for a court order 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 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 these circumstances are not all in place, the reaffirmation agreement may not be valid without a signed order from the judge in your bankruptcy case approving it.
If you are a southeast Michigan resident and are considering filing for bankruptcy, please feel free to contact me at (248) 977-4182 or jhilla@aronofflinnell.com to schedule a free, initial consultation.
