I often grapple with chapter 7 debtors over getting them to understand that they do not really need to reaffirm their mortgage to keep their home.

The primary reasons I emphasize them not reaffirming is that the reaffirmation means the debt is not discharged in the bankruptcy, missed payments can continue to harm the debtors credit, the debtor will be liable in the future for a deficiency balance and the bank can still foreclose if payments are not made in the future anyway, regardless of whether the debtor reaffirmed or not.

However, even beyond that, there is another hidden advantage that debtors often do not consider strongly enough. By not reaffirming, the debtor has the freedom to move without repercussion in the future.

I recently had a case where the advantage of not reaffirming the mortgage paid off handsomely for the debtor. In this instance, the debtor owed more on his mortgage than the house was worth, but the debtor wished to stay in the home. The debtor did not reaffirm the mortgage, and therefore discharged the debt. By continuing to pay, the debtor stayed in the house.

About a year after the discharge, the debtor received a job offer about an hour away from his home. The debtor accepted the job and naturally wanted to move closer to his new office. By not reaffirming, the debtor was able to walk away from his home and move to his new home without any troubles. The bank’s only recourse was to take the property back—the same property the debtor was voluntarily leaving anyway.

Now imagine the scenario that the debtor had reaffirmed the mortgage in his bankruptcy under the mistaken impression that he needed to do so to remain in the home. In that case, he would still be liable for the note. If he stopped paying because he wanted to move, he would have a post bankruptcy default, foreclosure and possible deficiency lawsuit to deal with. If he wanted to avoid that, he would have to keep paying on a property he no longer wanted or short sale the home.

This example illustrates the point that debtors should always think long and hard before entering into reaffirmation agreements.

In an effort to avoid filing bankruptcy, nearly every home owner with a troubled mortgage has attempted a loan modification to some degree. Although most attempts usually fail, even on the rare occasions when the modification has been approved, the debtor often still feels the need to file bankruptcy. As such, it is important to consider the impact and ramifications of a home mortgage loan modification before, during and after bankruptcy.

Loan modifications before a chapter 7 bankruptcy are not binding as to the note unless reaffirmed in the bankruptcy. If the loan is not reaffirmed in the bankruptcy, the note is then discharged. The debtor and lender can still honor the agreement as to the lenders lien rights (under a stay and pay scenario) without a reaffirmation agreement, but the note obligation would be forever discharged. Therefore, a debtor who saw his/her monthly mortgage payments slashed in half with a modification before bankruptcy might still not want to reaffirm the mortgage in the bankruptcy if the principal balance was not reduced and the home still has negative equity.

Loan modifications during a chapter 7 bankruptcy are binding if they are approved by the bankruptcy judge through a signed reaffirmation agreement. The debtor can still reaffirm a note which is not the exact same deal as the pre-petition obligation. A modification is essentially a reaffirmation agreement under better terms. Any modification agreed to during the case without bankruptcy court approval is not binding as to the debtors obligation on the note and is discharged.

Loan modifications after a chapter 7 bankruptcy can only be binding as to the debtor on the note if the debtor reaffirmed the mortgage with court approval during the pendency of the bankruptcy case. 11 USC 524 prevents the debtor and creditors from entering into an agreement after bankruptcy for a debt that was discharged in bankruptcy. Therefore, unless the mortgage was reaffirmed in bankruptcy, any post-discharge home modification is only binding as to the creditor’s lien rights.

Loan modifications before, during and after a chapter 13 bankruptcy are binding as to the debtor’s obligation under the note because the debtor who retains a home in the chapter 13 does not discharge the note. The debtor’s chapter 13 repayment plan is determined in part by the amount of money available to the debtor after the debtor pays the home mortgage, so a modified mortgage can lead to an increased payment to the debtors unsecured creditors.

It is important to note that most modifications start with a three-month trial period where the lender can back out for almost any reason before offering a permanent modification. One popular reason lenders deny permanent modifications is because of changed circumstances. As such, debtors should be wary of filing bankruptcy during the 90-day temporary modification trial period and just assuming the lender will continue to honor the modification agreement.

Guest Post by Atlanta Bankruptcy Attorney Peter Bricks.

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.

A reaffirmation agreement, in a nutshell, is an agreement signed as part of a Chapter 7 bankruptcy that must be approved by a judge to be valid, that in essence continues your legal liability for the reaffirmed debt even after the bankruptcy would have discharged it. In Michigan, so long as you are current on your mortgage payments, you cannot be foreclosed upon and cannot therefore lose your house. Therefore, there is no reason to sign a reaffirmation agreement in order to try and save it. Keeping your payments current does the trick alone and preserves your right to walk away from the property free and clear later on, after the bankruptcy, if your situation worsens for any reason.

When it comes to a second mortgage or a home equity loan or line-of-credit (HELOC), it especially makes very little sense to reaffirm this debt.

Particularly in Michigan, where I practice, the majority of properties that I see are already ”underwater” with regard to their first mortgages. (That is, the value of the home is worth less than the first mortgage.) A second mortgage on any of these homes is thus completely unsecured by the value of the home, the collateral for the loan. In this case, if you were to become deficient in your payments and the first mortgage creditor were to foreclose on the property, the second mortgage would receive nothing from the eventual sheriff’s sale auction of the property. Second mortgage creditors, as a result, rarely foreclose even when payments are deficient.

Of course, second mortgage creditors have the right to foreclose in virtually any case; it just doesn’t make a lot of sense for them to do so. These creditors, instead, may simply sit on the debt, allowing late-payments to accrue, reporting them adversely to the credit bureaus all the while, waiting for the home’s value to rise to the point where there is equity against their mortgage and where it makes sense for them to foreclose. Alternatively, they may charge the debt off (report it as lost business income to the IRS, issuing you a 1099 for the amount of debt “forgiven” and for which you will have to pay taxes) and attempt to collect it from you directly by way of collection lawsuit or other means.

In any case, if you are filing bankruptcy, regardless of the disposition of the real estate in questions, the bankruptcy will discharge your personal liability on that second mortgage note (and the first mortgage note), preventing the creditor from ever charging the debt off in a way that has taxable consequences for you and preventing the creditor from collecting it from you directly. The creditor still maintains its lien on the property itself, but, again, unless the home’s value rises sufficiently, it will get nothing out of any foreclosure sale of the property.

A reaffirmed second mortgage, however, becomes an otherwise-discharged that may rise again to pursue you after your bankruptcy where it might otherwise have simply lingered on with no material effect to you. It is extremely unwise and unnecessary to reaffirm a second mortgage, and, if your bankruptcy attorney, is advising you otherwise, consider the consequences before signing the agreement and question your attorney to ensure that there is some advantage to you in doing so.

If you are a 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.

There are a few specific circumstances under which a home may be retained through a Chapter 7:

First, if you own your home outright, it may certainly be retained through the bankruptcy provided there are enough exemptions available to exempt your equity from the bankruptcy estate so that the court-appointed trustee overseeing your bankruptcy process cannot liquidate it (i.e., sell the home off) for the benefit of creditors whose debts are otherwise being discharged by the bankruptcy. Here in my area of southeast Michigan and in the Detroit area in particular, there are few issues arising from this set of circumstances: while the homestead exemption providing for the exemption of real estate that is the debtor’s primary residence is not stellar, it is often sufficient to cover many of the older homes in my area.

Second and more problematically, if you are paying on a mortgage or land contract and are not in any arrears on your payments, the home may be retained in a couple of ways. One, the debt may be “reaffirmed” with the loan lender. “Reaffirmation” means that you are agreeing to continue paying on the original note of sale for the home (or a revised version of it) after the bankruptcy discharge is granted even though that particular debt would otherwise have been discharged in the bankruptcy. Most lenders will agree to sign such an agreement, provided that you are not behind in your payments. However, if you are behind in your payments or EVER fall behind in your payments, the lender generally retains the original contractual right to foreclose. If that happens after your discharge is received, you will remain liable for the amount owed under the original note of sale and/or any applicable deficiency judgments. As a result, signing a reaffirmation agreement is extremely tricky and is something that I, personally, will agree to only under very favorable circumstances to my clients. I would highly recommend consulting a knowledgeable bankruptcy attorney before signing any such agreement.

Third, if you are paying on a mortgage or land contract and, again, are not in any arrears on your payments, you may, depending on your state’s laws, opt to retain the home and continue making payments on it without signing a reaffirmation agreement. The viability of this option will vary from state to state. Here in Michigan, it is a viable option so long as you remain current on your payments—forever. Home mortgage lenders cannot foreclose on your home and evict you if you are current on your payments. Some lenders, however, will stop sending monthly payment statements, etc., after a bankruptcy if you have elected this option. Again, consulting a knowledgeable bankruptcy attorney before making such a decision is a must.

The bottom line is that, if you want to retain your home through a Chapter 7 liquidation, you must be current on your payments at the time of the bankruptcy filing, through the bankruptcy process, and beyond the bankruptcy discharge. Otherwise, there is a likelihood that the automatic stay will be lifted with regard to that property and foreclosure proceedings initiated before the bankruptcy is even complete.

If you have questions regarding bankruptcy and your real or personal property, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

First, in a Chapter 7 bankruptcy, it is possible to keep a car without striking a reaffirmation agreement with the loan lender. This is possible if you own the car outright and are not currently making payments to an auto loan lender on the vehicle. If that is the case, it may wholly or partially fit into either the state or Federal exemptions available.  Under the Michigan state exemptions, currently, $2775.00 may be exempted for an automobile. (Note that ”exempted” means that this property or that dollar-value’s worth of property may be “exempted” from the bankruptcy estate that is created legally when a bankruptcy petition is filed and which contains all of your property except that property that is “exempted.”) So, if you own your car outright and its fair-market value is $2775.00 or less (as of this writing), it is simply property wholly owned by you that you may exempt. Under the Federal exemptions, which are used alternatively to state exemptions, the vehicle exemption limit is currently only $2440.00.

Second, a car may be “redeemed” in a Chapter 7 bankruptcy. In redeeming property during a Chapter 7 filing, the debtor makes a lump-sum payment to the creditor for the total fair-market value of the property. This allows the debtor to retain the vehicle free and clear of the obligation to make any future payments, during or after the bankruptcy process. However, many prospective Chapter 7 debtors do not have a sufficient lump-sum available at the time that the bankruptcy petition is filed, and, thus, redemption is not always a viable option.

Third, if you do not own your car outright and are currently making payments on it, it may indeed be reaffirmed in a Chapter 7 filing—but with some caveats.

A “reaffirmation agreement,” first, is an agreement that is struck between the debtor filing for bankruptcy and the automobile loan-provider (or home-loan mortgagee) stating that you are reaffirming the debt you owe to that loan-provider and that you intend to continue paying it either as-is or with modified terms. The reaffirmation agreement keeps the property in question and the terms of payment surrounding it out of the bankruptcy estate.  The agreement, essentially, stipulates that the debtor agrees to continue to be held liable for the full amount of the agreement, even after the bankruptcy discharge occurs, while the creditor agrees to refrain from repossessing the vehicle.

The reaffirmation agreement must be signed before the discharge takes place, and it must be filed with the bankruptcy court. If the debtor is represented by an attorney in his or her bankruptcy filing, the attorney must also sign the agreement, stating that he or she believes that the agreement will not pose an undue hardship to the debtor, and the attorney must further attest that the agreement was signed by the debtor voluntarily and free of any undue influence. If the debtor is not represented by an attorney, the bankruptcy judge must approve the agreement. Additionally, the debtor must file with the court a statement of income showing that remaining disposable income, after the bankruptcy, is sufficient to make the payments required by the reaffirmation agreement.

As to the caveats, there are many. Many attorneys will not sign a reaffirmation agreement for their clients—ever. The primary reason for this is that, when you sign a reaffirmation agreement, you deprive yourself of the opportunity to fully enjoy the protections provided by bankruptcy. It is possible that, at the time you sign a reaffirmation agreement, you feel that you are fully able to handle the continued payments after the bankruptcy discharge. However, hard times may roll around a second time, and you may find yourself unable to continue making those payments at some point after the discharge (and well before the 8 year time-span required between Chapter 7 bankruptcies lapses). At that point, the creditor may not simply repossess the vehicle but will also be able to pursue you to collect the entire amount of the loan—all of which would have been discharged in the bankruptcy without the reaffirmation agreement.

There are ways around this sticky system, however, that an experienced bankruptcy attorney can guide you through to the best possible result. If you are considering filing for bankruptcy and would like to discuss the possibility of retaining your vehicle or other secured property, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.