I have recently seen a few second mortgages “reaffirmed” in bankruptcy by some of my fellow bankruptcy attorneys. However, in Michigan, as I’ve described here, there is no reason to file what is called a reaffirmation agreement for a mortgage debt when you file a Chapter 7 bankruptcy. So long as you are current on your mortgage payments, you will likely have no issue with retaining your home (although there is the possibility that, if it is an especially “luxurious” home, the Bankruptcy Trustee appointed by the court to your case may see retention of the home as an issue of “good-faith” in your bankruptcy filing).
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 southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or firstname.lastname@example.org to schedule a free, initial consultation.