One of the challenges of Chapter 7 bankruptcy is most people who own a home wish to hold onto their home, even after bankruptcy. In some cases, the mortgage company will request the homeowner sign a document called a reaffirmation agreement. Simply put, a reaffirmation agreement is a document that states you understand you owe money and that you agree to pay that money. In 99 percent of cases, this is simply a bad idea. We generally advise clients who are asked to sign bankruptcy reaffirmation agreements to think twice because it can create problems for them down the road.
Why is an affirmation agreement a bad idea?
In effect, you are simply affirming you owe your mortgage (or other) debt. However, what happens in six months or so if you cannot keep up your mortgage payments? What happens is your mortgage lender can then take steps to foreclose on your home and you may not be able to use bankruptcy as a means of holding them off. However, if you have signed a reaffirmation agreement, you could also be liable for a deficiency judgment if the lender cannot recover the amount you owe in a sale of your property. Without the reaffirmation agreement, they cannot collect these judgments. In fact, if you later walk away from your home, the lender cannot hold you liable because legally, the promissory note is no longer valid unless you have signed that agreement.
Most debtors are not aware that they legally do not have to sign these agreements and that the repercussions for signing them can be serious. Keep in mind, the banks must adhere to certain rules if they do ask you to sign a reaffirmation agreement including:
- Agreement must be filed with the court
- You (the debtor) have not received a Chapter 7 discharge
- You (the debtor) have not rescinded the agreement
There are times when signing these agreements is a really bad idea including:
- Property equity - if you have little (or no) equity in your home we strongly recommend you avoid signing a reaffirmation agreement.
- Second mortgage - it is typically a bad idea to reaffirm this debt because in some cases, it may be discharged under certain situations.
- Self employed - those who are self employed should avoid reaffirming debt at all costs. Since your income is not stable, you could lose everything and be liable for the debts you reaffirm.
What are the downsides of not reaffirming debt?
The most common downside of not reaffirming debt is the lender has the option of not reporting your payments to the credit bureau although in most cases, they may continue to do so. Many people believe that mortgage lenders use this as a threat to borrowers to get them to sign reaffirmation agreement. Our recommendation: Keep copies of your cancelled checks and if someone asks you to prove you have paid on time, you will have proof.
One other thing to be aware of: Lenders may also attempt to avoid sending you statements unless you have signed a reaffirmation agreement. Make sure you are not late on payments and continue to send them in whether you get a statement or not.
Chapter 7 Bankruptcy is offered to debtors as a means to getting back on their financial feet and signing a reaffirmation agreement could come back to haunt you later. If you are considering bankruptcy because you have received a foreclosure notice, contact the Law Offices of James C. Shields. we will do everything in our power to protect you from lenders who want you to sign affirmation agreements.