If you are a homeowner, you most likely have a mortgage and sometimes even a second mortgage or what is called a home equity line of credit or home equity loan. Unlike credit card debt or medical bills which are unsecured debt, meaning there is no collateral that is backing up the extension of credit, mortgage creditors have your house as collateral and are therefore secured creditors. Secured debt survives the bankruptcy meaning basically, that if you want to keep the house and continue to live in it, you must continue to pay the mortgage company or home equity lender after your bankruptcy case is discharged. You also have the option of surrendering the collateral or basically walking away from the home and letting the bank foreclose on their mortgage. If you have received a discharge in bankruptcy, you can walk away without on any deficiency balance on the home, meaning you will owe nothing to the bank.
A reaffirmation agreement is a legal document that is prepared by a creditor during your bankruptcy, and which is generally presented by secured creditors such as automobile finance companies. As a bankruptcy attorney in Detroit, the Motor City, I see automobile reaffirmation agreements nearly every day. It is usually about eight to twelve pages that contains numerous calculations and notices regarding your rights under the agreement. It usually has multiple places for the debtor to sign and must also be signed by your bankruptcy attorney indicating that the attorney believes that the agreement does not impose an undue hardship on the debtor and his or her dependents. In some instances, it must also be approved by the bankruptcy judge. As discussed above, a mortgage lender or bank is also a secured creditor however, rarely do they ever prepare a reaffirmation agreement during a bankruptcy, because they simply are not required. Most state laws as well as the laws in Michigan, prohibit a bank or mortgagee from foreclosing on the mortgage if the payments are current. A reaffirmation agreement contains a lot of information regarding the debt such as the present balance owing on the debt, the interest rate, and the monthly payment pursuant to the original contract. This is why the bank or lender is the party who prepares it. It is then usually emailed to the attorney for the debtor, who reviews it with the debtor and advises whether or not it is in the client’s best interest to sign the document. If the document is signed, it is then mailed back to the creditor for their review and signature after which the creditor filed the reaffirmation agreement with the bankruptcy court. In Southeast Michigan, where I practice, reaffirmation agreements involving motor vehicles that are financed are very common, as are lease assumption agreements for leased vehicles. Rarely does a mortgage lender or bank send us a reaffirmation agreement involving real estate.
The Law Does Not Require a Mortgage to be Reaffirmed during a Michigan Bankruptcy to Keep the Property
Many people mistakenly believe that to keep their house after they file bankruptcy, that a reaffirmation agreement must be signed and filed. This is simply not the case. The vast majority of bankruptcy cases filed in Michigan, and nationwide for that matter, involving home mortgages, are not reaffirmed. In fact, in over 98% of the cases that I file in Michigan, I never even receive a reaffirmation agreement to review with my client, let alone to sign and send back to the mortgage company for their signature and filing with the bankruptcy court. In the rare circumstance where I counsel my client to sign a reaffirmation agreement there is usually an incentive whereby the mortgagee has modified certain terms of the mortgage making it more attractive to the client, by perhaps lowering the interest rate or possibly bringing the account current if their is an arrearage owed. After the great recession, when home values plummeted, banks another mortgage lenders were more than willing to enter into such agreements and offered principal balance reductions interest reductions putting arrears toward the end of the loan term, etc., especially for those clients of mine whose home values had really taken a hit. Even then, I counseled my clients to considered the reaffirmation agreement very carefully as signing the agreement would make them once again personally liable on the contract or promissory note that would otherwise be discharged as part of the bankruptcy Court Discharge Order. In other words, they couldn’t walk away from the property without possibly being liable for a mortgage deficiency, if the house sold for substantially less than what was owed on the mortgage during the foreclosure sale, which is very often the case. Remember, the bank wants you to sign the reaffirmation agreement, because they want you back on the hook for the debt. They want you to be personally liable and not have the ability to walk away without recourse.
Most People Filing Bankruptcy in Michigan Should Not Reaffirm a Mortgage
The general consensus among most bankruptcy attorneys and colleagues of mine here in metro Detroit, Michigan, where I practice bankruptcy law, is that generally, a reaffirmation agreement involving a mortgage is not in our clients best interest. In the rare instance that a mortgage lender provides me with a proposed reaffirmation agreement, I will always present that to my client and review the terms with them and discuss the pros and cons of signing the agreement.
Pros of Signing a Mortgage Reaffirmation Agreement
So what are the pros, or benefits of signing the document? Upon the filing of a bankruptcy petition, banks and other mortgage lenders must stop reporting to credit reporting agencies, even if the homeowner is current and continues to make their regular monthly payments on the mortgage. Remember that in the vast majority of bankruptcy cases that I file and in which people own real estate, the bank never even offers a proposed reaffirmation agreement to sign. In the unusual bankruptcy case in which a reaffirmation agreement is signed and filed with the bankruptcy court, those monthly payments can once again be reported and may, if they are made timely, help improve their credit score. There is no requirement that a reaffirmation agreement must be filed for a homeowner to refinancing their home or for their present lender to enter into a loan modification with the homeowner. Some clients of mine, however, have reported that their particular bank or lending institution would not refinance their loan because they did not sign a reaffirmation agreement. There is no basis in the law for this, the bank is free to refinance the mortgage after the bankruptcy should they wish to do so, bankruptcy does not prevent the bank from doing so, it just seems with certain lenders that this is their internal policy. I usually advise my clients to shop around for better interest rates anyhow.
Cons of Signing a Mortgage Reaffirmation Agreement
So what are the cons of entering into a mortgage reaffirmation agreement. Well the main drawback of entering into a reaffirmation agreement with your mortgage lender is that you are basically eliminating your ability to walk away from the property should your economic circumstances get worse as your personal liability will not be distinguished by the bankruptcy discharge. This powerful tool of being able to strategically stop making your mortgage payments and intentionally default on those payments should times get hard, can be very reassuring. I have seen it many times in the past, especially after the great recession. I had many a phone call from previous clients who filed a bankruptcy with my office, who had fallen upon hard times due to the huge job losses that occurred and the major reduction in the value of their homes. I had many a conversation with clients who stated that they couldn’t find a job in Michigan but found a job in another state however felt that they couldn’t walk away from their house because they owe twice as much on the house as it was worth. I double checked the court docket for the bankruptcy case that I had filed for them and made sure the mortgage reaffirmation agreement was never signed. Of course, that was usually the case, so I would advise them that yes indeed they could in fact walk away from the house. Many of my clients were so relieved that they would not be responsible for any mortgage deficiency I could start a new life elsewhere they brought them to tears. With the record numbers of unemployed we are seeing due to COVID19, we may again see circumstances in which former debtors need to walk away from their mortgages and are happy that they did not reaffirm the debt.
In summary: If I file Bankruptcy in Michigan, Should I Reaffirm my Mortgage?
So what is the bottom line when it comes to reaffirming a mortgage obligation during your bankruptcy case? I have been practicing bankruptcy for over 28 years in metro Detroit Michigan and have represented over 20,000 clients and during that time, unless we faced a financial crisis, the banks were unwilling to offer any incentives to sign the reaffirmation agreement. The benefits of signing one are mostly to the bank, as they have you once again personally liable for the debt for which you could be sued, should you default after the bankruptcy. The drawbacks are that any timely payments you make will not be reported on your credit report, but remember, neither will any missed payments, and having the ability to walk away from the property, should you face future economic hardship and owe nothing because your personal recourse on the promissory note was discharged in bankruptcy is very powerful. Keep in mind that if you refinance your mortgage or take out a new mortgage or home equity loan after a bankruptcy discharge was granted, this is a new debt and is not part of the original bankruptcy filing.
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