Re-Affirmation of Mortgages in Bankruptcy

by Michael Selinfreund, President/General Counsel of Cherry Creek Title Services, Inc.

March 22, 2016

This article is intended for educational purposes only and not as legal advice.

 A reaffirmation agreement is a document signed by the debtor and creditor in which they agree that a debt is not discharged in bankruptcy.  To be effective, Reaffirmation Agreements must be filed with the bankruptcy court before entry of the Discharge Order which occurs 60 days after the initial 341 meeting.  11 U.S.C. 524(c) requires that the reaffirmation agreement must (1) be in writing and prior to the granting of the discharge; (2) receive the required disclosures under 524(K); (3) filed with the court; (4) (if applicable), accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating the agreement; (5) state that the debtor was full informed and the agreement is voluntary; (6) such agreement does not impose an undue hardship on the debtor; and (7) the attorney representing the debtor has fully advised the debtor of the legal effect.  The debtor has 60 days to rescind the reaffirmation agreement once it is filed with the court or prior to discharge.  This is a chapter 7 issue since it’s irrelevant in a chapter 13 case because the mortgage debt the debtor chooses to continue to pay is not discharged.

The overwhelming majority of bankruptcy attorneys frown on having their debtors reaffirm their mortgages since the debtor can instead elect the “ride through” option and keep the home by just making payments.  This way, if the debtor encounters financial difficulties subsequent to receiving their discharge and fails to pay their mortgage, the creditor cannot pursue them for any deficiency.  Because of this, some Bankruptcy judges have rejected reaffirmation agreements on mortgage loans. This is effectively a non-issue in states that have laws precluding foreclosing lenders from pursuing deficiency judgments on mortgages secured by the debtor’s primary residence.  It is worth noting that a debtor who has reaffirmed a debt in bankruptcy becomes ineligible for a mortgage modification under HAMP.  See In re Bellano, 456 B.R. 220 (Bankr. E.D. Pa. 2011) (creditor’s requirement that debtors reopen bankruptcy to file reaffirmation agreement contradicts HAMP language limiting eligibility to those chapter 7 debtors who have not reaffirmed their mortgage debt).

So, why would a debtor ever even consider reaffirming their mortgage?  The main reasons propounded by mortgage creditors is that failing to reaffirm will result in the creditor ceasing to report the post-discharge payments and will also preclude the debtor from being able to enter into a loan modification with the lender.  Debtors seeking to obtain new debt post-bankruptcy discover that all the “on time” payments they made after discharge fail to appear on their credit report.  When a debtor receives a discharge of their debt, they no longer personally owe the debt.  Creditors indeed have no duty to report the debtor’s payments if the debt is not reaffirmed, and, many creditors quit reporting because courts have punished mortgage creditors for reporting payments missed after filing under the theory that doing so is a prohibited collection effort.  The mortgage creditor’s last report to the Credit Reporting Agencies is likely that the balance due is “discharged in bankruptcy.”  In some circumstances such as when the debtor has significant equity; can afford the mortgage payment; and filed bankruptcy because of medical bills or some other extraordinary event rather than lack of income, it may be worth considering if that gives the debtor a path to a more favorable loan through a modification or refinance.

Some debtors ask if they can re-open their closed bankruptcy case and reaffirm the debt. In short, this is virtually impossible.  I’ve heard of only one bankruptcy court in Tennessee that has allowed debtors to re-open their cases for the sole purpose of reaffirming their mortgage.  To do so, a debtor’s discharge order would likely have to be vacated since a reaffirmation agreement must be filed before entry of the discharge. The bankruptcy code simply does not allow a debtor to vacate a discharge order to reaffirm a debt. And, bankruptcy courts have held that post-discharge reaffirmation agreements are unenforceable. The case of In re Conner, No. 09-42532 (Bankr. S.D. Ga. Oct. 25, 2013) involved a chapter 7 debtor seeking to reaffirm their mortgage to clear the way to enter into a mortgage modification agreement with Wells Fargo.  The bankruptcy court denied the debtor’s motion because section 524(c) specifies that a reaffirmation agreement must have been made before discharge.  The court reasoned that because a reaffirmation agreement made post-discharge is unenforceable, reopening the case would be an exercise in futility.  See also In re Owens, No. 10-72509 (Bankr. W.D. Va. Aug. 9 (2013).  The Conner court joined the majority of courts that hold that a reaffirmation agreement made post-discharge is unenforceable.

There are very limited options that exist for the post-bankruptcy discharge debtor seeking to add the favorable payment information to their credit report for a mortgage they did not re-affirm.  They can obviously supplement their loan application with proof of all such on-time payments.  Some attorneys suggest that such debtors dispute their credit report.  This may or may not lead to a change to their report, but at least the dispute, which includes the on-time payment information, will appear as part of the debtor’s credit file – at least for a while.

Because of all the complex issues involved, any debtor facing this issue should contact their bankruptcy attorney for advice and guidance.