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Should I Sign a Reaffirmation Agreement on my . . . home . . . car . . . other loan?

As a general rule, entering into a reaffirmation agreement is not generally advised. Many attorneys will advise their clients not to sign reaffirmation agreements, unless there is a specific benefit to be obtained in signing the agreement. This is because the primary goal of filing for Bankruptcy relief is to discharge debt and get a fresh start. A reaffirmation agreement, undermines that goal.

Upon completion of a Chapter 7, the debtor will receive a discharge from the court, which relieves the debtor of any personal liability on the debts, unless the debtor chooses to reaffirm the personal liability by and through a reaffirmation agreement. Under 11 U.S.C. § 524(a)(3), a discharge “operates as an injunction against the commencement or continuation of any action…to collect or recover from, or offset against property of the debtor” unless the debtor, under § 524(c), enters into an agreement with the creditor to reaffirm their personal liability of the secured debt. This 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 fully 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.

The decision to reaffirm a personal liability on secured debt depends on the type of secured debt. If the secured debt is real property (i.e. a mortgage loan on a residence), the debtor is reaffirming any personal liability that would be owed under the note. If the debtor enters into a reaffirmation agreement, he or she is liable for that amount. In essence, entering into a reaffirmation agreement is the same as “giving up” your discharge as it applies to a given debt. In most cases, this is not in a debtor’s best interest. For this reason, most attorneys do not recommend signing reaffirmation agreements.

If the secured debt is personal property (i.e., a vehicle loan), the debtor may have some incentive under the Bankruptcy Code to reaffirm the debt. Under § 521(2)(a), within 30 days of the filing of the petition or before the first date of the meeting of creditors, a debtor shall file with the court his or her statement of intentions, indicating whether the debtor intends to reaffirm or redeem the property in question for each secured debt. In conjunction with this, under § 521(2)(b), the debtor has 30 days after the first date of the meeting of creditors to perform its stated intention. In regards to personal property (i.e a vehicle loan), the debtor may not retain possession of the property unless he or she enters into a reaffirmation agreement within 45 days of the first meeting of the creditors. In other words, if a debtor does not reaffirm a vehicle loan, the creditor has the right to repossess the vehicle. Though the creditor cannot collect any money from the debtor, they can take the vehicle. For this reason, reaffirming a vehicle loan may be appropriate.

The issue is more complicated when the debt is a mortgage loan. To understand the complexity behind reaffirming mortgage loans, it is important to also understand that under Oregon law, if a debtor fails to pay on a mortgage, and the mortgage is foreclosed, generally the creditor cannot seek collection of a default judgment. ORS 86.770(2) provides “after a trustees sale . . . or after a judicial foreclosure of a residential trust deed, an action for a deficiency may not be brought or a judgment entered against the grantor.” This applies to the primary mortgage (i.e. first mortgage) as well as any “note, bond, or other obligation secured by a residential trust deed for, or mortgage on the property that was subject to the trustees sale or the judicial foreclosure [which] was created on the same day, and used as part of the same purchase or repurchase transaction . . . and is owed to or was originated by the beneficiary or an affiliate of the beneficiary of the residential trust deed that was subject to the trustees sale or the foreclosure.” This protection would not apply, for example, to a Line of Credit, or a Home Equity Loan but it would apply to the second mortgage in a 80/20 loan or similar transaction.

Accordingly, in the case of a first mortgage on a residence there may be some benefit in signing a reaffirmation agreement. For example, when a debt is reaffirmed, the lender will generally agree to resume sending mortgage statements. The lender may also agree to resume credit reporting activities – potentially helping a debtor rebuild credit. Also a reaffirmation agreement may allow the debtor to entertain the full range of assistance programs offered by the lender, and may be eligible for a loan modification where they might otherwise be disqualified (because with no liability on the underlying note, some lenders may determine that modification of the underlying note is not feasible to the extent that it is unenforceable except through foreclosure). With this said, some lenders will continue to work with debtors even if there is no reaffirmation agreement. In the case of a second mortgage, there is generally no benefit to signing a reaffirmation agreement, and in fact doing so is almost always a bad idea. You should, of course, speak to your bankruptcy attorney about your individual situation before making any decision on a reaffirmation agreement.

Even with these possible benefits, signing a reaffirmation agreement on a mortgage loan is the rare exception rather than the rule. In fact, the vast majority of mortgage lenders do not prepare or send reaffirmation agreements, and most bankruptcy attorneys do not prepare reaffirmation agreements for their clients. Because a reaffirmation agreement is designed to protect the creditor (i.e. the bank) unless the creditor prepares the agreement, there will be no agreement to be signed.

You will notice that the word “may” is regularly used in this article. That is because different lenders (and investors) treat loan modifications post-bankruptcy discharge differently. The Home Affordable Modification Program (HAMP) guidelines may allow modification at the servicer’s discretion but some lenders have hard-and-fast rules against any modifications post-bankruptcy – whether or not a reaffirmation agreement is signed. Further, guidelines for various government assistance programs change regularly. Often clients that a friend of a friend was easily able to obtain a loan modification post-discharge, but find out that their lender may not participate in the same home-retention programs. Accordingly, each case is individual, and the results can vary from loan to loan and lender to lender.

Presuming a debtor decides to enter into a reaffirmation agreement, either for personal property (vehicle loan) or real property (home loan), the reaffirmation agreement is filed with the court. The court requires that copies of the contracts (i.e., mortgage, note or vehicle financing agreement) be attached to the reaffirmation agreement upon filing. The court then holds a hearing to determine if the reaffirmation agreement creates an undue hardship on the debtor. The court can either approve or disapprove the reaffirmation agreement. In the case where the debtor’s budget does not show the ability to make the payments, the court will generally deny the reaffirmation agreement – which means that the agreement is of no force or effect.

In the end, re affirming a debt is a decision that should not be taken lightly. You should speak to your attorney about whether reaffirming the debt will be in your best interest.  If your bankruptcy is already over, and you elected not to sign a reaffirmation agreement, or if the lender never offered you an agreement, it may be possible to file an agreement by reopening your bankruptcy case.  Though such an agreement will have no legal impact, and will not be enforceable, some lenders simply want to see a reaffirmation agreement “on file”.  When faced with a mortgage lender unwilling to modify a loan, perhaps reopening the case (and paying the cost to do so) is worth the time and expense.  Then again, unless you have some assurance that the lender will actually modify the loan, reopening the case may simply be a waste of your hard earned money.