Tuesday, June 2, 2015

After your bankruptcy; should you have reaffirmed your mortgage?

Reaffirmation is a contract that cancels a bankruptcy for a specific debt.  It is virtually never a good idea for a debtor to reaffirm.  The disaster scenario, particularly in a stagnant real estate market, is you reaffirm the mortgage, suffer future job loss, the house gets foreclosed and the mortgagee can sue you for a massive deficiency.  They can garnish your bank account and your salary (if you get a new job).  If you do NOT reaffirm all those things can happen except the bankruptcy protects you from any deficiency.

In the run up to the big change in bankruptcy laws in 2005 the lending industry managed to almost make reaffirmation mandatory for car loans; there are some loopholes we debtor lawyers can use, but it was a pretty grim change for debtors with financed cars.  Luckily the provision did not extend to mortgages.  Mortgage companies rarely even ask for reaffirmations any longer, because competent debtor attorneys won't sign if they don't get concessions (reduced interest rate or something) and even if they do sign bankruptcy judges often refuse to allow them to be entered.  Mortgage companies can not force anyone to reaffirm.

Mortgage companies, however, often punish people who file bankruptcy by discontinuing sending them payment coupons or statements, disabling their online payment options and refusing to report to credit reporting agencies that they are making their monthly payments.  I consider it to be petty harassment by mortgage companies; they will tell you bankruptcy law requires them to take these steps.

I think refusal to report payments to credit reporting agencies is a violation of the Fair Credit Reporting Act.  Mortgage companies are required to report accurate credit information.  That isn't my area of the law, however, and I don't know of anyone who has taken that approach by suing their mortgagee in court for failure to report.

This often doesn't even come up during bankruptcy, because mortgage companies know they aren't likely to get reaffirmation agreements signed.  Usually it comes up years after bankruptcy when a debtor wants to refinance his or her home.  The mortgage company tells them "well, you need to reaffirm before we can refinance."  There are a couple of problems with this.  First, nothing in the law requires reaffirmation.  Secondly, you can only reaffirm during a bankruptcy; it isn't possible to do so after the fact.  Probably most important of all, reaffirmation is a very technical procedure and doesn't have a thing to do with creditworthiness (at least in my opinion).

If you are in this situation I have little specific advice to counter the mortgage company bureaucrat telling you to just go get a reaffirmation.  My experience, however, is that being organized and persistent when applying for loans will usually be enough to get you the loan.  Good luck!

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