Blog Post
My Mortgage Company Wants a Reaffirmation
- By mike@mdanielslaw.com
- •
- 14 May, 2020
What Direction Should I Go?
Chapter 7 Debtors must select a course of action with respect to secured debts like mortgages on houses. I most frequently recommend "retain & pay", which means you keep the house and continue making the mortgage payments. When my clients are preparing to file bankruptcy we discuss which choice is best for them; it is complex and can be confusing.
Reaffirmation is a contract debtors can sign that cancels the bankruptcy for one debt. Since the whole point of filing bankruptcy is to get a discharge, it rarely makes sense for the Debtor to reaffirm. During the runup to the massive 2005 bankruptcy amendments car lenders convinced Congress that "retain & pay" (previously the obvious choice for secured debts) shouldn't be allowed. They convinced Congress that Debtors should either reaffirm (so that if cars got repossessed after bankruptcy car lenders could sue them for any deficiency (and there is always a deficiency, at least until the car is almost paid off) and garnish their salaries. That's a poor "fresh start", but of course Congress is more likely to listen to national banks than individual debtor's attorneys. Fortunately mortgage lenders didn't get this provision of the law changed for them; "retain & pay" is still the obvious choice and isn't prevented by the 2005 bankruptcy amendments; in fact it is pretty rare for a mortgage company to even bother to prepare a reaffirmation agreement and send it to me. Car lenders still do it fairly often, but it's been a while since I've seen a reaff from a mortgage lender.
The change in the law in 2005 actually didn't create that many problems. Most debtor's attorneys refuse to allow their clients to reaffirm even car loans where they are arguably required to do so; although Ford Motor Credit will sometimes repossess a current car loan for lack of a reaffirmation, pretty much every other car lender ignores the problem and allows "retain & pay" as a practical matter, even though it is technically not allowed. It's simply more cost effective to accept payments than it is to repossess a bunch of cars worth less than the balance due.
Mortgage lenders don't like this reality. They'd prefer to have all their customers on the hook for potential deficiencies, even though their collateral rarely depreciates and it isn't really objectively necessary. They often engage in petty harassment such as disabling online payment options, refusing to report current mortgages to credit reporting agencies, and refusing to refinance mortgage debts that weren't reaffirmed in a bankruptcy.
When you try to refinance your mortgage that you had before filing bankruptcy, the lender will often tell you to "go get a reaffirmation". That isn't statutorily possible; once discharge is issued there is no way to reaffirm. I would translate what they often say, "your lawyer never got a reaffirmation" as "We never bothered to prepare a reaffirmation and send it to your lawyer because he's too smart to commit malpractice against your best interests." It is absolutely NOT the case that the loan doesn't exist because of bankruptcy (which they sometimes also say); if it didn't exist we'd ask them to release the mortgage and you'd own the house free and clear. If it didn't exist they'd return your monthly payments, and I assume that hasn't happened.
If you really need to refinance a mortgage you carried through bankruptcy, the simplest solution by far is to go to another bank. They may complain "these mortgage payments aren't reported by your previous mortgagee"; you can provide proof of payments, either by handing them check copies or by asking the previous mortgagee to provide you with a full payment history. The new bank won't be surprised that your previous mortgagee isn't reporting; it's pretty common in the industry.
As always, call your lawyer for more specific information.
Reaffirmation is a contract debtors can sign that cancels the bankruptcy for one debt. Since the whole point of filing bankruptcy is to get a discharge, it rarely makes sense for the Debtor to reaffirm. During the runup to the massive 2005 bankruptcy amendments car lenders convinced Congress that "retain & pay" (previously the obvious choice for secured debts) shouldn't be allowed. They convinced Congress that Debtors should either reaffirm (so that if cars got repossessed after bankruptcy car lenders could sue them for any deficiency (and there is always a deficiency, at least until the car is almost paid off) and garnish their salaries. That's a poor "fresh start", but of course Congress is more likely to listen to national banks than individual debtor's attorneys. Fortunately mortgage lenders didn't get this provision of the law changed for them; "retain & pay" is still the obvious choice and isn't prevented by the 2005 bankruptcy amendments; in fact it is pretty rare for a mortgage company to even bother to prepare a reaffirmation agreement and send it to me. Car lenders still do it fairly often, but it's been a while since I've seen a reaff from a mortgage lender.
The change in the law in 2005 actually didn't create that many problems. Most debtor's attorneys refuse to allow their clients to reaffirm even car loans where they are arguably required to do so; although Ford Motor Credit will sometimes repossess a current car loan for lack of a reaffirmation, pretty much every other car lender ignores the problem and allows "retain & pay" as a practical matter, even though it is technically not allowed. It's simply more cost effective to accept payments than it is to repossess a bunch of cars worth less than the balance due.
Mortgage lenders don't like this reality. They'd prefer to have all their customers on the hook for potential deficiencies, even though their collateral rarely depreciates and it isn't really objectively necessary. They often engage in petty harassment such as disabling online payment options, refusing to report current mortgages to credit reporting agencies, and refusing to refinance mortgage debts that weren't reaffirmed in a bankruptcy.
When you try to refinance your mortgage that you had before filing bankruptcy, the lender will often tell you to "go get a reaffirmation". That isn't statutorily possible; once discharge is issued there is no way to reaffirm. I would translate what they often say, "your lawyer never got a reaffirmation" as "We never bothered to prepare a reaffirmation and send it to your lawyer because he's too smart to commit malpractice against your best interests." It is absolutely NOT the case that the loan doesn't exist because of bankruptcy (which they sometimes also say); if it didn't exist we'd ask them to release the mortgage and you'd own the house free and clear. If it didn't exist they'd return your monthly payments, and I assume that hasn't happened.
If you really need to refinance a mortgage you carried through bankruptcy, the simplest solution by far is to go to another bank. They may complain "these mortgage payments aren't reported by your previous mortgagee"; you can provide proof of payments, either by handing them check copies or by asking the previous mortgagee to provide you with a full payment history. The new bank won't be surprised that your previous mortgagee isn't reporting; it's pretty common in the industry.
As always, call your lawyer for more specific information.