Bankruptcy filers who attempt to file a loan modification with their mortgage company after their discharge will often be met with the same negative response: an accusation of not filing the needed reaffirmation agreement during the bankruptcy case. Mortgage companies will claim that without having filed the reaffirmation agreement, the loan modification is not an option. This is a bit misleading.
In many situations, a reaffirmation agreement isn’t even necessary to do a loan modification. In California, many experienced bankruptcy attorneys will recommend that their clients avoid signing reaffirmation agreements for their mortgages.
Before you can understand why your attorney would recommend that you NOT sign a reaffirmation agreement, it’s important to understand what it is: what is a reaffirmation agreement? What are the legal implications? Under bankruptcy, a reaffirmation agreement is a written record between the client and a creditor in which the client agrees to continue paying the debt under the original contract. The bankruptcy judge must approve the agreement before it can be legally binding. If you sign a properly executed reaffirmation agreement that is then approved by the bankruptcy judge, it will legally rebind you to the original debt regardless of your eventual receipt of discharge on your debts. That means that defaulting on your mortgage down the road could result in legal action taken by your mortgage company in order to attempt to recover the debt.
California bankruptcy attorneys don’t usually recommend that you sign a reaffirmation agreement because under bankruptcy, you can keep your home. You simply have to be current with the mortgage payments. You can even refinance your home if its value increases in the future. You are also not legally liable for the debt so if, at some point down the road, you can’t afford the mortgage, you can simply walk away without worrying about personal liability.
The pros and cons of the Reaffirmation Agreement are simple:
PROS:
- Reaffirmed debt will appear on your credit score and can help you rebuild your credit.
- The reaffirmation allows banks to do loan modifications. (See CONS below).
CONS:
- Depending upon the total amount of reaffirmed debt in comparison to your income, you could end up hurting your credit score.
- A reaffirmation is not a requirement for a loan modification. Many banks will still do loan modifications without the reaffirmation agreement. In fact, fulfilling the requirements for the reaffirmation mean you don’t qualify for a loan modification since in signing the reaffirmation, you agree to keep your loan current and pay on time and the loan modification is designed to aid those who aren’t able to make their payments.
Banks want filers to sign reaffirmation agreements because they want you locked in to the terms of your original agreement even after you file for bankruptcy. In California, the benefits you receive by filing bankruptcy dissolve you of personal liability on mortgage debt while allowing you to keep your home so long as you continue to pay. This situation leaves you in control of your situation. You decide what you want to do: keep it, walk away or let it go through foreclosure. Don’t let the bank take this bankruptcy benefit away from you. There’s really no reason to do it their way other than to provide them with the opportunity to rebind you to a debt from which your bankruptcy left you free and clear.
If you still have questions about whether or not to sign a reaffirmation agreement, contact the Southern Californian Bankruptcy Law experts at Westgate Law today.