Do You Need to Reaffirm Your Mortgage to Get a Loan Modification?

REAFFIRMATION AGREEMENTS FOR MORTGAGES

Every once in a while a client will contact our office after their discharge upset that they are unable to obtain a loan modification from their mortgage company. The line that they are given by the mortgage company is that because their bankruptcy attorney didn’t file a reaffirmation agreement there is no way they can modify their loan.

This of course is completely false.  We assist clients with post-discharge loan modifications all the time without a reaffirmation agreement being filed in their Chapter 7 case.  In fact, we will not sign off on a reaffirmation agreement with a mortgage company (because there is no reason to other than to allow the mortgage company the ability to pursue you later).

WHAT IS A REAFFIRMATION AGREEMENT?

Under bankruptcy, a reaffirmation agreement is an agreement between the client and a creditor, whereby the client agrees to continue paying the debt under the original contract. The Bankruptcy Judge must approve the agreement before it can take legal effect. A properly executed reaffirmation agreement that is approved by the Judge will legally rebind you to the original debt, regardless of whether you receive a discharge from the bankruptcy court. Therefore, if you default on your mortgage payments sometime down the road, the mortgage company may take legal action against you to recover the debt, even if you have already received a discharge under your bankruptcy.

WHY BANKRUPTCY ATTORNEYS DO NOT ALWAYS RECOMMEND SIGNING REAFFIRMATION AGREEMENTS ON MOST MORTGAGES IN GEORGIA?

Attorneys do not recommend signing a reaffirmation agreement because under a bankruptcy, you can keep your home as long as you are current with your mortgage payments. You can refinance your home if it increases in value at a future date. Furthermore, you will not be legally liable for the debt, so that if you can no longer afford the mortgage, you can just walk away with no personal liability.  Even if a lender refused to report post-petition mortgage payments to your credit you can actually self-report these payments to build your credit.

PROS AND CONS

Signing a Reaffirmation Agreement and Credit Score

Debtors are often enticed to reaffirm their mortgage after hearing two persuasive arguments for doing so. First, the reaffirmed debt will appear on their credit report and can help them rebuild their credit. However, just because a debt appears on your credit report does not mean it will ultimately lead to better credit. By having the debt appear on your credit report, you are telling other creditors that you owe the entire balance of the mortgage. Many factors lead to a credit score, including debt to income ratio. If the mortgage balance is high and your income is low, then the credit score might be affected negatively.

Signing a Reaffirmation Agreement and Loan Modifications

The second argument in favor of signing a reaffirmation agreement is that it allows banks to do loan modifications. However, this is not a requirement. Many banks will still do loan modifications without a reaffirmation agreement. Additionally, most banks will NOT do a loan modification if you are current on your mortgage payments. When you sign a reaffirmation agreement, you are stating that you want to stay legally liable for the debt, that you will make the payments under the original contract, and that you will stay current on your mortgage payments. As you can see, if this is the case, then you do not need to do a loan modification. If you are thinking about doing a loan modification later, then you are saying you may not be able to afford your mortgage payments. In which case, signing a reaffirmation agreement contradicts this.

WHY DO CREDITORS WANT ME TO SIGN A REAFFIRMATION AGREEMENT?

Creditors want you to sign a reaffirmation agreement, because they want to lock you into the terms of the original contract even after you filed the bankruptcy.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

  • Blog Stats

    • 2,169 hits
%d bloggers like this: