Frequently debtors are solicitated with reaffirmation agreements on home loans. This is probably largely due to a misunderstanding or misconception by the real estate industry of in applying the new bankruptcy laws incorrectly to real estate loans. With the advent of the new Bankruptcy Laws of 2005, it was assumed that “Ride Thru” was eliminated. Presently, my firm has this issue up on appeal in the Ninth Circuit and the final outcome of this decision remains to be seen
Nevertheless, if one closely analyzes the new laws, none of the new laws eliminate “Ride Thru” and validate ipso facto provisions for loans based upon real estate. This is because the new code provisions of 11 USC 362(h), 11 USC 521(a)6, and 11 USC 521(d), solely deal with PERSONAL PROPERTY and not REAL PROPERTY. My collegues have also tried to explain this further as well. Please see the blog posted by Eugene S. Melchionne, Connecticut Bankruptcy Attorney and blog by Jay Fleischman, New York Bankruptcy Lawyer for further clarification.
So what does all this mean? In a nutshell, it means that reaffirmation agreements are not Legally necessary so long as you maintain payments on the property in a previous Rider Thru jurisdiction. The reality is also that most lenders simply do not want to foreclose on real estate anyways, especially in today’s real estate market.
In the California, the case of In re Bennet, 2006 Bankr. LEXIS 1811, Bankr. L. Rep. (CCH) P80635 (Bankr. M.D.N.C. May 26, 2006) likewise held that reaffirmation agreements are not necessary for debtors current on their mortgages, since they maintain the protections of ride thru:
Congress could have easily made 362(h)1 and 521(a)6 applicable to both real and personal property, but it chose not to. Thus, the court finds that debtors in this circuit continue to have the right pursuant to Belanger to retain real property without being required to reaffirm or redeem, so long as payments to the creditor are current.
Moreover, at least in California, there is also a strong possibility that reaffirmation does nothing for the lender as most real estate loans do not allow recourse against the debtor in any event, due to the once action rule, etc.
So as a matter of practice, real estate loans need not be reaffirmed in jurisdictions that recocgnized “Ride Thru” prior to the new Bankruptcy Laws of 2005, and debtors should simply maintain payments on their loans both prior to and after bankruptcy. Any demands for reaffirmation agreements by Lenders, at least in California, have no legal basis for them and are merely matters of individual lenders’ misconceptions of the new Bankruptcy laws. Likewise, any subsequent ramifications as a result of not reaffirming, such as not offering loan modifications, not sending billing statements, etc., are wholly without any merit or legal basis.
Written by Michael G. Doan
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