Reaffirmation agreements have been the source of significant debate since the bankruptcy amendments of 2005. One issue that strikes fear in the hearts of debtor’s counsel is whether to allow a client to reaffirm a mortgage obligation. This is a huge issue because of the real estate market and the uncertainty of the economy.
If a client wants to reaffirm this obligation, they must understand the ramifications of their decision. If they speak to the mortgage company, they will probably be told that if they don’t reaffirm the debt, the mortgage company will not report recent payments to the credit reporting agencies. This type of behavior has caused grief in our office because our Judge will not allow a debtor to reaffirm mortgage obligations.For those unfamiliar with the reaffirmation agreement process, think of it this way: The filing of a bankruptcy, and subsequent discharge, kills the obligation to pay on a promissory note on a home. A properly executed and filed reaffirmation agreement breathes life into this dead agreement; thereby obligating the debtor to future mortgage payments. In this uncertain economy, I would never consent to my client signing a reaffirmation agreement on a mortgage obligation.
So, you may be asking yourself: How credit scores fit into this analysis? Creditors have taken the position that they will not report current monthly payments to the Credit Reporting Agencies unless the debtor reaffirms the debt. This is similar to extortion in my opinion. Of course, the creditor has the right not to report the information to the credit reporting agencies; however, to hold this over the debtor’s head in the hopes of obtaining a reaffirmation agreement is criminal in my opinion.
I’ve had past clients call and accuse me of committing malpractice because I didn’t let them sign a reaffirmation agreement with the mortgage company. Now, we all know where this misinformation is coming from. The client spoke to the mortgage company, and they were told that your attorney screwed up. If your attorney had presented you with the reaffirmation agreement and you signed it, your credit would be fine right now. Obviously, this is not true. This is intentionally deceptive conduct.
However, the clients sometimes believe the creditors rather than their own attorney. First, our Judge would not let them sign it, so that pretty much kills the argument. Second, I look at the local property tax appraisal web site and see how much the value of their home has fallen since the time they filed the bankruptcy. In our neck of the woods, we are talking anywhere from 10% to 60%. This definitely brings the argument full circle when they see that they are not bound to the home which is now deeper in negative equity than ever before.
Clients must understand the ramification of signing a reaffirmation agreement. If all you care about is your credit score, then sign away, and I wish you the best of luck, because you will probably need it.
I think the signing of a reaffirmation agreement is a bad idea. Clients must understand that Bankruptcy is a Financial Tool that, if used wisely, can prove great benefits in the short term and the long term. The happiest clients that I have are the ones that truly receive a fresh start and a discharge of all of their obligations.
A reaffirmation agreement is an anchor that a debtor will have to drag around until the obligation is satisfied.
So, if a creditor tells you that if you do not reaffirm a debt, they will not report to the credit reporting agencies, tell them to Stick It. If you do not have an exit strategy or a hefty supply of cash to bail you out, the answer should be no. Trust me, there are other ways to build credit after bankruptcy.
This Post was submitted by Carmen Dellutri, Esq.
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Last modified: May 7, 2014