The Curious Case Of Bankruptcy, The Mortgage Company And Reaffirmation.

by Douglas Jacobs, Esq.

July 11, 2013

2434691031_dc47fc162a_m (1)Bankruptcy generally discharges or re-organizes a debtor’s obligations. This often includes any mortgage that the debtor owes.

In a Chapter 7 bankruptcy, the debts can go away but the liens often remain. The debtor either pays the mortgage or loses the property.

In a chapter 13, the same sort of thing happens: the debtor either pays the first mortgage or can lose the property. Sometimes the amount paid can be reduced, but the end result is the same: pay or lose.

So, what’s a reaffirmation agreement? These are contracts made with the mortgage holder after filing bankruptcy whereby the debtor promises to keep making the payments.

But wait! If he loses the property if he doesn’t pay, why does he need to make another promise to pay? Answer: because the mortgage company wants him to.

And, for many mortgage companies, if the reaffirmation agreement isn’t signed, payments on the account won’t be reported to the credit reporting bureaus. So, the credit report won’t show the payments being made, and the credit won’t recover as quickly. If the payments are being made, the ownership of the property won’t be in jeopardy, but the credit score will be.

Since the agreement to keep making the payments does little else but reaffirm what the debtor has already agreed to do, it doesn’t really change the debtor’s legal obligations.

So why do the mortgage companies occasionally refuse to accept and sign such a reaffirmation agreement? I don’t know. Maybe it’s just my clients. But it happens: twice in the last month.

Maybe its bankruptcy revenge: the mortgage company is frustrated that the borrower exercised his legal right to get a fresh start so they are trying to punish him.

Reaffirmation agreements are voluntary, but I’m filing motions in the bankruptcy court in both of these cases to see if I can get someone’s attention. I don’t know if the judge will have the power to do anything, but once the mortgage company hires an attorney, maybe I can start a rational dialogue. We’ll see.

 

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.

Last modified: July 6, 2013