What are the Implications of Non-reaffirmed Mortgage Debt in a pre-BAPCPA Chapter 7 case

by Jonathan Ginsberg, Esq.

April 9, 2009

Although most of the posts on this blog relate to questions about filing for bankruptcy now, bankruptcy lawyers like me regularly receive questions from prior bankruptcy filers (sometimes old clients and sometimes individuals seeking information). Here is a question I received from a woman who filed Chapter 7 pre-BAPCPA and is now having problems obtaining a mortgage:

I was discharged from a chap.7 Bk in nov/05.Then 2 years later tried to refi my home and found out it had gone in the the Bk and not reaffirmed.We called the bank and they told us it was not reaffirmed and yes it had been discharged. My equity line had been reaffirmed and my cars and at the time my attorney said it was up to the bank since they had been notified by her. The credit report shows discharged in chap7. Because of the market we could not refi the loan, we also turned the equity into a personal loan so their was no lien on the house and again we could’nt refi because of the market. My question since we have been out of Bk for four years, a year ago we walked away from the house can it be looked at as a foreclosure? And who’s fault was it with the reaffirmation? We have since gone back and made an offer on our house they have accepted our offer and we have been preapproved, but the last step is the loan co needs info on why the loan was not reaffirmed. What do I tell them and who is at fault. Please can you help thank you.

Here are my thoughts: What has happened here is as follows – it appears that this individual filed Chapter 7 in 2005. I am assuming she filed pre-BAPCPA (before October 17, 2005). If she received her discharge in November, 2005 I think it is a fair assumption that she filed prior to October 17 of that year.
by , Atlanta bankruptcy attorney

Prior to BAPCPA, in most jurisdictions debtors were not required to reaffirm secured debts. In fact, I knew man debtors’ lawyers who specifically did not enter into reaffirmations as a matter of practice because not reffirming provided extra protection to their clients.

When you reaffirm a debt in Chapter 7, you essentially make that debt permanent, and you eliminate bankruptcy protection. In the case of a mortgage debt, if you reaffirm, you reassume personal liability for your mortgage obligation. By contrast, if you do not reaffirm, you have no personal liability to pay that mortgage – although the lender still has a valid lien against the property. If you do not reaffirm a debt and later decide to walk away from the property, or the property is destroyed by flood or fire, you have no personal liability on the debt.

Under current law, a debtor must make a choice – either you reaffirm or you surrender, and if you do not make a choice, the default is surrender. But in pre-BAPCPA filings, you did not have to make a choice. In many of these cases, lenders were happy to have the payments and debtors regularly retained possession of their homes without reaffirming any personal liability thereto.

The primary downside to retaining possession without reaffirming was to a debtor’s credit. Since there was no reaffirmation of the personal liability, your credit would not reflect that you did, in fact, make regular payments.

For many debtors, however, the benefit of escaping personal liability outweighed the lack of credit reporting.

Further, many mortgage companies and some vehicle lenders would not agree to enter into reaffirmation agreements. The individual who asked the above question suggests that this may be the case here. It is possible that the mortgage company handling her loan would not process reaffirmation agreements. If this is the case, my questioner should explain to her prospective mortgage lender that in pre-BAPCPA days, mortgage lenders and debtors were not required to enter into reaffirmation agreements, and that her lender refused to do so. As such the absence of a reaffirmation should not be held against her.

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Jonathan Ginsberg, Esq.

I represent individuals in Chapter 7 and Chapter 13 cases filed in the Northern District of Georgia, which includes Atlanta, Newnan, Gainesville and Rome. I publish several informative web sites, including www.atlanta-bankruptcy-attorney.com and an Atlanta bankruptcy blog, www.thebklawyer.com/thebkblog. Please mention Bankruptcy Law Network when you call.

Last modified: February 5, 2013