On a few occasions, clients have come back two years after their discharge, frustrated that they are unable to obtain a loan modification from their mortgage company. The clients are being told by the banks that “because your attorney didn’t file a reaffirmation agreement, we cannot give you a loan modification.”
However, this is misleading. In most circumstances, a reaffirmation agreement is not necessary to do a loan modification. Additionally, in California, most attorneys recommend that clients should not sign reaffirmation agreements for their mortgages.
What is a Reaffirmation Agreement?
To understand why it is not recommended to sign reaffirmation agreements, it is important to understand what a reaffirmation agreement. In bankruptcy, a reaffirmation agreement is an agreement between the debtor and creditor. The Debtor agrees to continue paying the mortgage 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 mortgage and 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 Attorneys do not Always Recommend Signing Reaffirmation Agreements on Most Mortgages in California
Most Bankruptcy Attorneys do not recommend signing a reaffirmation agreement because 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.
Dissecting the Pros and Cons of Reaffirmation Agreements
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 Rebuilding 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 it can affect your credit score 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 Banks Want You to Sign a Reaffirmation Agreement
Banks want you to sign a reaffirmation agreement because they want to lock you into the terms of the original contract. In California, the benefit you receive by filing bankruptcy dissolves you of your personal liability on mortgage debt. However, you may still keep the home by continuing to pay for it without reaffirming. Banks do not like this, because there is no contract that binds you to the bank. You have control, whether you want to keep the home, or let it go through foreclosure.