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Why reaffirming a mortgage is a very, very bad idea.

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  • Why reaffirming a mortgage is a very, very bad idea.

    To all of the members and guests of this Forum:

    I know a lot of you disagree with my belief that one should never reaffirm a mortgage. Many of you believe that it is in your best interest to reaffirm, thinking that such will help “improve” your credit score. I now want to point out why reaffirming a debt, when the law does not require it, is a big mistake. . . and this could happen to you.

    This past week I was asked to write an opinion letter as to the ability of a debtor to get out from under a reaffirmation agreement. I spent the better part of today doing just that. This is such a touchy subject for me (as an attorney, a homeowner, and a consumer) that I felt compelled to post something about today’s efforts.

    Several years ago this person filed a Chapter 7. The debtor reaffirmed both the 1st and 2nd mortgages. The 2nd was in excess of $70K (at that time). Both loans were current. A few years later the debtor lost the home to a foreclosure.

    This debtor resided in an anti deficiency state so the 1st mortgage lender was precluded from collecting anything further. However, the 2nd was not.

    Since the debtor signed a reaffirmation agreement the debtor is 100% responsible for now unsecured Promissory Note, which is currently in excess of $100K. The debtor tried to dispute the claim saying that he/she never intended to sign a reaffirmation agreement. (Too little too late.) The debtor is now being sued for the $100K that is owed, all because the debtor signed a reaffirmation agreement when one was not required. The debtor cannot file another 7 for several years and may end up in a 13. I am sure this person is really happy at the thought of filing another bk.

    So, if you think this cannot happen to you, think again. I am sure this debtor never expected to lose the house and never expected to get sued for the 2nd. No one has a crystal ball. Bad things happen to good people and once again, this person is in financial ruin. Had this person NOT signed the agreement he/she would have been much better off. This is why I say:

    “Why on earth would someone say to a creditor ‘despite my bk I will pay you and if I don’t you can sue the crap out of me’”?

    This is exactly what each and every one of you is telling your creditor when you sign a reaffirmation agreement.

    By the way, the reason I was asked to look at the issue was to see if I could find a way to invalidate the agreement as a defense to the state court law suit. I did not find an out for this person. Personally, I believe the debtor’s attorney committed malpractice by letting the debtor enter into the agreement, but that is probably not going to help this person in defending the suit.

    If this persuades just one person not to sign on the dotted line then I have done my job.

    Best regards,

    Des.

  • #2
    Okay but what if you live in an anti deficiency state - CA - and you only have a first (second already settled and reconveyed) A reaffirmation should help your credit and there is no possible downside.

    Comment


    • #3
      I am with you despiritfeya,

      I suspect some people can't "think outside the house" and need to have an impartial financial person take the blinders off.

      And it is really sad when people didn't have to reaffirm to stay in the house anyway.

      And it is really, really sad that people could have been living rent-free for the 2-3 years it took the lender to foreclose, saving $20K, maybe $30K, banking it in CDs or TBonds and making a nice downpayment on a short-sale house after their credit rebounds but before the housing market does.

      Oh well, you know the old saying; you can lead a horse to water.......

      Tom in Colo
      Ch7 filed 5/12/2010.....341 meeting 6/30/2010....report of no distribution 8/15/2010.....discharged 10/01/2010.....closed 11/09/2010

      Comment


      • #4
        Originally posted by msm859 View Post
        Okay but what if you live in an anti deficiency state - CA - and you only have a first (second already settled and reconveyed) A reaffirmation should help your credit and there is no possible downside.
        Hi msm, It is my understanding that CA is a non-recourse (anti-deficiency) state as long as the first is purchase money only. In other words, if you refi, you lose the non-recourse status and are able to be sued for deficiencies.
        Stopped paying: 08/10, Filed CH7: 08/27/10 , 341 & No Asset Report: 10/6/10, Last day to object: 12/06/10, Discharged: 12/07/10, Closed: 12/08/10
        AHEM.....NOT AN ATTORNEY, NOT ADVICE, ETC, ETC

        Comment


        • #5
          if u file for bk7 u should not sign ANY reaffirmation.
          is that what i am led to believe?
          Filed chapter 7 on 9/17 341 on 10/20
          Chapter 7 Trustee's Report of No Distribution on 10/21
          Discharged and Case Closed on 12/21/2010

          Comment


          • #6
            I believe ccsjoe is right... and most of us here HAVE refinanced, taken out HELOCs etc. The CA provision does not apply to a lot of people including me.
            12/2009 Stopped paying CCs; 3/10 1st suit;
            8/2010 finally served; No Asset 7 filed. 11 mos since last bal xfer
            9/22/10 60 day club; 9/24/10 report of no distr; 11/23/10 DISCHARGED

            Comment


            • #7
              Originally posted by scorpion35 View Post
              if u file for bk7 u should not sign ANY reaffirmation.
              is that what i am led to believe?
              That, I'd say, is too "general". It also depends on the debt of said reaffirmation. I'm going to reaffirm our car-loan and there is absolutely no disadvantage.

              What I always wanted to ask in regards to BK and mortgage-reaffirmation: If you DON'T reaffirm, do you still have the same legal rights in case you are getting into difficulties paying your mortgage? I mean, if you DON'T reaffirm and you miss a payment, can they foreclose on you faster? Here in Florida, it takes some time to lose your home once you stopped making your payments. I'm wondering if a borrower without a reaffirmation would be granted the same time by law. I often heard the claim 'If you don't reaffirm and miss one payment, you lose your home" - so is there really a legal difference or not?
              Filed CH7 9/24/2010, 341 on 10/28/2010, Disch.&Closed: 1/6/2011. FICO EX: 9/2: 672.
              FICO EQ: pre-filing: 573, After BK Public Record: 568, 10/3: 673.
              FICO TU: pre-filing: 589, After BK Public Record: 563, 9/2: 706.

              Comment


              • #8
                The OPs point is part of a bigger picture we all have to remember. One of the consequences of a Chapter 7 filing is that it won't be available again for 8 years. Imagine being at the mercy of your creditors and their judgments (with full interest and costs) without any relief available. (Though I guess those of you with student loans don't have to imagine.)

                Those of us who made mistakes to get here can certainly be determined to not make those mistakes again and I trust most if not all of us won't.

                But you can also wind up here through events you have NO control over: Economy and Medical. And for the next 8 years you really have to pay or get bled dry by judgments. Judgments that don't even have a means test.

                Reaffirmation is a HUGE risk. I can imagine doing it, if I had to, for a serious, principal reducing modification. Maybe. But for a credit score?

                I realize it's not quite this simple but the first thing that comes to mind when someone is worrying about their credit score is: Whoa. Danger. Danger Will Robinson!
                12/2009 Stopped paying CCs; 3/10 1st suit;
                8/2010 finally served; No Asset 7 filed. 11 mos since last bal xfer
                9/22/10 60 day club; 9/24/10 report of no distr; 11/23/10 DISCHARGED

                Comment


                • #9
                  Just a quick comment that sometimes you don't have a choice either. In our case - the one filing is co-signer on the auto. If co-signer doesn't re-affirm -- it takes both out.... sigh.

                  I so wish there was a way out of that because the vehicle is way upside down to the tune of about 9-10k! (Have I mentioned I hate the auto industry?)....

                  But we don't have a choice...........

                  Comment


                  • #10
                    So, I pretty much have an answer to everything. . . most lawyers do. . . in response:

                    1. “Okay but what if you live in an anti deficiency state - CA - and you only have a first (second already settled and reconveyed) A reaffirmation should help your credit and there is no possible downside.”

                    Besides the comments about a refi, what happens if the legislature changes the law retroactively. This is what happened in Arizona 1 year ago. The legislature removed the anti deficiency protection for investors. The law took effect but the Governor signed an executive order repealing it.

                    2. "And it is really, really sad that people could have been living rent-free for the 2-3 years it took the lender to foreclose, saving $20K, maybe $30K, banking it in CDs or TBonds and making a nice downpayment on a short-sale house after their credit rebounds but before the housing market does.”

                    Totally agree with you Tom. . . I call it milking it for all it’s worth. 60 Minutes calls it a strategic default.

                    3. “if u file for bk7 u should not sign ANY reaffirmation. is that what I am led to believe?”

                    No. The Code requires one to sign reaffirmations for certain things such as vehicles but not for real estate. Further some judges are taking the position, in defiance of the credit industry, that reaffs are not necessary and if the debtor is current, the lender cannot repossess.

                    4. “What I always wanted to ask in regards to BK and mortgage-reaffirmation: If you DON'T reaffirm, do you still have the same legal rights in case you are getting into difficulties paying your mortgage? I mean, if you DON'T reaffirm and you miss a payment, can they foreclose on you faster? Here in Florida, it takes some time to lose your home once you stopped making your payments. I'm wondering if a borrower without a reaffirmation would be granted the same time by law. I often heard the claim 'If you don't reaffirm and miss one payment, you lose your home" - so is there really a legal difference or not?”

                    a. We need to dispel the myth that you have “legal rights” other than those contained in the contract, if you default. The lender is under no obligation to “work with you”. If the lender is “government backed”, it may have to “offer” you a program but. . .

                    b. Assuming a reaffirmation agreement is not required by the bk code (or your particular judge), if you are not in default under “non-bankruptcy” law and you have not signed a reaffirmation agreement, there is nothing the lender can do. You cannot be forced into signing such an agreement. If you are in default, the lender proceeds under state law regardless of such an agreement. State law is the same regardless of whether or not you signed a reaffirmation agreement.

                    Des.

                    Comment


                    • #11
                      Originally posted by despritfreya View Post
                      4. “What I always wanted to ask in regards to BK and mortgage-reaffirmation: If you DON'T reaffirm, do you still have the same legal rights in case you are getting into difficulties paying your mortgage? I mean, if you DON'T reaffirm and you miss a payment, can they foreclose on you faster? Here in Florida, it takes some time to lose your home once you stopped making your payments. I'm wondering if a borrower without a reaffirmation would be granted the same time by law. I often heard the claim 'If you don't reaffirm and miss one payment, you lose your home" - so is there really a legal difference or not?”

                      a. We need to dispel the myth that you have “legal rights” other than those contained in the contract, if you default. The lender is under no obligation to “work with you”. If the lender is “government backed”, it may have to “offer” you a program but. . . .
                      Thanks for answering my question - although you didn't really answer it..

                      I wasn't talking about the content of the mortgage-agreement - I was asking if it's easier for a lender to foreclose on you if you DIDN'T reaffirm - compared to HAVING a reaffirmed mortgage.
                      Filed CH7 9/24/2010, 341 on 10/28/2010, Disch.&Closed: 1/6/2011. FICO EX: 9/2: 672.
                      FICO EQ: pre-filing: 573, After BK Public Record: 568, 10/3: 673.
                      FICO TU: pre-filing: 589, After BK Public Record: 563, 9/2: 706.

                      Comment


                      • #12
                        Originally posted by IBroke View Post
                        Thanks for answering my question - although you didn't really answer it..
                        I wasn't talking about the content of the mortgage-agreement - I was asking if it's easier for a lender to foreclose on you if you DIDN'T reaffirm - compared to HAVING a reaffirmed mortgage.
                        I think I did answer in the 2nd part. . . "If you are in default, the lender proceeds under state law regardless of such an agreement. State law is the same regardless of whether or not you signed a reaffirmation agreement".

                        So, it is not easier or harder if you sign. Lender still has to use state law to foreclose and state law has no special procedures for those who do or do not sign reaffs.

                        Des.

                        Comment


                        • #13
                          Not all aspects of bankruptcy decisions are purely about paperwork and numbers. (even though I concede they should be) Some emotions and psychological energy does come into play. We are humans, and this is unavoidable.

                          I don't believe in making decisions based on fear. To never rebuild credit because of fear of what might happen in the future, is counterproductive to the fresh start that bankruptcy provides. Not reaffirming a mortgage leaves the borrower in a state of credit limbo, that reaffirming clears up. For some, with large second mortgages, or high interest rates on cars, this makes sense, since the benefit of not being responsible for the second mortgage, outweighs the security of reaffirming. For many of us however, a "fresh start" means that we want to get on with our lives without ambiguity and legal loopholes. As in anything regarding bankruptcy, every case is different.

                          For me, the biggest relief I had with bankruptcy, was that the burden of unresolved debts was no longer hanging over my head. When debts are not reaffirmed, but the collateral is not turned over, that ambiguity and uncertainty is carried into the fresh start. Some people can handle that, and so not reaffirming will be a good decision for them. For me, however, I wanted to know that the old debts of the past were settled one way or another and that my fresh start was not going to be carrying in the baggage of my pre-bankruptcy past (except for my student loans of course). As with anything ymmv.
                          Last edited by backtoschool; 10-03-2010, 01:22 PM.
                          You can't take a picture of this. It's already gone. ~~Nate, Six Feet Under

                          Comment


                          • #14
                            IBroke, a foreclosure process has to follow very specific state civil code procedures, steps and timelines, regardless of whether you reaff'd in bk or not. Just because you retain and pay, they still have to send NOD, etc...the bk has no effect on "cutting steps" in foreclosure as they are governed by a separate set of laws, unaffected by the bk.
                            Stopped paying: 08/10, Filed CH7: 08/27/10 , 341 & No Asset Report: 10/6/10, Last day to object: 12/06/10, Discharged: 12/07/10, Closed: 12/08/10
                            AHEM.....NOT AN ATTORNEY, NOT ADVICE, ETC, ETC

                            Comment


                            • #15
                              Originally posted by backtoschool View Post
                              Not all aspects of bankruptcy decisions are purely about paperwork and numbers. (even though I concede they should be) Some emotions and psychological energy does come into play. We are humans, and this is unavoidable.

                              I don't believe in making decisions based on fear. To never rebuild credit because of fear of what might happen in the future, is counterproductive to the fresh start that bankruptcy provides. Not reaffirming a mortgage leaves the borrower in a state of credit limbo, that reaffirming clears up. For some, with large second mortgages, or high interest rates on cars, this makes sense, since the benefit of not being responsible for the second mortgage, outweighs the security of reaffirming. For many of us however, a "fresh start" means that we want to get on with our lives without ambiguity and legal loopholes. As in anything regarding bankruptcy, every case is different.

                              For me, the biggest relief I had with bankruptcy, was that the burden of unresolved debts was no longer hanging over my head. When debts are not reaffirmed, but the collateral is not turned over, that ambiguity and uncertainty is carried into the fresh start. Some people can handle that, and so not reaffirming will be a good decision for them. For me, however, I wanted to know that the old debts of the past were settled one way or another and that my fresh start was not going to be carrying in the baggage of my pre-bankruptcy past (except for my student loans of course). As with anything ymmv.
                              I agree that there is not a single black and white answer. In my case I have a first I modified to a 3.5% fixed 26 years left. Current FMV pretty much equals what I owe. My second was settled. My FICO score is not my new god and right now I don't care what it is. However, I also don't know everything that may come up in the future so if I can do something simple with minimal risk that could potentially play a big part in raising that, it is worth consideration. I am also planning on reaffirming my car loan. Right now I am probably $1k down but that will change before I am discharged ($514/month 2.9% interest).
                              Bankruptcy should be a business decision not an emotional one.

                              Comment

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