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

[tobee43]

In response to:

"Immediately after discharge, we would start saving money to make the second mortgage a settlement-offer. What would be our options if they decide to deny it? I think CH 13 could be filed 4 years after the 7 but stripping wouldn't be an option any more because the debt would already be discharged, correct? And what if we would reaffirm the second mortgage in case they don't accept a settlement. Could it then be stripped in a potential CH 13?"

1. While the underlying debt is discharged in the 7 the lien passes through unaffected. The lien survives and the lender, if not paid, may exercise its rights against the lien. Will it? Probably not when it is sitting behind a $500k+ first with property worth $300k. But is has the right to.

2. As I have posted, reaffirming the 2nd makes no sense.

3. You DO NOT have to wait 4 years from the 7 discharge to file a 13. You only need to wait if you are wanting a discharge to be entered in the 13. Since you are not asking for a discharge and are seeking to strip the lien that survived the 7, you can file the 13 once you have the 7 discharge. The question will be whether or not the 13 was filed in "bad faith".

Practice pointer: You could try the strip in the 7. While there is no published authority to do this, if you file the 506 complaint, properly serve it and the lender fails to answer, you maybe able to get your judge to enter a default judgment. I did this once and was successful as the lender failed to file an answer. Had the lender filed an answer my client would have decided if she wanted to be a “test case”. If the answer was “no” we would have dismissed the adversary, filed her 13 (she had her 7 discharge) and filed a new adversary to do the strip.

Des.

really des...YOU may be one of the only atty's in the country that fight so hard for their clients.

a rarity indeed.

Practice pointer: You could try the strip in the 7. While there is no published authority to do this, if you file the 506 complaint, properly serve it and the lender fails to answer, you maybe able to get your judge to enter a default judgment. I did this once and was successful as the lender failed to file an answer. Had the lender filed an answer my client would have decided if she wanted to be a “test case”. If the answer was “no” we would have dismissed the adversary, filed her 13 (she had her 7 discharge) and filed a new adversary to do the strip.

so actually, you really don't know if the outcome could have yielded another result... had the complaint been answered and carried through...since this decision was based solely on the default. actually rendering the complaint moot. would have been an interesting argument had there been some written cases which you say there wasn't. a precedence looks good on a resume. (although sometimes i think you may be a pro bono pubic defender!! LOL!!!)

[despritfreya]

In response to:

"Immediately after discharge, we would start saving money to make the second mortgage a settlement-offer. What would be our options if they decide to deny it? I think CH 13 could be filed 4 years after the 7 but stripping wouldn't be an option any more because the debt would already be discharged, correct? And what if we would reaffirm the second mortgage in case they don't accept a settlement. Could it then be stripped in a potential CH 13?"

1. While the underlying debt is discharged in the 7 the lien passes through unaffected. The lien survives and the lender, if not paid, may exercise its rights against the lien. Will it? Probably not when it is sitting behind a $500k+ first with property worth $300k. But is has the right to.

2. As I have posted, reaffirming the 2nd makes no sense.

3. You DO NOT have to wait 4 years from the 7 discharge to file a 13. You only need to wait if you are wanting a discharge to be entered in the 13. Since you are not asking for a discharge and are seeking to strip the lien that survived the 7, you can file the 13 once you have the 7 discharge. The question will be whether or not the 13 was filed in "bad faith".

Practice pointer: You could try the strip in the 7. While there is no published authority to do this, if you file the 506 complaint, properly serve it and the lender fails to answer, you maybe able to get your judge to enter a default judgment. I did this once and was successful as the lender failed to file an answer. Had the lender filed an answer my client would have decided if she wanted to be a “test case”. If the answer was “no” we would have dismissed the adversary, filed her 13 (she had her 7 discharge) and filed a new adversary to do the strip.

Des.

[IBroke]

I see you are in Florida ... why would you even want to consider keeping the house there? Why would you want to keep a house that has a 560k first mortgage PLUS a 150k second mortgage? With the housing market in Florida especially, you can get a pretty great house for MUCH MUCH less than 710k! Obviously it will take 3 years from a foreclosure to get a mortgage again, but this one seems like a no-brainer to me.

Well, the answer is simple: Renting is not an option because we can't afford it. Our first mortgage was reduced from $3,900/month to $1,300/month (and that's PITI). Moving itself would cost us $10K and there is no 3,800 sqft.-home on the market for less.

Our goal is to get rid of the second mortgage - not of the house where we invested a lot of money in. Keeping an underwater property often doesn't make much sense - but with a monthly payment that is about half of the rent of a comparable property - it certainly does - even economically. Times are gone where you can simply buy a house with $0 down. So IF we would get approved for a decent home after 3 years, what do you think would be required as a downpayment? $30K? Where would that money come from if we would have to pay $1000/month more in rent over the next 3 years and pay for 2 moving-expenses? And how high would that monthly payment be? Less than $1,300 PITI? I don't think that's an option with an annual income of about $30K.

As you can see, the idea of just walking away from that home might not be as good as it first appears. The only question is CH 7 or CH 13.

[AbbeyA]

This is a very interesting thread because it activated my braincells to think about how we should proceed with my mother's finances next year.

She runs her own little business and we just "turbo-taxed" her first 1040 for 2009 (yeah, a bit late but we got it done). Total income was about $17K but the taxable income after the itemized deductions was $0. She only has to pay about $350 in Self-Employed tax. Our estimate is that 2010 might be a bit better - maybe around $24K. Looking at these numbers and considering that my mother doesn't have any assets besides some furniture in our house and the old car we both share (which is not yet paid off but will be when she files), I'd say a CH 7 is certainly in her reach as well.

The only thing giving me a headache is our second mortgage. We haven't made a payment in years and owe them about $150K. We were just recently able to get a HAMP on our first mortgage to reduce the monthly payment to a manageable $1,300/month. They actually wanted to revoke the mod but the judge on our case granted our motion to enforce our modification - so that should be a done deal.

I'm now trying to determine if we could lose our home if we would go the CH 7 route instead of CH 13. Due to the modification, the balance on the first mortgage increased to $560K and it would be great to have that liability discharged in a CH 7. What we certainly don't want though is a foreclosure triggered by the second. So once again, we owe $560K on the first, $150K on the second and the value should be close to $350K - at best (zillow puts it at $300K).

So how dangerous would be a CH7 in our situation? Do I get that right that the second mortgage would have to pay the foreclosure-costs PLUS the $560K before they could collect on anything? Why should they do that?

Immediately after discharge, we would start saving money to make the second mortgage a settlement-offer. What would be our options if they decide to deny it? I think CH 13 could be filed 4 years after the 7 but stripping wouldn't be an option any more because the debt would already be discharged, correct? And what if we would reaffirm the second mortgage in case they don't accept a settlement. Could it then be stripped in a potential CH 13?

Which BK CH would you recommend? It is a very though situation and I'm currently going through all possible scenarios. Guess not every case can be as simple as my CH 7...oh, well..

I see you are in Florida ... why would you even want to consider keeping the house there? Why would you want to keep a house that has a 560k first mortgage PLUS a 150k second mortgage? With the housing market in Florida especially, you can get a pretty great house for MUCH MUCH less than 710k! Obviously it will take 3 years from a foreclosure to get a mortgage again, but this one seems like a no-brainer to me.

[IBroke]

This is a very interesting thread because it activated my braincells to think about how we should proceed with my mother's finances next year.

She runs her own little business and we just "turbo-taxed" her first 1040 for 2009 (yeah, a bit late but we got it done). Total income was about $17K but the taxable income after the itemized deductions was $0. She only has to pay about $350 in Self-Employed tax. Our estimate is that 2010 might be a bit better - maybe around $24K. Looking at these numbers and considering that my mother doesn't have any assets besides some furniture in our house and the old car we both share (which is not yet paid off but will be when she files), I'd say a CH 7 is certainly in her reach as well.

The only thing giving me a headache is our second mortgage. We haven't made a payment in years and owe them about $150K. We were just recently able to get a HAMP on our first mortgage to reduce the monthly payment to a manageable $1,300/month. They actually wanted to revoke the mod but the judge on our case granted our motion to enforce our modification - so that should be a done deal.

I'm now trying to determine if we could lose our home if we would go the CH 7 route instead of CH 13. Due to the modification, the balance on the first mortgage increased to $560K and it would be great to have that liability discharged in a CH 7. What we certainly don't want though is a foreclosure triggered by the second. So once again, we owe $560K on the first, $150K on the second and the value should be close to $350K - at best (zillow puts it at $300K).

So how dangerous would be a CH7 in our situation? Do I get that right that the second mortgage would have to pay the foreclosure-costs PLUS the $560K before they could collect on anything? Why should they do that?

Immediately after discharge, we would start saving money to make the second mortgage a settlement-offer. What would be our options if they decide to deny it? I think CH 13 could be filed 4 years after the 7 but stripping wouldn't be an option any more because the debt would already be discharged, correct? And what if we would reaffirm the second mortgage in case they don't accept a settlement. Could it then be stripped in a potential CH 13?

Which BK CH would you recommend? It is a very though situation and I'm currently going through all possible scenarios. Guess not every case can be as simple as my CH 7...oh, well..

[despritfreya]

To wnguyen, in response to:

“Does it mean a debtor has to reaffirm his/her vehicle because the Code requires? My case specifically, my lawyer said there was no need to reaffirm (disregard the paperwork sent by the lender) because they won't take the car if the loan is current.”

11 USC §521(a)(6) states “in a case under chapter 7. . .in which the debtor is an individual (the debtor) shall not retain possession of personal property (like a car) as to which a creditor has an allowed claim for the purchase price (not a refinance or a title loan type debt) secured. . . by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors. . . either (A) enters into an agreement with the creditor pursuant to 524( C) (reaffirmation agreement). . . or (B) redeems such property from the security interest pursuant to section 722. If the debtor fails to act within the 45-day period. . . the stay. . . is terminated. . .

So based upon 521(a)(6) you must reaffirm or redeem and if you do not, the creditor is free to take action. HOWEVER,

Some jurisdictions have flat out held that so long as you are current and, based upon state law, if you fail to reaffirm there is nothing the lender can do. This may be the situation in your jurisdiction hence the reason your attny said you do not have to reaffirm.

In my jurisdiction state law does not help, but some of the judges are now warning creditors that they will have to answer to the court if they repo solely because the debtor did not reaffirm. I do not think the judge can really do anything but. . .

To tyson24, in response to:

“I was looking at my petition before I sign it, and notice there is no surrender or reaffirm checked in the statement of Intention for either my residential home or my rental property. My residence is current but my rental property is unpaid for 2 years but not yet in foreclosure. (Chase bank) If I do not surrender (in MN) will I have to pay the foreclosure fees if I do not surrender the home? Am I better to surrender it?”

The Code requires a Chapter 7 debtor (individual) to submit a Statement of Intention. If you did not it was most likely an oversight and should be corrected. While the Statement of Intentions may say you are retaining, so long as you do not sign a reaff it does not matter. Keeping or surrendering does not change the effect of a discharge. What does change the effect of the discharge is the signing of an official Reaffirmation Agreement and not rescinding it within the time period allowed. If, in your case, you stop making payments and do not sign a reaff you have effectively surrendered. But. . . please remember that if there is an HOA you must pay all assessments/fees that fall due from your filing date until the mortgage company forecloses.

Des.

[tyson24]

I was looking at my petition before I sign it, and notice there is no surrender or reaffirm checked in the statement of Intention for either my residential home or my rental property. My residence is current but my rental property is unpaid for 2 years but not yet in foreclosure. (Chase bank) If I do not surrender (in MN) will I have to pay the foreclosure fees if I do not surrender the home? Am I better to surrender it?

I am confused...not that it is that hard to confuse me these days

[wnguyen]

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.

Dear Des

Thanks for taking time to answer the questions in this forum. The bold part above puzzled me a little bit. Does it mean a debtor has to reaffirm his/her vehicle because the Code requires? My case specifically, my lawyer said there was no need to reaffirm (disregard the paperwork sent by the lender) because they won't take the car if the loan is current.

[tobee43]

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.

des.......i'm BLOGGING This THREAD....

while i understand all too well what a difficult decision it is to fore go one's home...we did it after living there 33 years because it was a sound business decision...not an easy one...but a sound one.

we came from a state...had we reaffirmed then not met the obligation after the discharged bk, we would have been responsible NOT only for fees associated with the foreclosure and this state is notorious for having foreclosure fees in excess of between 50k-100k..., (one of the highest in the country), but we would have also been responsible for the deficiency amount between the bank sale and the balance of the note...or mortgage.

one must, as difficult as it is....put all emotions aside to make a sound financial decision that best serves your future.

i personally fought it tooth and nail...until finally resolve and reality set in.

looking back it was one of the best decisions we ever made and there is not a day that i am sorry that we left the house.....we took our memories...they never leave...but the bank we were with and knew refused to work with us...so we called THEIR BLUFF since they refused to work with us, as des, you clearly pointed out they simply do not have to....sooooooo


here's the keys...have fun with the black mold, flooding problems, cracked foundation....on and on and on as in other threads i have gone.

[IBroke]

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.

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.

Thanks, folks, that clears it all up.

[msm859]

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.

[ccsjoe]

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.

[backtoschool]

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.

[despritfreya]

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.

[IBroke]

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.