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

[knowledge101]

Ok so I have done my due diligence on this topic and my attorney did not provide any advice in either regard and left it up to me. The reason I decided to re-affirm was because I have nearly 22% equity in the home ($115k home with a $90k balance). In the event I cannot pay the mortgage, I can always sell this home below FMV and still recoup most of the equity without a problem. This home is in an area that isn't very bubbly and grows slowly; even in 2008 the home price did not drop more than 5%. My personal preference in this case is that my equity will secure my home enough that even if I had to foreclose I would not have a deficiency. A home in this neighborhood foreclosed a few years ago and sold very quickly at foreclosure for $98k. I am taking my risk here that even in the worst case scenario I would not be deficient. The home is over-insured so I am not concerned with any catastrophic loss scenarios.

Now personally I am planning on moving out in the next year and turning this into a rental home. Obviously this is a topic not for this forum and I have researched it extensively. For me reaffirmation was a mental re-start; the Ch 7 was due to a business endeavor (if you can call it that) that did not work out and the mortgage was never underwater and I have always been able to pay it. Like I said, if in the event I cannot rent the place (very unlikely in our market) and have to foreclose, my equity gives me a safety net that I would not fear a deficiency. And yes I am doing this primarily for the credit history (Might be misunderstanding but if I reaffirm I believe I keep my good history for the mortgage from before I filed as well vs having a Included-In-Bankruptcy). For me it is more of a mental state of mind, knowing I can start over and keep the mortgage which I feel was a good deal (3.25% rate locked for 30 years in a home that has a hot rental market of which I have 22% equity). I understand I can keep the home without reaffirmation, but as another poster said here, I will always feel like I am in limbo with unfinished business from the bankruptcy.

I still have a few more weeks left to "rescind" my reaffirmation agreement, but at this time I haven't seen a convincing reason for me to do that? If anyone can advise please let me know why you think this wouldn't be a good idea...

[LadyInTheRed]

I was asked to sign a reaffirmation form also, but I said no, because at my age if I went in the hospital for some reason and couldn't continue payments, I figured they would take everything. Where would I go if I ever got out of the hospital!? When I talked to people at the bank about it, I was told they wouldn't send confirmation to the credit agencies that I was making payments, and they wouldn't send me statements. Well, my credit is already ruined, and the statement has the same things on it that the receipt I receive has when I make my payments. Except for a couple of auto-pays I'm a cash only person now. That reaffirmation locks you in and if something drastic happens, what then?

Exactly!

[LadyInTheRed]

Thanks, LadyintheRed,

I am not concerned about the 1098 except in conjunction with the fact that they are showing it as ZERO balance and CLOSED on two credit bureaus, plus not sending me any statements. Seems to indicate they have written it off their books.

The house was upside down at the time of the discharge and they verbally indicated they had no interest in having it since they would get "taken out" by the first mortgage.

Seems to me if they wrote the balance off of their books, that is a legal action resulting in them have nothing to collect upon???

ColoFiler this is the first time I saw your follow up question. Sorry for missing it before.

They show it as zero balance and closed on your credit report because the debt is discharged, so you have no legal obligation to pay it. Your credit report is a record of debt you are required to pay. Reporting a discharged debt would be inaccurate because you are not required to pay it. The debt no longer exists. What exists is a lien on your property and you must make payments according to the original contract to prevent the bank from foreclosing on that lien. Reporting a zero balance and closed on your credit report has nothing to do with the status of their lien and their ability to foreclose if you default and they decide it is worth while to do so.

They don't send you statements because they don't want to risk being accused of trying to collect a discharged debt. If you call them and ask them to send informational statements, they might do that. But, they might not. They do not have to send you statements to maintain their right to foreclose.

[stella123]

I was asked to sign a reaffirmation form also, but I said no, because at my age if I went in the hospital for some reason and couldn't continue payments, I figured they would take everything. Where would I go if I ever got out of the hospital!? When I talked to people at the bank about it, I was told they wouldn't send confirmation to the credit agencies that I was making payments, and they wouldn't send me statements. Well, my credit is already ruined, and the statement has the same things on it that the receipt I receive has when I make my payments. Except for a couple of auto-pays I'm a cash only person now. That reaffirmation locks you in and if something drastic happens, what then?

[ColoFiler]

Thanks, LadyintheRed,

I am not concerned about the 1098 except in conjunction with the fact that they are showing it as ZERO balance and CLOSED on two credit bureaus, plus not sending me any statements. Seems to indicate they have written it off their books.

The house was upside down at the time of the discharge and they verbally indicated they had no interest in having it since they would get "taken out" by the first mortgage.

Seems to me if they wrote the balance off of their books, that is a legal action resulting in them have nothing to collect upon???

[LadyInTheRed]

We are in Colorado and have a second mortgage - home equity line with Fifth Third Bank. That we DID NOT reaffirm after the Chapter 7 Discharge. We just keep struggling to pay the payment. Our mortgage is in the Bankruptcy Department who is very difficult to deal with. They do not send monthly statements or end-of-year Interest 1098.

I am pretty sure they are required by the IRS to send you Form 1098 if you are making interest payments. Have you specifically asked them to send you a 1098? Most lenders will send informational statements after you are discharged. Have you asked them to do that?

They report on our Credit "Debit included in or discharged through Bankuptcy Chapter 7: Balance Amount -0-: Closed Account Closed at Credit Grantor's Request" on Experian and Equifax.

Does this mean that have written-off the debt and would not be able to foreclose if we stopped paying?

No. They still have a lien on the home and can foreclose if you stop paying. But, they cannot sue you for a deficiency because the discharge relieved you of personal liability. If you can't afford to keep the home, stop making payments and live in the house for free until they sell the home at a foreclosure sale.

I would love an attorney answer or the contact for a Colorado BK attorney to talk to. Thanks for any help.
Lauren

I'm not an attorney, but the effects of a discharge of a mortgage are pretty straight forward. You can Google "discharge of mortgage in Chapter 7" for confirmation. BKforum members are not allowed to recommend an attorney in a public forum, only by PM. I don't think you have enough posts to receive PMs.

[ColoFiler]

We are in Colorado and have a second mortgage - home equity line with Fifth Third Bank. That we DID NOT reaffirm after the Chapter 7 Discharge. We just keep struggling to pay the payment. Our mortgage is in the Bankruptcy Department who is very difficult to deal with. They do not send monthly statements or end-of-year Interest 1098.

They report on our Credit "Debit included in or discharged through Bankuptcy Chapter 7: Balance Amount -0-: Closed Account Closed at Credit Grantor's Request" on Experian and Equifax.

Does this mean that have written-off the debt and would not be able to foreclose if we stopped paying? I would love an attorney answer or the contact for a Colorado BK attorney to talk to. Thanks for any help.
Lauren

[Griffy]

Thanks Des for the feedback.

I agree with everything you said. Bottom-line I will not be reaffirming either my 1st or 2nd. Will "try" to redeem the 2nd, but I too cannot find anything that supports real property redemption in my TX district. Both my BK attorney and a prepaid legal service said this can "sometimes" be done in my district but could not / did not tell me specifically Why it could be done.

"IF" I do get the redemption, I'll post back and let everyone know.

Thanks all!

[TRfromillino]

Honestly, I believe I will just do that. And actually I'm just about done asking him anything. There's no strategy with the guy, it's all cut and dried. This or that. His secretary is worth more than he is. Thanks so much for answering!

[LadyInTheRed]

Ok, I have to have an answer on this tonite! I keep reading about don't reaffirm, just keep paying and staying, if i want to. Well if you don't check reaffirm, than what do you check??? I tried to push past checking the 'other' box for retaining, stay and pay, but my lawyer informed me today that this option was not for real property and was not applicable in Illinois. So once again, I'm back to only being able to check reaffirm or surrender. I read that if I surrender, that automatically lifts the stay and they can take the house after discharge. I don't want that! But I'm so confused sometimes and I feel sometimes like I know more than my lawyer. But I have to go sign the papers tomorrow and they want to know what I'm going to do. And I don't know.

Ask your attorney about checking "reaffirm", but then not following through by executing a reaffirmation agreement.

[TRfromillino]

Ok, I have to have an answer on this tonite! I keep reading about don't reaffirm, just keep paying and staying, if i want to. Well if you don't check reaffirm, than what do you check??? I tried to push past checking the 'other' box for retaining, stay and pay, but my lawyer informed me today that this option was not for real property and was not applicable in Illinois. So once again, I'm back to only being able to check reaffirm or surrender. I read that if I surrender, that automatically lifts the stay and they can take the house after discharge. I don't want that! But I'm so confused sometimes and I feel sometimes like I know more than my lawyer. But I have to go sign the papers tomorrow and they want to know what I'm going to do. And I don't know.

[justbroke]

My lawyer (already paid him, so I can't run too far) finally called me back. He said he didn't know the provision off-hand but thought it was 5xx something not 722. He also said some jurisdictions allow the redemption and some don't.

What happens if we check redeem on the SOI and its not allowed ... I'm assuming I'm not going to go to BK jail

I have never seen a Redemption on real property (period). Would be nice to know just which "jurisdictions" s/he is talking about and whether YOUR district is in such jurisdiction! Ask him for some caselaw. LOL! (It would be nice if one could redeem real property... but where would the money come from???)

Nothing would happen if you checked redeem. You actually need to file a Motion to Redeem for a redemption to be taken seriously. (In other words, your Statement of Intention is nothing more than a, well, "statement" of "intention". It is not an act to actually do something.

[despritfreya]

Griffy,

If the attny mentioned “5xx something” I assume he is referring to 11 USC 521(a)(6) which requires a debtor to either surrender, reaffirm or redeem property within 45 days of the 341. But that provision specifically mentions personal, not real, property and refers one to 722 if redeeming.

It sounds like your attny is telling you that Dewsnup v. Timm, 502 U.S.410 (1992) somehow does not apply. In Dewsnup the debtor argued that she could force a cram down of the mortgage lien in the context of a Chapter 7 - in essence, get the lender to take a reduced amount based upon the equity in the property - just like what your attny is telling you - redeem the lien. USSC said “no” and I am not aware of any law passed by Congress that trumps this long standing principal. Even the 11th Circuit, which now allows lien strips of wholly unsecured second mortgages, I think would be hard pressed to allow such a cram down if there was any equity in the property after consideration of the senior liens.

Of course, I could be completely wrong and, in your district some unique rule allows one to pay a mortgage holder on real property some token payment based upon the equity and obtain a lien release. I just don’t see it. You will most likely have to negotiate a settlement outside the context of the bk.

If you check the redemption box on the SOI nothing will happen. Either the lender will seek a reaffirmation or the lender will let it go. If you are in one of the few Circuits that does not allow the “stay and pay” approach and the lender insists on a reaffirmation agreement you will have to decide if you really want to move in that direction and re-obligate yourself to the entire debt. The reality however is, unless you work it out with the lender (settle the lien) at some point the lender may exercise its right to foreclose. Will it do so now? Probably not since there is so little equity in the property. But, as property values increase so does the risk that the junior lien holder will try to recover some of its money.

Des.

[keepsmiling]

Just saw "Banned Camp" and loving it lol... better late than never

[Griffy]

Hey Des,

You're a knight in shining armor - I'm sure some gal is very happy.

My lawyer (already paid him, so I can't run too far) finally called me back. He said he didn't know the provision off-hand but thought it was 5xx something not 722. He also said some jurisdictions allow the redemption and some don't.

What happens if we check redeem on the SOI and its not allowed ... I'm assuming I'm not going to go to BK jail

Thx Griffy