Why You Did Not Reaffirm Your Mortgage Loan in Bankruptcy
We occasionally get calls from former clients about reaffirming their mortgage loan. A reaffirmation agreement is an agreement made between a creditor and the debtor that waives discharge of a debt that would otherwise be discharged in bankruptcy. In California, there is no reason to reaffirm a mortgage debt which is secured by a first deed of trust on a person’s home.
California’s foreclosure law provides that a lender who forecloses a person’s primary home in what is known as a non-judicial foreclosure proceeding on a first deed of trust, cannot collect money from the borrower after the house has been foreclosed. This means that even if someone does not file bankruptcy and their first deed of trust mortgage holder forecloses their primary residence property, they would not owe any money to the bank after the foreclosure. Since there is no deficiency balance (remaining balance owing after foreclosure) whether or not a person has filed bankruptcy, the debt does not need a bankruptcy discharge and therefore, there is no need to reaffirm the debt in bankruptcy - it does not provide the debtor or the bank with anymore protection. For this reason, in California banks do not request that debtors who have filed bankruptcy execute reaffirmation agreements for mortgage loans, and it is also the reason that we do not advise our clients to sign them.
When a debtor does not reaffirm a mortgage loan, the lender will stop reporting the loan on the debtor’s credit report. This sometimes becomes an issue when someone later tries to refinance the mortgage loan on their home, and the new lender is asking them why their credit report does not show that they have been timely making their mortgage payments. The mortgage lender stopped reporting mortgage payments (or non-payments) on the credit report since the time the client filed their bankruptcy. It does no good to call the lender and request they report the payments; the lender will not, and the lender will tell the client to call their former bankruptcy attorney and ask them to reaffirm the mortgage debt. Then the client calls us asking why we didn’t advise them to reaffirm the debt at the time they filed bankruptcy and requesting that we help them reaffirm the debt now.
If a new mortgage lender is concerned because the current lender is not reporting credit history for the loan on someone’s credit report, the borrower can always ask their current lender to generate a five-year payment history to provide to the new mortgage lender proving that payments have been made timely. There is no ability to reopen the bankruptcy case and file a reaffirmation agreement after a case is discharged and closed.
It is not possible to reaffirm the mortgage loan after the bankruptcy case has discharged and closed. The laws regarding reaffirmation require that debts be reaffirmed before the debtor receives a discharge. Even if it was possible to reopen the bankruptcy case, vacate the discharge and reaffirm the debt, a bankruptcy judge in California is highly unlikely to sign the order reaffirming the debt.
Clients often think that they did not include their house in their bankruptcy. Most clients think that because they keep their home and continue paying their mortgage payments after they file bankruptcy, it means that they did not include their house or their mortgage loan in their bankruptcy. For practical purposes it may seem that way, however when a person files bankruptcy, all debts are included in their bankruptcy filing; the law requires anyone filing bankruptcy to list all debts. However, depending on the kind of debt, it may or may not get paid after a bankruptcy case is filed.
There can be significant differences in the types of debts people owe. One such difference is secured debts vs. unsecured debts. When a person files a bankruptcy, they are seeking a discharge of their debts. A discharge is a permanent injunction (court order) on a creditor collecting from an individual for that debt. However, when a creditor is a secured creditor; the creditor has collateral, i.e. a car or a house. When someone lists a secured creditor in a bankruptcy, they have two choices when it comes to dealing with that lender’s collateral. They can keep the collateral and continue making payments to the creditor or they can surrender the collateral back to the creditor and that debt will be discharged in the bankruptcy. But just because someone keeps paying a secured debt after filing bankruptcy, it does not mean that debt was not included.
When someone opts to keep a secured creditor’s collateral after filing bankruptcy, there are several ways it can be done. One way to do this by simply continuing to make the monthly loan payments to the creditor as usual. The creditor will accept the payments and allow the person to keep their collateral. When the loan is paid in full, the lender will release the lien on the title.
Another way is to sign a reaffirmation agreement with the lender after the bankruptcy case has been filed. The reaffirmation agreement is a legal contract that states the borrower promises to repay the debt and makes the borrower personally liable for the loan. After a debt is reaffirmed in bankruptcy, the borrower can again be sued for payment if the borrower defaults. People frequently reaffirm auto loans in bankruptcy but, in California, do not usually reaffirm mortgage loans.
The difference between reaffirming a debt and paying it after bankruptcy and not reaffirming it and paying it after bankruptcy lies in the rights the creditor has in the event there is a default on the payments. When a debt is reaffirmed and then there is a default on the payments, the creditor not only can reclaim its collateral (foreclosure or repossession) but it can also collect any money still owing directly from the debtor because the debt is no longer discharged. If the debt has not been reaffirmed and there is a default, the lender may only pursue its collateral and will not be able to pursue the individual if there is any money still owing. Since most if not all creditors allow debtors to continue making loan payments after a bankruptcy is filed on secure debts without requiring them to sign a reaffirmation agreement, it is the best option to not reaffirm the debt because it affords the broadest protection for clients in the event that they are not able to pay the loan in the future. They will not be faced with any liability in case they default. The downside to not reaffirming a debt in bankruptcy is that the creditor will not report any more loan payments on the debtor’s credit report, which can slow somebody’s ability to rebuild their credit after filing bankruptcy. But because reaffirmation agreements do not provide added legal protection for lenders on 1st deeds of trust loans on primary residences in California, lenders don’t require or even request debtors sign these agreements, and we don’t advise that anyone sign them.