Reaffirmation is a Legal Process

Mortgage rates historical trends

Mortgage rates historical trends (Photo credit: Wikipedia)

Reaffirmation is a legal process where a debtor who is filing bankruptcy is willing to sign a reaffirmation agreement with a lender who has a secured loan with the debtor. The debtor basically agrees to give up their right to a bankruptcy discharge for that particular debt, and the lender agrees not to foreclose or repossess the property because the debtor has filed bankruptcy. A reaffirmation agreement can be for any kind of secured asset in which the debtor owes monies for the asset.

The legal process of reaffirmation in bankruptcy requires a filing debtor to be counseled either by their lawyer and/or a bankruptcy judge about the legal ramifications of signing a reaffirmation agreement with a lender on a secured asset. A lawyer or bankruptcy judge has to sign the reaffirmation petition to the court as proof they counseled with the filing debtor.

Many bankruptcy lawyers refuse to sign off on a reaffirmation agreement because it puts their clients at a disadvantage later on if something goes wrong, and their client defaults on the loan. If a debtor later defaults on a reaffirmed loan, the debtor has no further bankruptcy recourse and must deal with collections from the debtor. In the opinion of some legal experts, that kind of result more or less violates the spirit of filing for bankruptcy protection from the very beginning.

There is a spot on a bankruptcy petition that a filing debtor can check to indicate their desire to reaffirm a loan. It is not a binding and legal part of the process though. When the box is checked, it simply alerts the court of the intention of the filing debtor. Before an affirmation is binding in bankruptcy court, the affirmation agreement has to be signed by both parties and by the debtor’s lawyer and/or bankruptcy judge. The bankruptcy judge ultimately approves or disallows the agreement.

Here is an example of a debtor who probably did not reaffirm his mortgage loan and wanted to get rid of the home after having a Chapter 7 bankruptcy discharge prior to determining the need to vacate: “I moved from Utah to Southern California last summer due to a job transfer. Did the Chapter 7 back in 2010, discharged at the end of that August. Marked the box reaffirm on the bankruptcy paperwork, but never did any paperwork with the bank. The mortgage is still being reported on my credit reports, and I am still current on my payments. Ideally, I’d like to get rid of the house. However, I’m trying to do the right thing and not let it go into foreclosure or do a short sell.”

Other than marking the box for affirming his intention on the bankruptcy petition, there is no real indication the debtor signed an affirmation agreement during the bankruptcy process. If he did not, that means the mortgage was discharged in the Chapter 7 bankruptcy, and if that is the case, the debtor can legally walk away from the house at any time he wants to without fear the mortgage company can come after him for the debt.

It really doesn’t matter whether the debtor has been making payments on the loan. Just because you get a discharge does not mean you cannot still pay on your discharged debts.

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