By:Michael A. Cibik
If you choose to file for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code, one option you may be urged to consider is signing a “reaffirmation” of your obligation to make mortgage payments. You should not make that decision without the advice of your attorney.
Each year, about three-quarters of a million Americans, file under Chapter 7 seeking a fresh financial start and relief from creditor demands. Therefore, it is worth understanding “reaffirmation.” It is an agreement that you can sign—if you choose to do so–during a bankruptcy proceeding. In the reaffirmation, you agree:
On the face of it, that seems a silly thing to do. If you win bankruptcy relief from your obligation to make your mortgage payments, why turn right around and “reaffirm” that obligation? Well, your creditor (the bank or other lending institution holding your mortgage) would like you to do so. But why should you agree?
Some background on Chapter 7 may help to clarify the context in which the “reaffirmation” option arises.
Broadly speaking, Chapter 7 is one of two ways that personal bankruptcy works. Under Chapter 7, you liquidate “all” your remaining assets—but with some “exemptions” or exceptions—to pay as much as possible of what you owe your creditors. Under Chapter 13 of the Bankruptcy Code, you set up an agreed repayment plan, “scheduling” your debt payments to be manageable over time given your expected income.
Almost 70 percent of consumer bankruptcy petitions (or filings) in the federal courts are under Chapter 7. The other 30 percent are under Chapter 13. The overwhelming majority of both types of filings are categorized as “non-business; that is, they mainly involve consumer debt.
The apparent preference of consumers for Chapter 7 may be explained by the speed of the debt relief. You can obtain such relief much more quickly under Chapter 7. By contrast, a Chapter 13 repayment plan can last up to five years.
(By the way, you probably have heard, as well, of Chapter 11 filings. Corporations, partnerships, and sole proprietorships that desire to remain in business, avoiding liquidation while they go through “reorganization,” often choose Chapter 11.)
If you do consider a Chapter 7 bankruptcy filing, you should be aware that your petition is not automatically accepted for action by the court. There are certain qualifications that you, the debtor, must meet. Also, you are required to have a trustee assigned to your case; pay various court charges; and provide financial statements such as income-and-expense reports, copies of tax returns, and a list of all property—among other things.
It is imperative to have the assistance of a qualified lawyer as soon as you start considering the possibility of filing for bankruptcy. By the time you actually make a court filing (if that turns out to be your choice), you will have taken many preliminary steps with your lawyer’s advice.
If you are a homeowner filing Chapter 7 (or a husband and wife filing jointly), and “all” your assets are turned over to be liquidated to pay some part of what you owe, your home is not included. It is exempt.
Furthermore, if the court “discharges” you (your filing is successful), you have no obligation to make any more payments on your mortgage.
Does that sound too good to be true? It is. When you arranged for your mortgage with the bank, you entered into not one but two agreements. You signed a promissory note that you would make the scheduled payments on the mortgage loan (home loan). And you agreed to a “lien” on your home, which became the bank’s security in case you defaulted on your payments on the promissory note.
With your successful bankruptcy, the promissory note, per the court, no longer binds you. But the lien is not canceled. Therefore, if you no longer make payments on the mortgage loan, the bank will have recourse to selling your home to pay the mortgage loan.
It often is said that filing under Chapter 13 can “enable you to keep your home.” That means only that if your debt payments are stretched out in a five-year repayment plan, you might thereby be able to make payments to the bank and keep your home.
But under Chapter 7, you also can keep your home. You can keep it if you make your mortgage payments. In order to make those payments, you certainly do not have to sign the “reaffirmation” of your promissory note. You just keep making the payments, when due, but you are not legally obligated to do so. You are doing so because wish to keep your home.
That is why many attorneys wonder why people would want to sign a “reaffirmation.” They can keep making payments on their home if they are able. In addition, they seem to have a definite advantage under one scenario.
If the bank does end up selling your home, and if the sale does not yield all the money required to pay your entire mortgage, the bank would like you to make up the difference. If you and your bank have entered into the “reaffirmation” agreement, then the bank has a legal basis for this: You reaffirmed your promissory note.
If you did not sign the reaffirmation, the bank has no basis for collecting from you the balance of the mortgage not covered by the sale of your home.
This means–to repeat what we said at the outset–there is at least one obvious reason to refuse to sign a reaffirmation. And, finally, be aware that acceptance of your reaffirmation agreement by the court is not automatic. Most judges will ask some tough questions about why you are reaffirming. And some judges don’t sign reaffirmations at all because you don’t need one to keep making your mortgage loan payments.
A reaffirmation is a decision, like many you will face if you elect Chapter 7, to be made only after discussion with your attorney. And, by the way, a reaffirmation, if you decide to make one, can be approved by the judge only at the time you make your court filing. It cannot be approved when your bankruptcy is discharged. Therefore, an affirmation is one of many issues you and your lawyer must discuss as early as possible.
As Philadelphia bankruptcy lawyers, Cibik & Cataldo, P.C. has 35 years of experience providing legal services to thousands of clients in the Philadephia area. We have done so with a strong value orientation and with compassion and respect for clients. Michael A. Cibik, Esq. and Michael A. Cataldo, Esq. are both certified by the American Bankruptcy Certification Board, which means that you have an objective standard of excellence and reliability when you make your choice of legal counsel in financial and bankruptcy matters.
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