Mortgage Reaffirmation and Refinancing after Bankruptcy

One of the questions we get asked most frequently relates to mortgages and reaffirmation agreements.

This usually comes up a few years after you have completed your Chapter 7. You may want to refinance your home mortgage to draw out some equity or because of better interest rates being offered by lenders.

The mortgage company says you can’t refinance because you never reaffirmed your mortgage in the bankruptcy case. The mortgage company representative (not known as the best sources of legal information), will often blame your bankruptcy attorney for not reaffirming the loan, and will sometimes give you the impression that you don’t even own the home because of this “error” in your bankruptcy.

What is a Reaffirmation Agreement?

A reaffirmation agreement is a written document that can be filed in a Chapter 7 bankruptcy case.   The reaffirmation is like a contract, and it is an agreement between you and a creditor that even though you have filed bankruptcy, you agree to be on the hook and agree to pay their debt anyway.  A reaffirmation agreement, especially on mortgages, is entirely optional and rarely done.  If the parties really want one for some reason, it is the mortgage company that has to prepare the agreement and sends it to you for signature.  Many mortgage companies don’t even bother to prepare it because most debtors don’t sign anyway.  Your attorney doesn’t have any of the information needed to prepare the agreement, nor is it their job to draft it.

You do NOT have to Reaffirm to Refinance

The truth is that you do NOT have to reaffirm your loan to refinance. There is no law that says anything like that. The hurdle is not a law, it is just the bank’s policy. They may have chosen not to offer to refinance to people who chose not to reaffirm. That’s the bank’s prerogative, just like it is for them not to offer to finance without a down payment, or whatever other criteria they have decided to require for lending. It has nothing to do with the bankruptcy, but rather it is merely a bank policy and a silly one at that. From the bank’s perspective, they would be better off if you refinanced so that you would be personally liable to them again. So if a bank has a policy that prevents them from refinancing you, my advise would be to find a better bank. Find a reputable mortgage broker to help you locate a mortgage company to refinance your loan.

Reaffirmation is a Bad Idea

Reaffirming a mortgage in Chapter 7 is a bad idea anyway. A reaffirmation agreement waives your discharge regarding the mortgage loan and makes you personally liable for the debt. This means that if anything ever goes wrong with the home or your ability to pay on the loan, you are on the hook. If the home ever goes into foreclosure, you can end up with a considerable deficiency judgment and your wages garnished for the remaining balance.

Without a reaffirmation agreement, you are not personally liable for the debt. So, while the mortgage company can still foreclose on their lien if you don’t pay, you are free to walk away with no penalty or further damage to your credit. The bankruptcy has removed your personal liability. If anything ever goes wrong (property damaged, you can’t afford to pay, you need to move out of the area, etc.) you can walk away and let the bank foreclose.

Because of this, most bankruptcy attorneys advise you NOT to reaffirm a mortgage…ever.  In fact, many attorneys consider it to be malpractice to advise a reaffirmation to their Chapter 7 clients.

Is it Too Late to Reaffirm?

Even if you really wanted to reaffirm, if you already received your Chapter 7 Discharge, it is too late. To be valid, a reaffirmation agreement has to be filed before you get the discharge.  (See FRBP 4008).  There are some judges who will allow late reaffirmation agreements to be filed, but that is not the case in the courts where we practice.  So, the whole thing is moot. The only option if you want to refinance is to find a bank with a reasonable policy on the matter.