I received a panicked call from a client who told me that she just spoke with the bankruptcy department of her mortgage company. She was told that her bankruptcy lawyer made a mistake, she no longer owned her house, and that she needed to do a reaffirmation agreement to keep her house. I had to slow her down and talk her off the ledge but before I could respond to what the bankruptcy department told her, she needed some background information.
When she bought her house, a deed was prepared and recorded naming her as the owner of the house. The bank gave her a loan to buy the house and had her sign a contract promising to repay the debt. The home buyer gave the bank a lien which basically said if she didn’t pay for the house, the back could recover the house by foreclosure. Now this is kind of an important point. The bank gave her the loan. She gave the bank a lien. That lien is called a mortgage. She did not transfer the house to the bank. She was the owner when she left the closing.
When she filed for bankruptcy, her debts were discharged and contracts were wiped out. This not only includes common contracts like credit card agreements but also that home loan contract. A reaffirmation agreement basically reinstates the contract and personally liable remains for the debt after bankruptcy. Would you sign an agreement stating that you will remain liable for your credit card debt? Probably not. Filing bankruptcy to get rid of that liability was your goal. So why sign a reaffirmation agreement to remain personally liable for the home loan. You do not sign the reaffirmation agreement to own the house. The deed says you own the house, not reaffirming the debt. The one has nothing to do with the other. It bears repeating: YOU DO NOT HAVE TO SIGN A REAFFIRMATION AGREEMENT TO KEEP YOUR HOUSE. Sorry about the caps but this is a really important point.
The bankruptcy discharges liability on the debt. She remains the owner of the house. She can (theoretically) sell it, refinance it, or remain in the home and keep making payments. She can even let the house go into foreclosure after the bankruptcy if she doesn’t want to keep it anymore. So why sign the reaffirmation agreement stating that she will be personally liable?
But if you don’t sign the reaffirmation agreement, you don’t get a free house. While the debt is gone, the lien given to the bank remains. If you don’t make the monthly payment, the bank will foreclose and recover the house. You won’t have to move out right away, but you will be moving out at some point.
My client became upset when she was told that her bankruptcy lawyer made a mistake by not having her sign the reaffirmation agreement. But once she understood that she still owned the house, that signing the reaffirmation only reinstated the personally liability on the debt, that as long as she made her payments she could stay in the house, and that if she ever decided to let the house to, she could walk from it and there was nothing the bank could do to her other than foreclose the house. In my opinion, she held all the cards. So what do you think? Did I make a mistake?
“R” also stands for:
- Reaffirmation Agreements
- Rental vs Continued Home Ownership
- Renting After Bankruptcy
- Reaffirm, Redeem, or Retain & Pay?
- Reorganization (Chapter 13)
Chris McAvoy is a Taylor, Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info. We help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.