My Attorney Is An Idiot! I Wanted To Keep My House In My Chapter 7 Bankruptcy

reaffirmation agreementYears after your bankruptcy discharge has been granted in Chapter 7, you may still be grappling with the concept of a “reaffirmation agreement” for your mortgage.  This can come up, for example, if you try to re-finance the home.  Or, if you are monitoring your credit report, like you should be, and the trade line for the mortgage you have been faithfully paying merely says “included in bankruptcy.”  Here is why your attorney was wise in making sure you did NOT sign a reaffirmation agreement for your mortgage.


If you sign a reaffirmation agreement and then default, you have the worst possible outcome: your lender can foreclose on the property securing the debt, and the creditor can also sue you for the unpaid balance of the debt.  In other words, it is as if there was no bankruptcy filed, all protection has been removed.

If you are asked to sign a reaffirmation, please review it carefully with your attorney.  Although the perception exists that a “simple” Chapter 7 can be done without an attorney, the reaffirmation agreement is just one of the many bumps in the road that can result in harm to the consumer.  And don’t let anyone tell you that signing a reaffirmation is necessary to “rebuild” your credit, that just is not so.

With Cuyahoga County being a national leader in “underwater homes,” and with mortgage payments stretching out for decades into the future, signing a reaffirmation agreement on a mortgage puts the consumer at extreme risk in the future.  Loss of employment, business failure, or being tired of making on a home which will never be worth what is owed on the mortgage, are just a few reasons why it makes more sense to keep paying on the mortgage without signing the reaffirmation agreement.


Reaffirmation of debt only applies to “personal” property, like automobiles.  Sections 362(h) and 521(a)(6), the provisions added by the bankruptcy “reforms” of 2005, terminate the automatic stay as to an interest in property if the debtor does not comply with § 521(a)(2) or 521(a)(6) – by not timely filing a statement of intention and performing that intention under § 521(a)(2), or by not entering into a reaffirmation agreement or redeeming the property within the statutory period under § 521(a)(6) – apply only to personal property.  This is explicitly stated in 11 U.S.C. §§ 362(h) and 521 (a)(6).  The Bankruptcy Code also approves “keep and pay” without reaffirmation on consumer debts in real estate because it specifies that the discharge injunction under § 524(a)(2) does not apply to a “creditor [who] retains a security interest in real property that is the principal residence of the debtor.” 11 U.S.C. § 524(j)(1).


When you and your attorney prepare your bankruptcy documents for filing with the court, you must submit a detailed budget.  The income you have is listed on Schedule I.  The expenses you have are listed on Schedule J.  The idea is that there is no “discretionary income.”  The consumers rent or mortgage, car payment, food, clothing, utilities, etc., consume all available income, and there is nothing left over to pay the debt which the consumer is seeking to discharge.  But what happens if Schedules I and J show a deficit?  (Monthly expenses exceed available net monthly income?).  In the case, the court is obligated to deny the reaffirmation agreement.  A recent case on this point is In re Cannella, Case Number 8-16-70319 from the United States Bankruptcy Court for the Eastern District of New York.  You can read the full text of the decision here.  In that case, the Debtors asked Judge Alan S. Trust to approve a reaffirmation agreement for their home.  They complained that the mortgage company had stopped sending monthly mortgage statements and that their credit reports no longer reflecting the timely payment of their mortgage.  The court found that their mortgage balance was $250,971.14, and that their budget (Schedules I and J) showed a monthly deficit of $233.45.  The bankruptcy code states that a negative budget presumptively imposes an “undue hardship” on the debtors and the Court must deny the motion to approve the reaffirmation agreement.  11 U.S.C. § 524 (m).

While I have never signed a reaffirmation agreement in more than 3,000 consumer bankruptcy filings (so far), if you are determined to this to yourself, at least make sure that your budget (submitted under penalty of perjury) shows a realistic ability to repay the debt and maintain all your other normal household expenses.

I could probably come up with another reason (or two) why reaffirming real estate debt is a bad idea, but you get the point.  You can keep the home by making the monthly payments voluntarily, and after the discharge your mortgage company can start sending monthly payments if you ask them in writing to do so.  You can also correct errors in your credit report by following the instructions here.  In the meantime, if you are facing financial difficulties, call me at 216-642-8234 and we can review bankruptcy options and whether they make sense for you.  This post as always is for general discussion purposes, and does not constitute legal advice.

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