Once every one or two years, our law firm gets a phone call from a former Chapter 7 client who wants to know if they reaffirmed on their mortgage loan, and if they didn’t, whether they could reopen their case to reaffirm on the loan. Sometimes, the client is upset and really believes that something very bad happened (or didn’t happen) when they find out that their mortgage loan was not reaffirmed during their Chapter 7 bankruptcy. Worse, some clients will say that the mortgage lender or broker they are working with on a refinance has told them that their lawyer “screwed up.”
What is the “problem?” Well for that lender or broker, an in-house underwriting requirement may dictate that they want prospective clients to have reaffirmed on their mortgages while in their Chapter 7 cases. What is the reality? A Chapter 7 case can be successfully and fully completed without the client having signed a reaffirmation agreement. In fact, many judges around the country very much prefer we advise clients to not reaffirm, especially if that client was “under water” with their mortgage. In recent years, but not so much in today’s slightly improved housing market, many clients owed more on their mortgage than what their houses were worth.
If that client reaffirmed and could not afford mortgage payments in the near future, and defaults, and cannot sell the house for enough to satisfy the mortgage, then after the mortgage company forecloses, it may pursue the client for the deficiency on the loan. That client may be sued and his/her wages garnished for that deficiency. A client who did not reaffirm cannot be held responsible for the deficiency.
If the lender you’re working with insists on you “correcting” the situation, the good news is that you can reopen your case to reaffirm. The bad news is that it does annoy some judges; they may consider the reopening of a case to do something you were not required to do as cluttering up their docket. But if that lender is the only lender who will work with you and that refinance will save you thousands of dollars over time, then spending a nominal amount of money to reopen your case may be deemed worthwhile by you. And the judge, while irritated, will likely oblige your request to reopen your case to do so.
What is the take-away? Not reaffirming on your mortgage is not a true barrier for a successful refinance. Lenders/brokers of course prefer prospective clients who have stellar credit and look “just so” on their credit report. But we don’t live in a perfect world and very few people have “perfect” credit. Your income and responsible use of new credit are much stronger predictors for most lenders of your credit-worthiness for a refinance than whether you reaffirmed during your Chapter 7 case.
A final word – for each of the few people we hear back from regarding this “problem”, imagine all the other former clients who emerged from their bankruptcies stronger and leaner, and moving on to fulfilling lives with their finances right side up.
