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Reaffirmation Agreements on Real Estate

Reaffirmation Agreements on Real Estate
By Mike Wallace, Bankruptcy Attorney, serving clients in all of East Texas, including Lufkin, Nacogdoches, Palestine and Jacksonville

I have previously written about reaffirmation agreements on vehicles and the importance thereof, but in that discussion I did not address the issue of reaffirmation agreements on real estate.  First, with respect to home equity loans there is absolutely no reason for a Debtor to sign such an areement, beacause such loans are non-recourse in nature in the State of Texas.  In other words, Debtors do not have personal liability on such loans and the creditor must look only to the property in the event of a default.  Since there is no personal liability to begin with, there is no discharge in the bankruptcy of personal liability to be waived.

With respect to conventional real estate mortgages it is clear under the current state of bankruptcy law that a reaffirmation agreement is not necessary or required by law.  This is because Sections 521(a)(6) and 362(h) of Title 11 of the U.S. Bankruptcy only apply to personal property.  The signing of such an agreement on a conventional real estate loan can be a trap for the unwary.  The reason this is true is because when you sign a reaffirmation agreement you waive the discharge of your personal libility.  Therefore, if you later default on the mortgage you will remain personally liable for the deficiency.  A deficiency arises if the mortgage company sells the property for an amount that is less than what they are owed.  As a rule of thumb, lenders typically sell properties at foreclosure sales for 75% of the outstanding mortgage, unless there is a third party buyer who is bidding on the property.  It is my professional opinion that it is never in  debtor’s best interest to sign a reaffirmation agreement on real property unless the mortgage company is offering some significant change to the terms of the loan, (i.e. a reduction in principal balance or a reduction in the interest rate).

Unfortunately, some mortgage companies are now holding debtors hostage who received a discharge of their personal liability and then desire to work with the mortgage company on a modification.  In other words, the mortgage company is refusing loan modifications for debtors who received a discharge in bankruptcy, and who did not sign a reaffirmation agreement.  I believe such a stance by the mortgage company smells of bad faith, and the reality is that the mortgage company uses the lack of a reaffirmation agreement as a pretext to deny loan modifications.

At a minimum, reaffirmation agreements on real estate are a double-edged sword.  If you sign one, then you have waived your discharge of personal liability.  In the event the property value drops and you later default, then the mortgage company will look to you for the deficiency.  The prospect of this happening in the real estate market that we have seen of late is significant.  If you don’t sign the reaffirmation agreement, then the mortgage company tells you that they will not report the favorable paying of your mortgage to the credit bureaus.  Additionally, they will quite likely refuse any modifications or allow you to make electronic payments on the mortgage.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law are very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

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