Monday, September 27, 2010

UPDATE! Reaffirmation of Mortgage Debt

Last week, we addressed whether or not a debtor should consider reaffirming mortgage debt to ensure that their right to remain in their home, in the event the debtor does not reaffirm debt secured by real property. One open question is whether a the failure to reaffirm a debt creates a risk that the lender may foreclose on an otherwise current mortgage gives the lender the right to immediately foreclose on the mortgage. Many mortgages contain a term whereby the act of filing bankruptcy constitutes a default, even if payments are current, and the bank can recover its security interest securing the loan.

Prior to the 2005 Bankruptcy Abuse Protection Act (“BAPCPA”) reforms, debtors could retain personal property (mortgages, car loans, etc.), provided they remained current on the monthly payments, called "ride through". However, BAPCPA largely eliminated the so-called “ride through” option for security interests in personal property; the result of which is that now, in order to keep personal property securing a loan, the debtor and creditor would have to execute a reaffirmation agreement. In a reaffirmation agreement, the creditor would contractually exclude the debt from discharge in bankruptcy.

While the law was clear that BAPCPA imposed a reaffirmation requirement on personal property transactions, the law made no clear indication as to whether a debtor could retain a security interest in real property, absent a reaffirmation agreement. Recently, in In re Caraballo, the Connecticut Bankruptcy Court addressed this issue, and determined that debtor’s ongoing retention of real property does not require the execution of a reaffirmation agreement. 386 B.R. 398, 400 (Bankr. D. Conn. 2008). As such, bankruptcy petitions may keep their property during and after bankruptcy, as long as they remain current on their payments. Additionally, the “ride through” option preserves the previous terms of the loan or finance agreement, thereby preventing creditors from imposing harsher terms on debtors during the bankruptcy process.”

The Caraballo court, in reaching its conclusion, held that the mortgage holder could not foreclose on the debtor who did not reaffirm as long as payments continued on the mortgage, thereby providing an additional layer of protection to a debtor who has not reaffirmed his mortgage debt (either intentionally or at the lender’s refusal), and adds an additional layer of complexity when determining whether or not to reaffirm mortgage debt.


  1. Reaffirmation of mortgage debt is an important concept when we are speaking about Chapter 7 bankruptcy filing. If a person files Chapter 7, he or she will get the option of debt reaffirmation. If the person wants to save his or her property or car from being taken away by the lender, then he or she can sign a debt reaffirmation agreement and reaffirm the debts. This will make him/her personally liable for the debts. If he or she pays the dues on time, it will not only help him or her save the asset but will also help in improving his or her credit score. Paying the balance on time will have a positive affect on the person’s credit report.

  2. The fact is the mortgage company must place a 0$ amount as the debt owing after a chapter 7 discharge, and the current payments are not reported. There seems to be little of no information on the idea of a ride through. That said people who keep the property and do not pay are in some ways in a better position than those that pay current, in terms of what gets reported to the credit bureau the impact is the same. Of course the non-payor runs a greater risk to foreclosure than the one who pays "current" this economy the brakes are on some foreclosures

  3. My chpt 7 bankruptcy was discharged in March, 2008. I stayed in my house, which has a 1st and 2nd mortgage. Payments have been on time prior to and since the bankruptcy. I just realized that the 1st and 2nd mortgage holders are reporting balances and payments, though everything I've read says they should not be. I don't recall filing a reaffirmation of these debts, and my attorney's office provided me with a copy of the case, showing that no reaffirmations were filed. Should the companies be reporting to the credit bureau? Does it matter as long as my payments are on time? (I've been using cash since the bankruptcy) Should I notify the credit bureau?

    1. The ongoing reporting will help your credit and is accurate. Although it is unusual for reporting to continue without a reaffirmation agreement, this should be in your favor.

  4. We filed bankruptcy recently ourselves,no attorney. We found out, if we file a reaffirmation agreement, we could owe the balance of the house, if it ever goes to foreclosure.. the house according to mortgage co. reaffirmation agreeement,which we have not signed, is worth 130000, we owe 230000. Our discharge is in july .... We are not going to be reaffirming, as we would still owe another 100000 should anything happen and they foreclose.


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