Why reaffirming a mortgage is a very, very bad idea.

[freeseattle]

Thank you so much. this info helps. i do not reafirm!!!! if i put my condo for short sale ? will it delay the foreclosure proccess while condo listed "for sale"? or foreclosure proccess proceed as usual regardless of what i am doing with it. i just want to extend my stay rent free. i know about HOD's -paying them. What is the "protection of automatic stay" exactly? does it end with discharge ch7? thanks again. Mila

[cw99]

Specifically to Des but very interested in other opinions:
Des, I have been going back and forth on the question of reaffirmation. I honestly have been losing more sleep (and crying more) about this then the actual decision to file once I looked at the gravity and totality of our financial situation. You are clearly in the mindset that one should not reaffirm and while I do agree with that from a logical standpoint, I have questions more to my specific circumstances and I apologize at the length of this post.

Our mortgage is with Wells Fargo. We are about even on what is due to what it is worth...no equity but not upside down. We have never been late on any payments with them (and not on any of our cards until we had determined that we were definitely being forced to file...robbing from Peter to pay Paul scenario). We are in the process of a remodification with them but that has been dragging on for months now (and i'm honestly not expecting anything). There was a c/c to Wells Fargo that was included in the BK petition for about $25k. We are still receiving mortgage notices (with for information purposes only on the top) and I still have access online to our account (though not to the c/c account). While we intend to stay here and continue to be current on our home, can they or will they, in our state force a foreclosure if we are current and continue to be? We live in PA so I believe that is 3rd Circuit. I am so confused because I have seen both good and bad experiences with them regarding this. Do you have any direct experience with Wells Fargo?


We have 2 new automobiles that are financed with Honda Finance. We thought we were going to be Chapter 13 and our attorneys (both of them...don't ask) suggested that we get auto loans because our vehicles (8 and 10 years old) would most likely not survive the 3-5 year plan under the Chapter 13, our equity (what there was of it was not helping our numbers for Chapter 13 assets), any loan we got post BK wouldn't be at nearly the rate we were able to get prior to filing (my score was still 760 and husband was 729), and we would benefit from being able to take the $496/mth/vehicle loan allowance within the plan. So we got 2 new reasonable vehicles because the pricing and the financing available was actually about the same as something used. Honda has sent a reaffirmation letter for both vehicles. I have read horrible things about GM and Ford doing repos even while accounts are being paid timely with people trying to do "ride throughs" and while I have seen primarily good things being said about Honda, that is not the case with every situation. Do you have any experience with Honda specifically? Or know where PA stands on ride throughs. My biggest fear is that we will continue to pay on time but they will be repossessed regardless. I travel extensively for work and need a large reliable vehicle (got rid of an Expedition for a Pilot). Also, our attorney says that she will not sign the reaffirmation as she believes it will cause undue hardship on us. The 6 month snapshot that she was working with did look particularly grim but it's amazing being able to have some money left over at the end of a good commission month without having to pay $5k or more a month to credit cards.

We have our 341 on Dec 10th and while there is no presumption of abuse on PACER, our attorney said to expect to be flagged for potential abuse because we had over $200k in unsecured debt. We paid over $90k towards credit cards in the past 18 months (well above the min payments due until we knew we were filing) and had no intention of the situation coming to this but it has. She believes that she will be able to reasonably explain with specifics to our circumstances that there was not intentional abuse, as there was not.

Thank you for advance your consideration on this. I just want to get a few decent nights of sleep.

[despritfreya]

To cw99:

Let’s try to break this down point by point:

1. I have been going back and forth on the question of reaffirmation. I honestly have been losing more sleep (and crying more) about this then the actual decision to file once I looked at the gravity and totality of our financial situation.

One should not be losing sleep. Everything related to the bk is simply a business decision. If you can get your mind around that everything else falls into place.

2. Our mortgage is with Wells Fargo. . .no equity but not upside down. We have never been late on any payments with them. . . We are in the process of a remodification with them but that has been dragging on for months now. . .We are still receiving mortgage notices (with for information purposes only on the top) and I still have access online to our account. . . While we intend to stay here and continue to be current on our home, can they or will they, in our state force a foreclosure if we are current and continue to be? We live in PA.

a) Unlike personal property, there is no requirement in the bk Code to reaffirm a real property (real estate) loan.

b) So long as you are not in default under your contract, under State law the lender cannot foreclose. (Please note - any provision in the contract that claims filing a bk is an incident of default is simply not enforceable.)

c) The loan modification process can take over a year to finish. Don’t give up. It took exactly 1 year and 2 months for my two neighbors to get their loans modified.

3. Do you have any direct experience with Wells Fargo?

a) As it relates to Wells Fargo "the bank" - can’t stand them. I tell my clients to bank someplace else. Bad, bad, bad.

b) As it relates Wells Fargo "mortgage lender": 1)Loan mods, yes - but for only one client. Modification was approved subject to a Court Order. Not a big deal. 2)Reaffirmation Agreements - no since my clients never sign them. I have never had a client who was keeping their home have a problem with Wells Fargo if they were current.

4. We have 2 new automobiles that are financed with Honda Finance. . . Honda has sent a reaffirmation letter for both vehicles. I have read horrible things about GM and Ford. . .and while I have seen primarily good things being said about Honda, that is not the case with every situation. Do you have any experience with Honda specifically? . .Also, our attorney says that she will not sign the reaffirmation as she believes it will cause undue hardship on us. . .

Many of my clients have loans through American Honda Finance. Honda routinely sends me the Reaffirmation Agreement. I then send the Agreement to my client with a long detailed “warning” letter. The Attorney Certification that I sign is of my own design and clearly indicates that I believe signing the Agreement is a hardship unless my client’s income/expenses have changed. Sometimes this Certification is taken by the Court as an indication of hardship and the Court sets a Hearing. My client goes to the Hearing and either reaffirms or doesn’t. In my State a technical “ride through” is not permitted however, the Judges have been putting their foot down and have been daring the lenders (including Honda) to repo if the account is current and the vehicle is insured. I have had at least 2 clients not sign the Honda reaff when they got this type of comment from the Judge. In both cases Honda has done nothing but accept payments. Since I generally leave the finalization of a reaff to my client, once the Agreement leaves my office I don’t keep track so I don’t know how many of my clients heed my warnings and just do the “ride through” without incident.

If I were the debtor grabbling over the reaff issue (as it relates to the vehicles only), I probably would not sign for fear that if I came onto hard times again I would lose the vehicle and get sued. Since I am not dealing with Ford (idiots), I would take my chances. It is a tough decision because, if you lose the vehicle(s) solely because you failed to sign (being otherwise current), replacing them after doing a bk will mean you pay a higher interest rate and may even be more likely to default as the payment may be higher. This is truly a “catch 22” and I do not have a clear answer.

5. We have our 341 on Dec 10th and while there is no presumption of abuse on PACER, our attorney said to expect to be flagged for potential abuse because we had over $200k in unsecured debt. We paid over $90k towards credit cards in the past 18 months (well above the min payments due until we knew we were filing)

The US Trustee has 10 days from your 341 to file a notice of presumed abuse. If you get to December 21 and nothing is on the system, end of problem.

As it relates to the credit card payments, if there were payments that can be recovered as preferences your Trustee will pursue that avenue. It is not your issue. As it relates to the $200k in credit card use, the Trustee probably will only be interested in whether or not you purchased (and still have) any “toys”.

Your attorney is doing a good job. She is making you aware of the potential problems. 9 time out of 10 things go smoothly so try not to lose any more sleep.

Des.

[cw99]

Des, Thank you very very much for taking the time to respond and for the clear responses. I truly appreciate your help and for validating our lawyers advice which I did believe to be correct and in our best interest but hearing from someone else solidifies it for me. I also want to thank you for taking your time as a professional to be involved in a forum like this. I have found this entire site to be so useful. Reading other peoples' experiences and questions has definitely made the last few weeks that much better. I only wish I had come across it sooner. Thanks again.

[jdade]

I recently filed a chapter7 BK and have some furniture that im buying from Aarons lease to own. can stop making payments on this debt until i am discharged from my BK?

[dneil]

I have an important question. I have a first and second mortgage. This is how the stupid bank wrote our mortgage up.The second is a pretty raw deal as it is 10.25% at 15 years with a balloon loan of 19 grand at the end. Mind you, the second mortgage was only for 22,500.00 So I will be paying 200 dollars a month for 15 years and then STILL owe them 19 Grand!

WE filed chapter 7. Is there any way to get this second loan stripped? Countrywide originated the loan and it is now in the hands of Bank of America. If they would either rewrite that loan or perhaps get rid of that loan somehow, I would consider reaffirming the debt. Otherwise my butt will be parked here, living here and paying for this house the way I am supposed to for the rest of that 15 year balloon loan with no reaffirmation agreement. That bank really took us!

[keepinitreal]

I'm pretty sure you can't strip a second in a Chapter 7, only in a Chapter 13.

[dneil]

Well that sucks. Maybe I will just not sign an affirmation agreement like I had first planned and try to pay extra on the second mortgage. Those dirty greedy banks...

[IBroke]

Again, it all goes to motive. In your scenario there still could be bad faith. While I am looking at this from the creditor's point of view, an aggressive debtor's attorney will argue that there is nothing wrong with using the provisions of the Code to their fullest. As to the length of the Plan if you are below median the Plan is 3 years if above it is 5 years but in either case the Plan ends (no discharge) when all "allowed claims" are paid in full, which, theoretically could be almost immediately upon Confirmation. Definitely a very grey area.

Des.

Hey des, look what I found today about this topic:

"As with all legal questions, the answer is it depends. While the Supreme Court has ruled that you can not strip a second mortgage in a Chapter 7 proceeding, you still may be able to file a subsequent Chapter 13 case to achieve the goal.

So the issue really depends upon whether you can qualify for Chapter 13 relief and whether such plan is proposed in good faith.

This double bankruptcy is often referred to as a Chapter 20, which essentially is a Chapter 7 followed by a Chapter 13. Unfortunately, a Chapter 20 usually brings up issues of bad faith and Bankruptcy Courts highly scrutinize these filings. Lien stripping in the subsequent Chapter 13 case entails both qualifying for Chapter 13 relief and qualifying for lien stripping within that chapter.

To strip a second or junior mortgage on the personal residence in the subsequent Chapter 13 requires proving Chapter 13 eligibility (you have income and are within the debt limitations) and that the lien is totally unsecured (the value of the house is less than the first mortgage debt). For more information on the specific qualifications of lien stripping, please click my blog here.

Most issues arise over whether the subsequent filing was done in good faith or not. Bad Faith frequently arises when individuals attempt to take advantage of both chapters where such advantages are not typically available in either chapter. For instance, filing a Chapter 7 to remove the unsecured debt for a later Chapter 13 solely in an attempt to reduce the Chapter 13 payments due to the lower debt load, is often viewed as bad faith.

On the other hand, reducing the unsecured debt in a prior chapter 7 case in an effort to qualify under the debt limits in the later Chapter 13 case, thus saving the fees, costs, and requirements in avoiding a Chapter 11 case, is generally considered not bad faith. Its a very fine line, but very important distinction between reducing monthly payments and reducing debt to qualify.

By the same token, the sudden drop in real estate values after the filing of a chapter 7(wherein one would not have qualified for lien stripping with previous values), which makes lien stripping a possibility now, would also be considered in good faith.

So what then gets paid in the subsequent Chapter 13 since all debt was previously discharged? Courts continue to struggle with this dilemma in Chapter 20 cases. On the one hand, there is no longer any unsecured debt due to the previous discharge under 11 USC 524. So technically, when the Chapter 13 is filed, the only debts that might remain are secured debts, taxes, student loans, non-dischargeable debt, other priority debt, and post chapter 7 debt. But assuming none of this other debt remains and the only purpose of the Chapter 13 is to strip the lien, does anything get paid?

The majority of Courts are now holding that while the secured lien is now voided and the debtor no longer personally owes any of the debt, a new unsecured debt is still created. Even though the prior Chapter 7 discharged this debt as a personal liability of the debtor and it can not be collected against the debtor personally, it is an unsecured debt that can be collected against the Chapter 13 estate. As such, most Bankruptcy Courts are now allowing these unsecured claims to be paid over a 3 to 5 year plan, even though the debtor no longer personally owes it.

So what then happens on discharge? Since under the new bankruptcy laws, a chapter 13 will not receive any discharge if filed within 4 years of a chapter 7, does the debtor now personally owe a huge unsecured debt upon completion of their chapter 13? No, as previously stated, since the debt has already been discharged in the previous chapter 7, the debtor no longer personally owes the new unsecured debt, even though there will be no discharge of this new unsecured debt in the subsequent chapter 13 case.

Finally, there is also no Code provision that requires that a lien may be stripped only upon Chapter 13 discharge. In fact, the Code provisions that are used, 11 USC 506(d) and 11 USC 1322, each provide that the lien stripping is immediate, even if no discharge and even prior to completion of all chapter 13 payments. Moreover, since the new Bankruptcy Laws under 11 USC 348 and 11 USC 349 provide remedies in the event of dismissal or conversion, new arguments can be made for immediate recording of the avoided lien.

In short, a prior chapter 7 should not be an obstacle for a subsequent chapter 13 that is filed to strip a junior mortgage, provided the requirements for lien stripping exists and there is no bad faith in that chapter 13 filing. Always check with an experienced Bankruptcy Attorney if you think you might qualify for this relief."

The way I read it is that another "GOOD faith"-reason could be a scenario where your unsecured debt amount exceeds the limit for a CH13 so that basically, you have no other choice than filing CH7 first. It's also claimed that the court would consider a previously discharged second mortgage as new "unsecured debt" in order to process a CH13 right after a CH7 - if I read it correctly.

It's really though but I'm starting to like the CH7 approach. An additional CH13-filing would only be an emergency-solution. Our first goal would be a settlement-approach for the second mortgage. BTW, our first mortgage went down to $1,180/month due to lower insurance and property-tax. Zillow puts the current value at about $270K - that's also a good guess for an auction-price - so I guess settlement-chances after a CH7 are quite good.

[despritfreya]

The way I read it is that another "GOOD faith"-reason could be a scenario where your unsecured debt amount exceeds the limit for a CH13 so that basically, you have no other choice than filing CH7 first. It's also claimed that the court would consider a previously discharged second mortgage as new "unsecured debt" in order to process a CH13 right after a CH7 - if I read it correctly..

Yes. In the first scenario (get rid of unsecured to get below 109 limit) this approach has always been "the norm". 13's are almost always preferable over 11's due to the cost, extra work required of the debtor and the voting requirements. Do a 7 to get rid of dischargeable debt then come back for the 13 to pay taxes and cure mortgage arrears, etc.

As to treating the discharged personal liability on a 2nd (if striping in the 13) as an allowed unsecured claim, I do not see it. The Chapter 7 discharge acts as an injunction to collection. Filing the 13 (where there will be no discharge) and then allowing a claim as an unsecured creditor is nothing more than violating the discharge injunction. But, if a Court is going to require you to pay your disposable income for the "commitment period" and there are no creditors, maybe that is a solution to the bad faith argument. On the other hand, if you allow the 2nd to have an unsecured claim, what about all of the other creditors that were discharged in the 7? Then are you not back to being over the 109 limit? Doesn't make sense to me.

I'm starting to like the CH7 approach.

Yes, trying to "buy" the lien release (outside of the context of the bk) makes a lot of sense and I hope you are successful.

Personally I see no reason why one could not strip the 2nd in a 7. Forcing a debtor to do a "20" makes little sense to me as it is a waste of court resources. At least 1 judge in my district has entertained strips in Chapter 7. I did it once and I know of 2 other attorneys who have tried it (all in front of the same judge). In each case we won by default therefore we do not know what this judge would have done if an Answer to the Complaint had been filed and we litigated the issue.

Des.

[IBroke]

Thanks for the info, des.!

[ohantonio]

Currently in the middle of filing for bankrupcty, then a divorce will soon follow. In our intial meeting with our BR atty, he mentioned that one of us would reaffirm to keep the house. So does this mean that she could reaffirm the existing mortgage in her name only and be solely responsible for the mortgage from then on? If so, my name will still be on the deed and the B isn't going to sell the house without giving me half.

[keepinitreal]

Currently in the middle of filing for bankrupcty, then a divorce will soon follow. In our intial meeting with our BR atty, he mentioned that one of us would reaffirm to keep the house. So does this mean that she could reaffirm the existing mortgage in her name only and be solely responsible for the mortgage from then on? If so, my name will still be on the deed and the B isn't going to sell the house without giving me half.

Ohantonio, your attorney can't force you to re-affirm your mortgage. Our attorney put the re-affirmation form in front of us and we told him we weren't going to sign it.

Even if you don't re-affirm and your wife does, you both still owe on the mortgage. The only change will be if the payments stop, the lender can only go after the person who DID re-affirm.

If you sell the property, you still have to divide the proceeds the same way you would have previously.

[ohantonio]

The only reason that I would want to re-affirm is that we actually have some equity in the house and I wouldn't want to jeopardize letting that go.

[IBroke]

The only reason that I would want to re-affirm is that we actually have some equity in the house and I wouldn't want to jeopardize letting that go.

I don't see how NOT reaffirming puts ANYTHING in jeopardy for you. Your equity IS and STAYS YOUR equity, no matter if you reaffirm or not. The only thing a reaffirmation of the mortgage is going to give you is LIABILITY - but no additional rights or security.