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Home / Firm Blog / Bankruptcy / Reaffirmation Agreements after Chapter 7 Bankruptcy
18
August
2010

Reaffirmation Agreements after Chapter 7 Bankruptcy

Filing a Chapter 7 Bankruptcy should be used as a last resort in the event an individual has no other avenue to become solvent again. Under a Chapter 7 Bankruptcy, all of an individual's debt is discharged (with some exceptions such as taxes, student loans, court-ordered support etc.). In exchange for the discharge, all non-exempt assets are liquidated and distributed among creditors.

A main concern of those considering bankruptcy is what happens to their home when they file a Chapter 7. When an individual obtains a home loan from a bank, they agree to repay the bank the entire amount of the loan and also grant the bank a mortgage interest in the property. If the individual successfully obtains a Chapter 7 discharge, their personal liability to the bank is discharged along with their other debts. The bank, however, still retains its mortgage interest in the property and may foreclose on the property once the bankruptcy case is closed.

One way to avoid this result is to reaffirm the mortgage with the bank. This is accomplished through a reaffirmation agreement. In a reaffirmation agreement, the debt originally owed to the bank is renewed, allowing it to survive the bankruptcy. The individual stays in their home and continues to pay the bank every month almost as if they never filed bankruptcy. An individual has 60 days after signing a reaffirmation agreement to rescind it should they later decide they do not want to reaffirm the debt.

Banks typically favor reaffirmation agreements since their claim will survive the bankruptcy. Individuals, however, must overcome a couple hurdles in order to enter into a reaffirmation agreement. They must have sufficient income, after expenses are deducted, to make their monthly payments. Pre-bankruptcy late fees and interest may be added to the principal amount as well. If the debtor does not have sufficient income, then a presumption of "undue hardship" arises. In most instances when the presumption arises, the bankruptcy court must approve the agreement before it goes into effect.

Reaffirmation agreements are generally disfavored by borrowers because reaffirming the debt on personal property leaves the individual open to a deficiency judgment. If the borrower cannot make the monthly payments after all and the home is foreclosed, the lender can pursue the borrower for the difference in the foreclosure price and the mortgage price, the deficiency. If the debt had been included in the Chapter 7, then any possible deficiency would have been discharged.

Reaffirmation agreements are an avenue to keep individuals in their homes and can be useful in helping rebuild credit. If you are considering filing bankruptcy, you should always consult with an experienced bankruptcy attorney first who can fully explain the benefits and risks associated with filing bankruptcy and entering into reaffirmation agreements.

  • Item Tag: bankruptcy, Chapter 7, deficiency judegment, mortgage, reaffirmation agreement

Author; Pat Gallagher Categories: Bankruptcy

About the Author

Pat Gallagher

Pat Gallagher

Attorney Pat Gallagher is founder of The Gallagher Law Firm overseeing its day-to-day operations, as well as the long-term strategic planning of the firm. He focuses his law practice on the needs of businesses and specializes in a wide variety of transactional matters, litigation and mediation. He received his J.D. legal degree from the Washington University School of Law in St. Louis, Missouri. Mr. Gallagher has litigated cases throughout Michigan before the American Arbitration Association, State and Federal Courts, Michigan Court of Appeals, Michigan Supreme Court and the United States Court of Appeals.