Why, When Choosing Bankruptcy in Massachusetts, Reaffirming a Mortgage may be a Bad Idea.
A mortgage reaffirmation agreement, though a large and wordy document, is essentially very simple. The mortgage reaffirmation agreement is a representation of your commitment, as the holder of a mortgage, to resume or reaffirm your personally liability to the mortgage lender. As a practical matter, when you sign a reaffirmation agreement, you are agreeing to pay the mortgage and may be opening yourself to future wage attachments or levied bank accounts under certain circumstances. If you are currently considering filing for bankruptcy in Massachusetts under Chapter 7, while mortgage reaffirmation may be an option, it may not be a desirable one.
You might ask, why would anyone sign a reaffirmation agreement? This is a great question. There are times when the terms of the reaffirmation agreement could be favorable to the borrower. When the bank or other lender has improved the terms of the reaffirmation agreement by drastically lowering interest rates, or dealing favorably with arrearages, or by some other means, signing a reaffirmation agreement may be a good choice. However, and this is the case more often than it is not, the terms of the reaffirmation agreement are typically little to no different than the terms of the original mortgage.
So, if you are considering filing for bankruptcy under Chapter 7 in Massachusetts and signing a mortgage reaffirmation agreement at the same time, understand that you may be agreeing to forego the legal protection to which you are entitled under Chapter 7. In Chapter 7, if you do not sign a reaffirmation agreement, and you intend to keep and pay your current mortgage, you will have personal liability for the mortgage discharged in bankruptcy. This usually means that, if for some reason, you fail to make a payment after filing under Chapter 7 and the bank forecloses on the property, the bank cannot pursue you personally for any deficiency after the sale. For example, suppose you have filed Chapter 7, not signed a reaffirmation agreement, and miss several mortgage payments and the bank decides to foreclose. Suppose the outstanding amount of the mortgage is $200,000, and the house sells for $150,000. Who pays the bank the $50,000 that is outstanding? Who pays this $50,000 deficiency? If you have not signed a reaffirmation agreement with the bank holding the mortgage, then the bank has no ability to pursue you for the $50,000 that it is owed them. This, because, having filed under Chapter 7 bankruptcy, your personal liability for that debt has been discharged by the Bankruptcy Court. On the other hand, if you had reaffirmed the mortgage with the bank, even after filing for bankruptcy, you would have agreed via the reaffirmation agreement to assume personal liability for the mortgage despite having filed for bankruptcy.
For the above reasons it is usually unwise to sign a reaffirmation agreement when filing for Bankruptcy under Chapter 7. While there may be rare circumstances in which a reaffirmation agreement has been drafted in favor of the borrower, such circumstances would indeed be rare. It is advisable to contact a competent attorney to assist with navigating the bankruptcy process as well as any attempts by a lender to obtain a signed reaffirmation agreement.
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