When one reaffirms a debt in bankruptcy it in effect takes the debt out of the protection of the bankruptcy laws. The contract is treated as if the bankruptcy did not exist. There are sometimes good reasons to do this and most times not. Your bankruptcy lawyer can help you steer through the murk. Although the law actually relates to personal property debt and not real estate, the mortgage companies have taken the tact to ask, and in an indirect way, demand that one signs a reaffirmation agreement on the mortgage and note. This move should be very carefully considered by the debtor in bankruptcy and only upon the advice of an experienced attorney.
One advantage is that if one gets a reaffirmation then the mortgage company will continue to notify the credit reporting agencies that the debtor is paying the debt–which is helpful to rebuild one’s credit. Part of the twist though is if one does not sign the reaffirmation the company refuses to alert the reporting agencies of the regular monthly payments, with the side effect of not improving the credit. Although this is not warranted by law it has become the common bank practice.
I had an example yesterday that was indicative of the absurdity of the bank tactics. The debtors did not get a reaffirmation for their home on which Wells Fargo Bank possessed the mortgage. For over 4 years since the bankruptcy the debtors made every single monthly payment on time to Wells Fargo. As the interest rates have improved of late the debtors approached WFB to refinance their loan. The person they negotiated with proposed a very nice refinancing deal (better interest rate, limited closing costs, no docs, etc.). This would save the debtors a large amount of money. Unfortunately, when the broker placed the loan application into review the bankruptcy department nixed the loan solely because the reaffirmation had not been signed. The point of the reaffirmation is to insure that the loan was paid. In fact it had been since the BK and for 6 years prior, AND it was paid to the same bank that would refinance the loan. Yet the loan was denied.
There obviously was no increased risk to the bank (which by the way had netted $5.7 billion dollars in the last reported quarter) but was a good savings for the debtors. Moreover, in Iowa even if the debtors would default the bankruptcy reaffirmation would having little practical meaning because the usual procedure is to waive any deficiency in the foreclosure (regardless of the so-called protective reaffirmation). The reaffirmation would give no real value to the bank. Also in this particular case there was a substantial amount of equity in the home so the bank was protected even with a default–and it knows this! This is the nonsense we face with banks…
Lastly it is noteworthy that both judges and debtor attorneys are reluctant to agree to reaffirmations–in part because these agreements tend to contradict the very goal of most bankruptcies and for real estate, don’t apply. Each may sign when presented with the right arguments, but there is resistance.