Monday, May 9th, 2011
Most people know that Chapter 7 allows you to wipe out unsecured debt – credit card bills, medical debt and other signature loans. But what about secured debt – loans you are still paying to finance your home, your car, perhaps some jewelry or furniture?
This past March, I discussed redemption of property in Chapter 7. Redemption of property is a viable option but it is far less common than "reaffirmation" of debt.
Why Do You Need to Reaffirm?
Secured loans actually contain two different kinds of obligations. On one hand, you obligate yourself personally to pay a particular debt. This is typically in the form of a promissory note. The second layer of obligation ties the specific item of property to the loan. This is called a security agreement.
When you file a Chapter 7 and a discharge is issued by the judge, your personal liability on your secured debt is extinguished. This is why payments on a non-reaffirmed car loan or home loan will not be reflected on your credit reports. You have no personal obligation to pay. However, a Chapter 7 discharge does not extinguish the lender's security interest against property. This is why a vehicle lender can repossess or a mortgage company may foreclose to recover property. In such a situation you would not have any personal liability for any deficiency amount.
A reaffirmation serves two main purposes:
- you will have the certainty of knowing that you are once again in a contractual relationship with the lender. If you do not reaffirm, you could wake up one day to find that your vehicle has been repossessed or that you are being foreclosed upon.
- secondly, payments on a reaffirmed debt will appear as positive information on your credit reports. This means that your credit score will recover more quickly
Can You Negotiate Better Terms in a Reaffirmation?
Because a reaffirmation agreement is a new contract between you and your lender, you absolutely can negotiate different terms. I have negotiated reduced payments, lower interest rates and reduced balances on furniture, electronics, and vehicles. I have also negotiated lower payments on 2nd and 3rd mortgages.
It has been my experience that some lenders will just not play ball. They would rather incur the expense of recovering, storing and reselling a used item. I think this attitude of "we do not negotiate with debtors" is silly and counterproductive, but some lenders take this position (I suspect that some of these lenders do not have the staff or protocol for handling a negotiated debt).
On the other hand, many lenders will agree to a deal with terms a lot better than the original contract. But you do have to ask, and, of course, if you agree to any terms, you must live up to the deal. Reaffirmation agreements can be canceled by the debtor within 60 days after the agreement is entered, or the case is closed, whichever comes first.
Posted in Debt negotiation, Obligation, Reaffirmation and negotiation, a, agreement, agreements, amount a, and, balances, deal , debt, deficiency, handling, item, layer, lower, negotiated, payments, protocol, rates, reaffirmation, reaffirmation because, reaffirmation of secured debt, reduced, serves, specific, terms , the, ties | Comments Off
Sunday, July 18th, 2010
Last month, I met several times with a potential Chapter 13 client who was facing a mortgage foreclosure. Over the course of the past few months he has been juggling his creditors and bills trying to stay afloat and during that time he fell behind to his mortgage company by more than four months, and found himself in the foreclosure process.
This individual earns over $100,000 annually, but, unfortunately he used to earn more than double this amount. His problem was not the mortgage, but his other bills, including a very high car payment and a mortgage payment arising from a failing real estate investment.
Not surprisingly the foreclosure notice got his attention. He immediately took action by calling me to discuss Chapter 13 bankruptcy and by contacting his mortgage company to discuss repayment options. By the Wednesday prior to the pending foreclosure sale scheduled for the following Tuesday, my client had provided me with enough information so that I could prepare a rough draft of a Chapter 13. In this case, by the way, my client and I entered into an agreement whereby he paid me around $300 to open a file and to start entering information into my petition preparation program.
On the pre-foreclosure Wednesday he called to say that after a lot of discussion he was expecting a decision the next day from his mortgage company but that if he did not hear from them by mid-day on Thursday, we would be proceeding with the Chapter 13. A few hours later he called back to say that his mortgage company had agreed to postpone the foreclosure until September and that the Chapter 13 was on hold for now.
Let's analyze what my client did right and what he did wrong.
On the positive side, he did the following right:
- he did not panic – he approached the problem as a business problem not as a personal, moral failure
- he began to address the problem early. His first contact with me was literally the day he received the foreclosure notice. He correctly guessed that the negotiation process with the lender would take several weeks
- he took a two step approach to the problem – he opened negotiations with his lender, and at the same time he started planning for a Chapter 13
- he retained me early on in the process and paid me a small sum ($300) to start the petition preparation process. He also obtained his credit counseling certificate shortly after our first meeting. Contrast that to some of the potential bankruptcy filers who call me on the Friday before foreclosure looking to start the process.
- he convinced his lender to delay the foreclosure by two months – a 2 month delay is preferable to a 1 month delay in that my client now has enough time to try and sell his home
Now, what did he do wrong?
- my main criticism is his failure to get a written confirmation of the suspension of the foreclosure. What if the lender's representative failed to communicate with the foreclosing attorney? What if the lender's representative is simply dishonest? Can a verbal promise by a lender's representative to delay a foreclosure be enforceable? What would the remedy be?
I am very wary of relying on verbal promises. In law school, my contracts professor once made the comment that "an oral contract is worth the paper it is written on," and I do not disagree.
I did find a California state appellate case in which an appeals court found that a homeowner who relied to his detriment on a broken promise by a lender to delay a foreclosure had a cause of action for money damages. However, even in this California case (which would not serve as binding precedent in Georgia) the foreclosure was not reversed and the only issue to be considered by the trial court on appeal was money damages. Add to this months and months of delay and I wonder if the homeowner in the California case felt that he won anything. (Thanks to Michael Renne and his San Francisco Bankruptcy Law blog for his post about Garcia v. World Savings.)
When your home is at risk, I would not rely on any verbal promises from your mortgage company. I would also not rely on an email as the admissability of emails as evidence is questionable. Instead I would suggest that you ask for a faxed letter from your lender or its attorney on letterhead, with the original mailed to you. Further, if you enter into an agreement with the lender directly, you should contact the foreclosing attorney's office (with a copy of the foreclosure suspension letter) to confirm that they are aware of the deal as well.
Posted in Alternatives To Bankruptcy, Debt negotiation, Foreclosure, Foreclosure issues, Garcia v. World Savings, Michael Renne, Petition, a, chapter 13 and foreclosure, delay, estate, failing, foreclosure negotiations, garcia, georgia foreclosure, investment not, letter, my, notice, pending, post, pre foreclosure, preparation, program on, promise, promises , real, representative, sale, savings, scheduled, surprisingly, suspension, the, v, verbal, verbal agreement to stop foreclosure, wednesday, world | Comments Off
