Bankruptcy Questions Answered

Bankruptcy Court Requires Reaffirmation Agreement For Homestead Mortgage

Chapter 7 bankruptcy debtors often own cars subject to a car loan and lien. The new bankruptcy law states that debtors must reaffirm loans on all personal property in order to maintain the property through their Chapter 7 bankruptcy. So, debtors who want to keep automobiles must sign a reaffirmation agreement making them personally liable to pay the loan until paid in full. The Chapter 7 bankruptcy discharge will not discharge the debt and will not protect the debtors if they cannot pay the loan after the bankruptcy is closed.

Real property is different. The new bankruptcy law does not expressly require reaffirmation of debts secured by real property such as mortgage debt. Therefore, I have advised my clients not to reaffirm home mortgages in bankruptcy because they were not so required. I did not think debtors should obligate themselves personally on mortgage debt if not legally required to do so. That way, if after their bankruptcy the debtors could not pay the mortgage and had to walk away from their house the mortgage lender could not sue them personally.

A new ruling by an Orlando bankruptcy judged ends the option to "ride through" a mortgage debt. The judge said that if a debtor wants to keep real property after bankruptcy the debtor has to reaffirm their personal obligation to pay the mortgage debt just like they have to do with their cars and other personal property. The judge cited a ruling by the Eleventh Circuit Court of Appeals that debtors mus act to either surrender or reaffirm a debt if the debtor desires to retain the collateral. The judge said the Eleventh Circuit made no distinction between real property and personal property and that no distinction is merited.

As a consequence of this ruling debtors (at least Orlando Division debtors) must reaffirm personal liability for a mortgage if they want to retain their homestead and other real property after a Chapter 7 bankruptcy. If they are not willing to reaffirm the mortgage they must surrender the house to the lender in which event the bankruptcy discharge would shield them from liability. But, you can’t keep the house without accepting the responsibility and risk for future defaults.

Reaffirming a mortgage debt is not a problem in a good or even normal housing market when housing values increase. In today’s real estate market bankruptcy debtors will have to seriously consider the risks of retaining their homestead and other real property since a future default may subject themselves to substantial legal liability. The case is In re Linderman, 09-BK-02087