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reaffirmation agreements of mortgages- beware!

A reaffirmation agreement is a doctrine set forth in the Bankruptcy Code that basically binds a debtor who could otherwise discharge an obligation o reaffirm and have that obligation survive the bankruptcy.  The Bankruptcy Code requries the reaffirmation of debt secured by personal property.  The failure to do so could result in its return to the creditor.  That is most often seen in the context of a continuing car loan that a client will reaffirm and agree to repay beyond the bankruptcy discharge and that the Debtor will remain liable on that obligation regardless of obtaining a bankruptcy discharge.

However, many attorneys do not appreciate the ramifications of executing a reaffirmation agreement.  There is no mandate under the Bankruptcy Code that obligates a Debtor to reaffirm the mortgage obligation.  Even so, many attorneys have their clients reaffirm the mortgage obligation for hundreds of thousands of dollars.  The Bankruptcy Code does not compel such an agreement and why an attorney would want a client to agree to repay a large mortgage loan if there is a subsequent default, when the law does not impose upon Debtor to do so, is highly questionable.

For example, what happens if you reaffirm an obligation on a mortgage and six months after the completion of the bankruptcy, something catastrophic hppens and you can longer afford the mortgage obligation?  If that house is subsequently foreclosed, you, the Debtor, who agreed to the reaffirmation agreement, could be liabile for hundreds of thousands of dollars.  That is completely contrary to the intention of filing a chapter 7 bankruptcy and unburdening yourself of debt that you cannot afford to pay.

Clients should be fully informed by their counsel as to all of the ramifications and problems that may occur in executing a reaffirmation agreement on a mortgage obligation.  An attorney with knowledge and an expertise on this issue, only under the rarest of circumstances, should permit a client to reaffirm a mortgage debt.

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