Long Island Bankruptcy Lawyer Notes Troubling Trend for Loan Modifications Post-Chapter 7

HUNTINGTON, N.Y. - April 24, 2014 - PRLog -- Banks are demonstrating a troubling trend when homeowners  seek a modification of their mortgage after receiving a Chapter 7 discharge: Demanding that those seeking the modification enter into a reaffirmation agreement. Long Island bankruptcy lawyer Andrew M. Doktofsky said that the trend is troubling because the reaffirmation agreements are not required under law, and are unadvisable in most circumstances. In addition, courts are generally refusing requests to reopen a bankruptcy case for the purpose of approving the agreements, making them impossible to obtain.

"This decision by banks to require these reaffirmation agreements has put those who have received a Chapter 7 discharge in a tough spot," Doktofsky said.

A reaffirmation agreement is an agreement in which a debtor seeking bankruptcy protection commits to repay a debt that would otherwise be discharged. In a Chapter 7 bankruptcy, a debtor's non-exempt assets  are liquidated, or sold, and the proceeds are used to pay creditors. However, the Bankruptcy Code, and in some instances, state law, provide debtors with various exemptions that usually allow them to keep all of their property. Most Chapter 7 cases are known as “no asset” cases because there are no assets that can be sold to pay creditors. Most debts are discharged in bankruptcy, except for those debts, such as student loans, that are deemed nondischargeable under law.

Reaffirmation agreements (http://www.amdlaw.com/BankruptcyLaw/ReaffirmationAgreemen...) generally come into play with secured loans for personal property, such as auto loans . Most financing agreements for automobile loans contain a clause defining a bankruptcy filing as a default, which would allow the lender to repossess the collateral, i.e. the vehicle, even if the debtor continues to pay the loan. A reaffirmation agreement permits the debtor to retain the collateral by promising to continue to pay the loan. Most lenders, however, will allow a debtor to keep their vehicle as long as the loan is paid, even without a reaffirmation agreement.

An attorney will rarely advise a client to sign a reaffirmation agreement for a mortgage, Doktofsky said. The agreements are not required by the Bankruptcy Code, and, in the event of a foreclosure, the agreement leaves the debtor personally liable for a deficiency judgment.

It is unclear why banks are insisting on requiring that mortgage loans be reaffirmed in bankruptcy, Doktofsky said. Theories floated have included that they do not want to violate the bankruptcy discharge, or that they are simply seeking to lock borrowers into  a personal obligation to pay the loan. The  requirement may be in violation of the Home Affordable Modification Program's eligibility criteria, which states in Section 1.2 that "Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP."

The development is particularly troubling because debtors whose Chapter 7 cases have been closed must go to Bankruptcy Court to reopen their case, and courts have been denying these requests. This is because the Bankruptcy Code requires that reaffirmation agreements be filed with the Bankruptcy Court prior to entry of the bankruptcy discharge. As one court stated, “The court does not find a statutory or other basis to vacate a discharge at the request of a debtor in order to enter into a reaffirmation agreement.” (In re: McNeal, 2013 WL 5494322 (Bankr. N.D. Ohio 2013)).

"These decisions by banks have made it impossible for some people to modify their mortgages," Doktofsky said. "Debtors who are considering a Chapter 7 bankruptcy filing may need to seek a loan modification before filing. This issue demonstrates that  all aspects of a bankruptcy filing be well-considered and well-advised before the bankruptcy case is filed."

Andrew M. Doktofsky, of Andrew M. Doktofsky, P.C., is a Long Island bankruptcy lawyer (http://www.amdlaw.com/) who represents clients in both Chapter 7 and Chapter 13 bankruptcy cases in Nassau and Suffolk Counties, New York.