Reaffirmation of Real Estate – October 6th, 2016 Interview

Katherine:

Hello, everyone. Thank you for joining us on This Needs to Be Said. We’re with our friend, attorney Pete Moak, and he’s going to talk with us today about reaffirmations on real estate. We’re still talking bankruptcy, but here’s another category that you may have wondered about, and he’s going to spell it out. Welcome back, Pete, how are you?

Pete Moak:

I’m doing wonderful, thank you. It’s good to talk to you again.

Katherine:

As always, same here. So reaffirmations of real estate. We’ve talked about automobiles, and being able to decide if we keep the car or we have to let the car go in the bankruptcy, but this time, we’re talking about real estate. I want to know, initially, are we talking about the personal home, or are we talking about maybe someone who’s a real estate investor in this situation?

Pete Moak:

Well, we’re talking about either one.

Katherine:

Okay.

Pete Moak:

But I’m going to discuss separately this situation if a person is a homeowner and they live in the home that they are talking about. In other words, the property where they live is the property that we’re discussing. That’s called their homestead. Another topic that we’re going to discuss on another date would be the homestead exemption, but today, we’re going to discuss whether or not a person should or should not reaffirm the debt that they have on their home.

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Katherine:

Okay. All right, well, I’m looking forward to what we’re going to learn today.

Pete Moak:

All right. It is a fairly common question that I get, when someone owns a home and they receive their mortgage statements, typically, then when they file the bankruptcy, the mortgage company is not forwarding or sending to them a mortgage statement on the balance that they owe on their home mortgage. Sometimes, the mortgage company or the bank will say, “Well, we’re not sending you any statements because you needed to do a reaffirmation of the loan in order for us to be able to send you the mortgage statements.” Well, it’s not necessary to reaffirm the debt on a person’s home, but I want you to understand that you will be able to stay as the owner, in other words, keep the home that you live in, even if you don’t reaffirm the debt. There’s no necessity for you to reaffirm the debt when you file bankruptcy.

This is unlike the kind of loans that exist on cars. It is typical, on the loan that is obtained to buy a car, that the lender includes language that says that the lender can consider the loan to be in default, even though you’re current with your payments, but it’s in default simply because you filed bankruptcy. That kind of clause or phrase in the loan documents does not exist in a real estate mortgage. Therefore, there’s no way that the lender can consider the home buyer, the debtor who’s filed bankruptcy, to be in default simply because they have filed bankruptcy. The only way you can be in default is to miss your mortgage payment.

Now, assuming that you’re current with your mortgage payments, and the question rises, “Well, why am I not getting a statement from my mortgage company?” The answer is because the mortgage company does not want to be accused of sending you a statement saying you owe this amount of money when the bankruptcy rules say that the person who’s filed bankruptcy, the mortgage company cannot try to collect the debt from them, in violation of the court’s order to stay away from the debtor and don’t try to collect the debt.

The way I help people understand this situation is that when you borrow money to buy a home, there’s two documents that are significant that you sign. One is the promissory note. Whenever a person borrows money to buy a home, of course, they sign a promissory note, and the promissory note says something to the effect that “I promise to pay X number of dollars”, usually it’s at a certain interest rate, and so much per month, and it’s spread out over 36 … 30 years, or 360 months. That is the promissory note.

Now, a promissory note is a document that’s no longer legally enforceable once a person files bankruptcy, and there’s a second document that’s more important, and that is the security agreement. The security agreement is a document that is somewhat attached to that promissory note. Years and years ago in antiquity, back 100 years ago, if you signed a promissory note and you gave the lender a security agreement, there was actually a string attaching those two documents. There was some wax that was attached to the paper on one, and a string went from one to the other and was attached with wax, and that was called an elange.

Nevertheless, we don’t do that anymore. The security agreement identifies the promissory note, and the security agreement basically says that the person who’s borrowing the money agrees that if they do not make the payments according to the terms of the promissory note, that the lender has the right to foreclose on the property, to sell the property, and use the money that they collect at the sale to pay the balance owed on the promissory note. The filing of the bankruptcy eliminates the enforceability of the promissory note, but it does not change in any way the terms of the security agreement. The security agreement survives the bankruptcy, because it was a voluntary agreement that the debtor made and it’s not being enforced because of any collection of another debt that is not eliminated.

Here, we have a situation where the security agreement survives the bankruptcy, but the promissory note is no longer enforceable on its own. So you don’t need to reaffirm the debt, all you need to do in order to keep your property and continue to live in the home in every way the same as you did before it just to continue to make your mortgage payments. There is no necessity for a homebuyer filing bankruptcy to reaffirm the debt.

There are some situations where some people later, may say, “I want to get a loan modification.” When there’s a necessity to do a loan modification, the mortgage lender or the bank is going to say, “We can only do it if you reaffirm the debt on your home loan.” In other words, you’ve got to get permission from the judge to authorize us to consider that discharge with regard to the promissory note as being something that is reaffirmed, so another motion needs to be filed with the court, to ask the court to allow the debtor to reaffirm, so that the debtor can get a loan modification. We’ve done quite a few of those, and that’s not at all unusual, for a home lender to require that the home, that the debt be reaffirmed in order to get the loan modification.

The pros, of course, of reaffirming is that the lender is going to continue to report to the credit bureaus that you’re making your payments on time. Also, the lender will continue to send you monthly statements, and also the lender will give the debtor access to the lender’s website, so that the person can go online and look up what the balance is and any chances in their escrow account, et cetera, so all of that is a benefit for reaffirming the debt, and as I’ve already mentioned, it may be a requirement to get a loan modification that you reaffirm the debt.

If you are not reaffirming the debt, of course, then the mortgage company or lender is not going to report the payments to your credit bureaus, and if it goes into foreclosure, of course, the fact that you haven’t made your mortgage payments will be reported, or go on your credit report as a foreclosure. Most of the lenders, however, if you file bankruptcy before your home goes into foreclosure, they don’t report it as a foreclosure on your credit. You won’t receive the monthly statements anymore, and you won’t have access to the lender’s website, but there is no necessity for reaffirming the debt.

The conclusion that you need to carry away from this is that if you own a home, and it’s just a home that you live in, then all you need to do is to continue to make your regular house payments on time, and of course, you should have an awareness that the mortgage payments are due on a certain date, usually the first day of the month, and that those payments are due on the first of the month. Then you know that the amount is going to be the same, every month. If the lender has a change in the escrow amount, that is, the monies that are being withheld for taxes and insurance or something, then they will send a notice for that.

You can still refinance the home loan at some point in time in the future and you can still sell your home, even though you filed bankruptcy. None of those circumstances are changed, or none of those things that people may do in the future is changed because they have filed bankruptcy. You can sell the home, you can move out of the home and make it a rental property if you want to after your bankruptcy. All of those things are still allowed. You are the homeowner still, even though you filed bankruptcy.

Now, when a person has investment property, again, there is no need to reaffirm the debt. Everything is the same on that with regard to investment property, except that a person needs to understand that the exemption laws affect whether or not a person is going to be able to keep their investment property if they file bankruptcy. In a chapter 7, if there’s equity in the home, meaning that the amount that the home can be sold for exceeds the amount that’s owed on the mortgage, then there’s equity and the trustee can sell that property and use the equity to pay the creditors in a proportional fashion after the bankruptcy. Typically, we don’t have people who own investment property that has any kind of equity in it that still is going to be protected in any way after the bankruptcy, so we’ll always want to consider whether or not the debtor is going to sell the property before the bankruptcy or surrender the property to the mortgage company, because they don’t have any equity on the property anyway.

Those are the issues addressing the reaffirmation of real estate, and I hope that’ll be a big help to the people who have the questions. If the bank asks me to reaffirm, do I have to do that? The answer’s no.

Katherine:

Mm-hmm. This has been … there’s a lot of things people don’t know to consider, so another reason this needs to be said, audience, why you shouldn’t ask your friends and family about bankruptcy, because there’s some things that we just don’t know to know. It does … I don’t even have any words for it, Pete. I’m just like, “Wow. Wow.” Being able to still have your house payments reported on time, being able to still do things as the owner because you still ultimately are the owner, but you have a protection for you in this process. This has been a wow edition of you sharing with us bankruptcy news. Pete, thank you, and before you go, tell people how they can get in touch with you outside of This Needs to Be Said.

Pete Moak:

All right. Of course, they can go to my website, which is www.themoaklawfirm.com, that’s T-H-E-M-O-A-K-L-A-W-F-I-R-M.com, and they can also call at 480-755-8000 ext. 1. That’ll put you in touch with my person who is setting the appointments for us to talk on the phone or to visit in person, so that we can go over what’s necessary for you to get the debt relief that you need.

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Katherine:

Awesome. Pete, until next time, thank you so much.

Pete Moak:

All right. Take care. Bye-bye.

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