What Can You Do if Your Lawyer Failed to Ask for a Reaffirmation Agreement from Your Mortgage Company?

Recently I received an email from a woman who filed bankruptcy several years ago and who recently discovered that her lawyer had not requested or filed a reaffirmation agreement. She has been current on her mortgage before, during and after her bankruptcy but because there was no reaffirmation agreement filed, the mortgage lender is not reporting her on-time payments to the credit bureaus.She would like to rebuild her credit and believes, correctly, that on-time mortgage payments would be a big help to improving her credit score. However, her case has been closed for almost three years and she doesn’t know if she has any options.She saw one of my videos where I suggested that refinancing her mortgage could be an option but she is concerned about “rocking the boat” with her mortgage company and possibly losing her house to foreclosure.She is asking me what she should do.I replied by noting that I practice bankruptcy law in the Northern District of Georgia and that while bankruptcy is a federal law, there are state law components as well as legal precedent that applies in her federal court circuit. Further, I pointed out that every bankruptcy court has local rules and customs and that she should reach out to a bankruptcy lawyer in her jurisdiction for advice specific to her case.I can speak generally to this problem as I have seen it come up here in the Northern District of Georgia and I suspect that my experiences are most likely similar to those of lawyers and debtors elsewhere in the country.First, what has happened here is not that unusual. While the language of the bankruptcy law is designed to make a Chapter 7 debtor decide to either formally reaffirm a secured debt or to surrender the collateral, as a practical matter, many Chapter 7 debtors choose the “stay and pay” option.This is the case because reaffirmation agreements in Chapter 7 have become much more complicated than they were prior to 2005 when Congress overhauled the Bankruptcy Code. Since that time if I have a client who wants to reaffirm a secured debt, I, as the attorney, have to sign the reaffirmation agreement and certify that I have reviewed my client’s budget and that I believe that reaffirmation is in my client’s best interest.Congress added this attorney certification requirement to make attorneys more responsible for the decisions of their clients. In theory, this means that a debtor would have a cause of action against his lawyer for improper advice if it turned out later that the debtor really could not afford to reaffirm.Understand that when you reaffirm a debt you are basically removing bankruptcy protection and restores personal liability for a debt. So in the case of a mortgage, if a debtor reaffirms her mortgage debt or auto loan, and later defaults, the creditor can file a lawsuit against the debtor to pursue a deficiency balance.By contrast, if you do not reaffirm a secured debt like a mortgage or vehicle loan, the lender still has a secured claim against the property but has no right to pursue the debtor individually for a deficiency judgment.The tradeoff, as the woman who emailed me has discovered, is that if you do not reaffirm your personal obligation to pay a debt, all those payments you make post bankruptcy will not appear on your credit report.As a practical matter, I am not aware of any case since 2005 where a lawyer got sued for offering bad advice for recommending or certifying a reaffirmation agreement. Still, that possibility exists and many lawyers see no reason to take any chances.Perhaps my emailer’s attorney had some concerns about her ability to repay and did not pursue a reaffirmation on that account. Of course if this is the case the attorney should have been more up front with his client.As an aside, this potential for being held financially responsible for a client’s decision to reaffirm is part of the reason why the cost of bankruptcy has gone up so much. You can thank Congress for thus unnecessary complication.So, what should someone like my emailer do?One option would be file a motion to reopen her bankruptcy case for the purpose of obtaining and filing a reaffirmation agreement. This is an imperfect solution because (1) the bankruptcy judge may not agree to a reopening; and (2) even if she can reopen her case, the mortgage lender may not want to take the time or make the effort to prepare and process a reaffirmation agreement. I can also tell you that it can be very difficult to try to explain to a mortgage company bankruptcy clerk why they should cooperate with this process can be challenging at best.A second option would be to refinance the loan with another lender to end up with a loan that is both secured by the real estate and by the debtor/borrower’ promissory note. Adding personal liability to the arrangement would result in positive credit references.My emailer had expressed concern about asking her current lender to refinance – might that trigger a foreclosure? My feeling is that a borrower who is current would not be at risk but to be safe, why not reach out to another mortgage lender or to a mortgage broker to find an uninvolved lender to process a refinance?Beyond reopening or refinancing, I am not aware of any other options. In my experience debtors have not had problems selling homes when there was no reaffirmation, and I have also found that many Chapter 7 debtors are able to improve their credit scores without a reaffirmation.In sum, I don’t know that my emailer’s situation will create too many problems for her financially so keeping things as they are would not be the worst thing. Otherwise I would suggest that she look into refinancing her mortgage with a new lender – that may solve her problem without risking anything with the current mortgage company.The post What Can You Do if Your Lawyer Failed to Ask for a Reaffirmation Agreement from Your Mortgage Company? appeared first on theBKBlog.