Reaffirm a Home Equity Loan in California Bankruptcy? Are You Kidding?

Why You Should Never Reaffirm a Home Equity Lone in California BankruptcyEvery now and then my San Jose bankruptcy law firm still gets a fat letter from one of the Big Banks soliciting to try to convince us and one of our bankruptcy clients to reaffirm a California home mortgage loan. If I’m in a relatively good mood that day, I’ll scan the bank letter and reaffirmation agreement and send the original to my office shredder. I’ll contact my client to inform him or her of the bank’s “offer.” But in reality the idea of reaffirming a first or second mortgage in California bankruptcy is ludicrous. Let me explain why.

It is true that the 2005 changes to the Bankruptcy Code (“BAPCPA”) effectively require bankruptcy debtors to either reaffirm or redeem a loan secured by personal property if the debtor opts to retain that personal property. She can, by the way, always surrender that personal property. Now, any law student who has even a few weeks of law school under her belt has learned in her first year Property class, that “personal property” means property that is not “real property” or real estate. If it’s land or a structure permanently affixed to land, it’s real property, not personal property. The Bankruptcy Code, as amended by BAPCPA, provides in Section 362(h) that the Automatic Stay is terminated as to personal property if the debtor does not timely reaffirm or redeem a loan secured by that personal property. Likewise, Bankruptcy Code §521(a)(6) requires that a Chapter 7 bankruptcy debtor either reaffirm or redeem a purchase money loan secured by (again) personal property if he wants to retain that personal property.

These sections most commonly apply to vehicles, since vehicles are the most common type of personal property secured by purchase money loans. They certainly do not apply to home mortgages, deeds of trust and home equity lines of credit (“HELOCs”). Hence, there is no requirement under the Bankruptcy Code that a debtor who wants to retain her home sign a reaffirmation agreement with a mortgage lender or home equity line lender. Let me say that again. You don’t have to reaffirm a loan secured by your home or any other real estate in bankruptcy. In California, a bankruptcy debtor might ultimately lose her home, but if she does it will be because either (a) the home has more equity than available Chapter 7 exemptions permit (in Chapter 7 only), or (b) because she has defaulted on the loan and the lender goes through the ordinary California foreclosure process after the Automatic Stay has either been lifted or has expired.  She will not lose her home because she did not sign a reaffirmation agreement.

Signing a reaffirmation agreement on a home equity line of credit in a California bankruptcy would be an especially terrible idea from the bankruptcy debtor’s perspective. This is why I stated above that these go to my office shredder. Why? As I have written before on this blog and my firm website, home equity lines of credit in California are generally deemed to be non-purchase money loans, and as such, HELOC lenders can still sue on their promissory note after the security (the home) has been foreclosed upon by the first mortgage lender. In other words, if the home was under water when the primary mortgage lender foreclosed, then the balance owed on the HELOC merely becomes unsecured debt, like credit card debt. However, a bankruptcy discharge discharges that personal debt, and removes the HELOC lender’s right to sue on the contract. Signing a reaffirmation agreement on such a loan would restore the lender’s right to sue on a contract even after the property securing that loan was foreclosed upon. While I have some confidence that our San Jose Bankruptcy judges would be unlikely to approve a reaffirmation agreement on a mortgage loan or HELOC, I always counsel my bankruptcy clients not to sign one in the first place. It’s not required, and it could expose the bankruptcy debtor to serious personal liability in the future.

This situation should illustrate once again why filing personal bankruptcy without being represented by an experienced bankruptcy attorney can have grave consequences for the bankruptcy debtor. Creditors are keen to take advantage of lay persons filing bankruptcy on their own.

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