In recent posts, we have discussed the basics of reaffirmation agreements, whether or not you should reaffirm your home loan, and why you should not get legal advice from lender representatives who told you it was a mistake to not reaffirm in your Chapter 7 cases and they will not refinance because of this. This past week I saw another example of a client being led astray on this issue, only this time it was from another lawyer. The individual had multiple properties, seven figure debt, and monthly expenses were far more than his six figure income. The Statement of Intention reflected the surrender of his primary home and “retain and pay,” which is what virtually all good Bankruptcy lawyers recommend. The case apparently sailed through as a “no asset” case and he got a discharge of well over $1.5 million. Fast forward several years later and the lender in one of the homes retained says he cannot refinance because he did not reaffirm, so he apparently calls a lawyer friend. The lawyer friend, apparently with little knowledge of Bankruptcy and reaffirmations, could only conclude that because a lender would not refinance several years after the case was over, something must have gone wrong in the case. This was in spite of several attempts at explaining reaffirmations, and the reasons why good Bankruptcy lawyers rarely recommend reaffirming home loans. This illustrates the importance of getting advice from an experienced Bankruptcy lawyer.
First, and most importantly, the individual obviously still had the house several years later in spite of not reaffirming and in spite of a discharge of a large amount of debt. This is actually a case study of the best possible ending, but the inexperienced lawyer simply could not understand this. Further, with expenses well over income, it is unlikely a Judge would ever have approved the reaffirmation for the non-residential property (even if a lawyer made an error in supporting reaffirmation). The lawyer friend’s response to this was that this was basically irrelevant because the client (in hindsight several years later) wanted to keep the property. In fact, this position is the opposite of a Bankruptcy lawyer’s professional and ethical obligations to get the best result for the client, based on knowledge and experience in the law and how judges will rule.
There are certainly some negatives that come out of Bankruptcy cases. Perhaps the biggest one is a hit on a credit report and problems getting credit for a while. Even the best Bankruptcy lawyers cannot avoid that on behalf of clients. In most Chapter 7 cases, the primary goals are to get a discharge of all debt (at least all debt that is eligible for discharge), keep exempt property and allow the client to emerge from the case otherwise unscathed. A discharge of significant debt, and emerging from the case with the option to keep one or more homes, perhaps with the choice of which one(s) to “retain and pay,” is the best case scenario. Again, this is illustrated by the fact that several years later, the individual still had the property! Nevertheless, in spite of the obvious fallacy of the lawyer’s arguments, the lawyer ultimately stuck with the accusations about how the case was handled incorrectly merely because the lender said they would not refinance and I expect the former debtor was the victim of misinformation from two sources – the lender and the friend. If you have questions about your Bankruptcy case, even if it is several years ago, call your lawyer. Most lawyers will be happy to answer questions. If you cannot do that, such as when your lawyer has retired, call another experienced Bankruptcy lawyer. Most are happy to spend a few minutes speaking with you.