If you own a home and file for Chapter 7 bankruptcy, mortgage reaffirmation may be a consideration. Your lender may send your bankruptcy lawyer a reaffirmation agreement, but should you sign it?
This can be a confusing and difficult decision, so it’s essential to understand what a reaffirmation agreement is and how it may affect you.
The Impact of Bankruptcy on Your Mortgage
Chapter 7 bankruptcy allows you to eliminate most of your debts and get a fresh start. When you file for Chapter 7 bankruptcy, you are asking the court to discharge (eliminate) your responsibility for paying certain debts. This means that you no longer have to pay these debts, and creditors cannot take any action to collect them from you.
One important thing to note is that Chapter 7 bankruptcy does not eliminate the lien on your property. If you have a mortgage on your home, the lender can still use the mortgage to foreclose on your property if you don’t make your payments. However, you are no longer personally responsible for the mortgage. You cannot be sued for any deficiency (the difference between what you owe on the mortgage and the amount the lender can get from selling the property).
In contrast, Chapter 13 bankruptcy doesn’t eliminate your personal liability for mortgage loan payments unless you give up the property. At the end of a Chapter 13 case, you remain personally responsible for the mortgage.
What is a Reaffirmation Agreement?
A reaffirmation agreement is a new promise to repay a debt that would otherwise be wiped out in a Chapter 7 bankruptcy. When you sign a reaffirmation agreement, you take back your personal responsibility for a particular debt that would otherwise be discharged in your bankruptcy case.
Reaffirmation agreements are typically used for secured debts, such as mortgages or car loans, where the creditor has a lien on a property. By signing a reaffirmation agreement, you agree to continue paying the debt and keep the property.
Why You May Want to Think Twice About Reaffirming Your Mortgage
Reaffirming your mortgage can have both positive and negative consequences. On the positive side, reaffirming your mortgage may allow you to keep your home and improve your credit score by continuing to make payments on the mortgage. However, there are also several negative consequences to consider before you decide to reaffirm your mortgage:
- Reaffirming your mortgage creates new debt: When you sign a reaffirmation agreement, you assume liability for a debt that would otherwise be eradicated in your bankruptcy. This means that you will be responsible for paying the mortgage, even if the value of your home has decreased.
- You may lose the property if you can’t make the payments: If you cannot make your mortgage payments after reaffirming the debt, you may lose your home to foreclosure. This can be especially risky if you are struggling to make your payments and are considering bankruptcy in the first place.
- Reaffirmation agreements are unnecessary: You can keep your home even if you don’t reaffirm your mortgage. You can continue making your mortgage payments after bankruptcy and protect your home from foreclosure, even if you do not sign a reaffirmation agreement.
How to Decide Whether to Reaffirm Your Mortgage
If you are considering reaffirming your mortgage, it is crucial to carefully weigh the pros and cons and seek the advice of a bankruptcy attorney. Also, consider the following factors:
- Can you afford the payments? Reaffirming your mortgage means a new promise to repay the debt and committing to making your payments on time. Make sure you can afford the payments before you agree to reaffirm the debt.
- Do you want to keep the property? If you are unsure if you wish to keep the property, it may be best to avoid reaffirming the mortgage. You can still make payments on the mortgage after bankruptcy and protect your home from foreclosure. Still, you will not be personally responsible for the debt. This can allow you to decide whether to keep the property long-term.
- Are there other options for dealing with the debt? Before you reaffirm your mortgage, consider whether there are other options for dealing with the debt. For example, you may be able to negotiate a loan modification with your lender or explore other options for avoiding foreclosure.
Reaffirming your mortgage can be complex and challenging, and it is only suitable for some. Before you reaffirm your mortgage, make sure you understand the consequences and seek the advice of a bankruptcy attorney. You should also carefully consider whether you can afford the payments and whether you want to keep the property in the long term.
ABOUT THE AUTHOR
Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.
I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.
I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.
I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.