Should I reaffirm my mortgage?
I'll explain why it's best not to reaffirm a mortgage.
Don't reaffirm your mortgage.Should I Reaffirm My Mortgage in Bankruptcy?
Richard Fonfrias, J.D.
Chicago’s Financial Rescue
& Bankruptcy Lawyer
Fonfrias Law Group, LLC
When you file Chapter 7 bankruptcy, you must disclose whether or not you choose to reaffirm any of your debts, including your mortgage or car loans. Reaffirming a mortgage in bankruptcy means that you continue to be obligated on your mortgage debt, just as though you hadn’t sought bankruptcy protection at all. In other words, you agree that you’re still obligated to pay the debt even if you declared bankruptcy on all your other debts. Depending on your financial situation, reaffirming your mortgage could be a not-so-financially wise decision.
How Do I Reaffirm a Mortgage in Bankruptcy?
When you reaffirm a debt, you’ll sign a new agreement that makes you personally liable on that loan again. This means that you give up the benefit of your bankruptcy discharge and reassume that debt in full.
The reaffirmation of the mortgage is a multi-page agreement your attorney files with the court. This agreement states that you affirm or “agree to pay that debt (mortgage)” regardless of your bankruptcy discharge on other debts.
The reaffirmation agreement requires your attorney or the debtee’s bankruptcy attorney to sign forms saying that they have read the agreement and that it does not impose an undue hardship on their client.
Some attorneys, for good reason, will not sign this because they know what the downsides or cons of reaffirming a mortgage in bankruptcy can mean. Some judges won’t let the debtor reaffirm a mortgage loan unless the debtor is incurring some kind of valuable benefit for doing so. So, if your attorney and the judge aren’t keen for you to reaffirm a mortgage in bankruptcy, there’s a good reason not to do so.
Reaffirming your debt is a legally binding agreement. Once you agree to do this, you don’t get to change your mind once the papers are signed. Don’t take this decision lightly. You could wipe out the relief you just gained by filing bankruptcy!
Bankruptcy laws require debtors to surrender, redeem, or reaffirm secured debts, including mortgages and car loans. However, if you’ve shown good faith and responsibility, like not being late on your mortgage payments or not missing payments, your mortgage company may not push for you to reaffirm the mortgage—if you continue making your mortgage payments on time. Remember, they want their money, not a lot of legal hassles.
Who Does Reaffirming a Mortgage in Bankruptcy Benefit Most?
Depending on the financial issues and circumstances involved, the party benefiting most from a reaffirmation of debt is always the lender.
Reaffirming a mortgage in bankruptcy protects your lender from losing out on the money they have invested in your house. If you do reaffirm the mortgage, the lender is now fully protected if you stop making payments. They can file a deficiency claim to ensure you pay for the house, even if you don’t get to keep it.
Your benefits aren’t as great. Reaffirming your mortgage allows you to retain your ownership in the home and your accumulated equity if you are current or if you can keep up your payments on the mortgage.
So, it can be a win-win for both you and your lender, but the lender is the biggest winner. You don’t have to reaffirm the mortgage to prevent foreclosure.
You may have heard about debtors having to reaffirm their car loans. However, this requirement does not apply to real estate. Debtors do not have to reaffirm a mortgage debt. It’s your choice.
Should I Reaffirm My Mortgage in Bankruptcy?
It depends. I know that sounds like waffling on the answer, but there are a lot of factors to consider before deciding to reaffirm your mortgage or not.
Are you current on your payments?
How important is your credit score to you?
Have you kept up the insurance on the home?
Are you paying your property taxes?
Do you feel secure enough in your financial future that you are confident you can continue to keep making payments?
Are you on good terms with the lender?
Are you prepared to pay the deficiency if you can’t make payments and the house goes into foreclosure? (read more about deficiency below).
You’ll need to discuss the pros and cons of your particular case with your bankruptcy attorney before deciding what to do.
What’s the Worst That Could Happen if I Choose Not to Reaffirm My Mortgage?
The worst that could happen if you don't reaffirm your mortgage is the creditor can repossess your property and evict you, and you’ll have to find a new place to live.
However, if you reaffirm and fail to make payments, the creditor can not only repossess the property and evict you, they can sue you for a deficiency afterward.
If there is a bankruptcy discharge of your mortgage, then the lender can’t go after you for any money, even if there is a large deficiency after the home is foreclosed on and auctioned off. If you choose not to reaffirm your mortgage, the promissory note you signed when you first got your mortgage will be discharged in the bankruptcy just as your other debts are. That’s the worst-case scenario. Best case scenario? It’s possible not to reaffirm the debt and still keep the house.
Your liability for the mortgage is dissolved in the bankruptcy; however, your lender retains a lien on your home through the mortgage if you choose to stay and continue to pay your mortgage without reaffirming the mortgage. Once the house is paid off in full, then the lien is removed, and the house is yours.
If you’re worried about your home being foreclosed on if you choose not to reaffirm your mortgage, relax. Lenders are very unlikely to start foreclosure proceedings as long as you remain current on your mortgage payments.
They also expect you not to breach other terms of the mortgage note, such as keeping your home insurance up to date and continuing to pay your property taxes on time.
Most mortgage companies want to avoid foreclosure if possible, so don’t let your fear of their foreclosing force you into choosing to reaffirm. As long as the mortgage company feels confident they’ll get their money by allowing you to stay in the home, they will generally work with you—until you start missing payments, let your insurance lapse, or fail to pay your property taxes. Your bankruptcy attorney can address this possibility during the bankruptcy.
Not reaffirming a mortgage is a very powerful tool you can fall back on if you choose not to keep your home later on. Having a mortgage default option can be very valuable and is an option you should ask your bankruptcy attorney about.
When Should I Reaffirm a Mortgage Obligation?
If your mortgage payments are current and other conditions are favorable, there is usually no great benefit or any compelling reason to reaffirm a mortgage in bankruptcy—no matter what the mortgagee or lender tells you.
The primary benefits to reaffirming are:
You can rebuild your credit sooner.
You can negotiate better terms, lower interest rates, lower monthly payments, etc., on the new loan.
Reaffirmation protects you against repossession. A lender may agree to let you keep the house and live there and make payments, but they’re in business to make money and can, at any time, for any reason, repossess the home if they choose to do so if you haven’t reaffirmed the debt.
Remember, it’s in the lender’s best interest, not yours, to get you to reaffirm your mortgage. Why? They have a better chance of getting your home, and their money, and their investment in the house if you reaffirm your mortgage.
It’s true; reaffirming your mortgage may look like a good deal. The mortgagee or lender may even agree to modify one or more of your mortgage terms in your favor to get you to reaffirm.
When you’re hurting financially, lower monthly payments or lower interest rates on a reaffirmed mortgage may look good in the short term, especially if you want to keep the house. But consider the risks you take on if you do so. Take your time and consult your bankruptcy attorney before reaffirming your mortgage.
Is it Better for My Credit Score to Reaffirm My Mortgage?
While your credit score will drop after bankruptcy, chances are it wasn’t that good going into bankruptcy. Regardless of what you decide to do, you’re going to spend time rebuilding your credit. Once you file bankruptcy, most lenders will stop reporting to credit reporting agencies anyway, even if you’re continuing to make monthly payments. It’s a process commonly referred to as retain and pay, and it means your timely, responsible payments aren’t reported. There are pros and cons there as well. If the lender does report payments, if you’re late, that will hurt your credit score.
Before deciding to reaffirm a mortgage in bankruptcy, talk to your attorney about the pros and cons of your case. It’s a big decision to make and could negate the benefits of filing bankruptcy if you make the wrong decision.
If You Have Questions About Reaffirming a Mortgage in Bankruptcy, or Other Legal Matters, Don’t Hesitate to Call 1 (312) 969-0730