Understanding Reaffirmation: Your Mortgage And You

If you're a homeowner who's filed for bankruptcy, you might be wondering if you should reaffirm your mortgage. Reaffirming a mortgage has pros and cons and is possible but not necessary in Chapter 7 bankruptcy. By reaffirming, you waive bankruptcy discharge protection and remain personally liable for the debt. It can make it challenging to repair your credit post-bankruptcy as your lender might stop sending monthly payment statements and reporting payments to credit agencies. However, if you don't reaffirm, there's a chance you could lose your house. This article will explore the topic in detail, providing insights into the benefits and drawbacks of reaffirming a mortgage.

How do I know if I reaffirmed my mortgage?

Lender's consent

Lenders' consent to reaffirming a mortgage depends on several factors, including the borrower's payment history and the lender's willingness to create a reaffirmation agreement. Some lenders may not be interested in the process of creating and signing a new contract, as their rights to foreclose on the property remain unchanged, with or without a reaffirmation agreement.

Lenders will typically consider the borrower's payment history before consenting to a reaffirmation agreement. If the borrower is up to date with their mortgage payments, the lender may be more inclined to agree, as it indicates a lower risk of default. However, even if borrowers have a good payment history, some lenders may still refuse to refinance without a reaffirmation agreement. This can create challenges for borrowers seeking to refinance with a different lender, as the new lender may prefer to see a credit report with the payment history.

It is important to note that reaffirming a mortgage has both positive and negative consequences. On the positive side, reaffirming may help borrowers keep their homes and improve their credit scores by continuing to make timely payments. However, one of the significant negative consequences is that reaffirming creates new debt. When borrowers sign a reaffirmation agreement, they assume liability for a debt that would have otherwise been discharged in bankruptcy. This means they will be responsible for paying the mortgage, even if their financial situation changes or the value of their home decreases.

Before deciding to reaffirm a mortgage, borrowers should carefully consider their options and seek legal advice. It is a complex decision that should take into account the potential risks and long-term financial goals. Consulting a bankruptcy attorney can help borrowers understand the implications of reaffirmation and explore alternative options, such as negotiating a loan modification with the lender or avoiding foreclosure through other means.

Court approval

Reaffirming a mortgage debt is a big decision, and it is not a requirement when filing for bankruptcy. It is a complicated process, and it is always advisable to seek legal advice.

The court will also consider whether the property is 'underwater', meaning the debt owed is larger than the home's market value. If the property is underwater, the court may be less likely to approve the reaffirmation agreement.

The court's role is to act in the best interests of the debtor and ensure they can handle the payments after bankruptcy. If the debtor has an attorney, they will review the agreement and confirm it is in the debtor's best interest. If the debtor does not have an attorney, the court will take a more active role in reviewing the agreement and may schedule a hearing.

Once the court approves the agreement, it becomes legally binding, and the debtor must continue making payments as outlined. This is a serious commitment, and reaffirmation agreements should not be entered into lightly. If the debtor falls behind on payments, the creditor can pursue collection actions such as repossession or legal action for the balance owed.

The court approval process is designed to protect debtors from potential financial hardship and ensure they fully understand the commitments and risks of a reaffirmation agreement.

Bankruptcy benefits

• Protection from Personal Liability: When you file for bankruptcy, it wipes out your personal liability on the mortgage debt. This means that if you don't reaffirm the debt and receive a bankruptcy discharge, you are no longer legally responsible for paying the outstanding balance. The debt is essentially forgiven, and you can walk away from the mortgage without worrying about future payments or repercussions.
• No Risk of Deficiency Judgment: If you choose not to reaffirm your mortgage debt, your lender cannot pursue you for any deficiency balance if they foreclose on the property. In other words, if the property is sold and there is still a remaining balance on the mortgage, the lender cannot come after you personally for that money. This is a powerful tool that provides financial protection and peace of mind.
• Continued Home Ownership Possibility: Even if you don't reaffirm your mortgage, there is a possibility that you can keep your home as long as you stay current on your payments. Some lenders will allow you to retain the property and continue making timely payments without reaffirming. This option provides flexibility and the opportunity to maintain your housing situation.
• No Impact on Credit Score: When you don't reaffirm your mortgage debt, your future payments will not be reported to the credit agencies. While this may slow down the rebuilding of your credit score, it also means that any late or missed payments will not negatively affect your credit score. This can provide some breathing room as you work on stabilizing your financial situation.
• Negotiating Power: While it is not a common practice, there is a possibility that you can negotiate more favourable terms on your mortgage if you choose not to reaffirm. In some cases, lenders may offer lower interest rates or reduced monthly payments to incentivize reaffirmation. However, this is not guaranteed, and most lenders will not change the original terms.
• Avoiding Additional Attorney Fees: Reaffirming a mortgage debt typically requires the assistance of an attorney, which can result in significant additional fees. By choosing not to reaffirm, you can avoid these extra costs, which can add up quickly, especially if the process becomes complicated.

It's important to remember that the decision to reaffirm a mortgage debt during bankruptcy is complex and depends on various factors. While there are benefits to not reaffirming, each situation is unique, and it's always best to seek personalized advice from a legal professional who can guide you based on your specific circumstances.

Credit score impact

Reaffirming your mortgage can have both positive and negative consequences for your credit score.

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. Lenders will report these payments to credit agencies, demonstrating your financial responsibility and gradually improving your credit score. Creditors might also offer more favourable loan terms as part of the reaffirmation agreement, such as lower interest rates, reduced monthly payments, or an extended payment period.

However, there are several negative consequences to consider. Firstly, 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 decreases. 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 already struggling to make your payments and considering bankruptcy.

Additionally, some mortgage lenders refuse to refinance without a reaffirmation agreement, which may violate the stay on collections that comes with a bankruptcy discharge. Ultimately, the decision to reaffirm your mortgage should be made carefully and with the advice of a bankruptcy attorney, considering your ability to afford the payments and your long-term plans for the property.

Foreclosure risk

Firstly, it's important to understand that reaffirming your mortgage means you are choosing to remain financially responsible for the debt, even after bankruptcy. This means that if you reaffirm your mortgage and subsequently struggle to make payments, you could face foreclosure. The lender can initiate foreclosure proceedings if you default on the loan, and filing for bankruptcy will not prevent this.

Additionally, reaffirmation agreements are not always in your best interest. While mortgage companies may argue that reaffirming is the best way to ensure your payments are reflected on your credit report, it is not the only option. Some lenders may refuse to refinance without a reaffirmation agreement, but this could violate the stay on collections that comes with a bankruptcy discharge. Ultimately, it is up to the courts to decide, and judges may refuse to approve reaffirmation agreements to protect filers from potential disaster if they cannot make payments in the future.

Furthermore, reaffirming your mortgage can lead to increased time and expenses in the bankruptcy process. It may require additional attorney fees and considerable extra work for your bankruptcy lawyer. Your attorney must determine whether you can afford to reaffirm, and you may be held personally liable for the debt if you cannot keep up with the payments.

It's worth noting that even if you don't reaffirm your mortgage, lenders will typically not foreclose as long as you stay current with your payments. However, they may stop sending monthly payment statements, so it's your responsibility to ensure timely payments without reminders.

In conclusion, while reaffirming your mortgage may provide some benefits, it also carries significant foreclosure risks. It is essential to carefully weigh the pros and cons before making any decisions and, if possible, seek advice from a legal professional experienced in this area.

Frequently asked questions