Filing for Chapter 7 bankruptcy protection allows a debtor to eliminate their debt (some debts are non-dischargeable) to creditors. As part of the Chapter 7 process, the debtor can reaffirm on certain debts remaining responsible going forward. These debts generally include vehicle loans and mortgages. The debtor would generally opt to complete this paperwork to keep their obligations on these debts the same as prior to filing a bankruptcy.
Reaffirming a Mortgage
When you purchase a house, you normally sign a note outlining the terms of your new loan, and you sign a mortgage lien that attaches to the property (and allows foreclosure of the property in the event of non-payment). Filing for Chapter 7 bankruptcy is set up for you to eliminate your debt through the discharge you receive. The Chapter 7 bankruptcy will eliminate your personal obligation on the note but not eliminate the lien (ie: you don’t get a free house). The remaining lien allows the creditor to foreclose if you don’t pay but they cannot hold you personally responsible on the unpaid debt after foreclosure. Completing a reaffirmation agreement would reinstate your personal liability on the debt which allows the mortgage company to come after you if you don’t pay the debt.
A mortgage company generally will not provide status of your payments to the credit reporting agencies if you don’t reaffirm. This means your credit score won’t get this “positive” reporting that would help your credit score after filing for Chapter 7. It can also create more work in the event you try to refinance or purchase another home in the future because that reporting isn’t on the credit report. You can generally get around this issue by requesting a payment history from your mortgage lender.
To reaffirm or not, that is the question…
This is a question each debtor must determine for themselves. If your home is underwater (ie: no equity) then you may not want to take the risk of reaffirming for the limited benefit of credit reporting. The ability to walk away from the property down the road without the bank coming after you personally is not a benefit to give up lightly. On the other hand, if you have equity in the property and you know there is enough to pay the mortgage then the benefits of the positive reporting shouldn’t be overlooked.
At the law offices of Andersen, Ellis & Shephard, we have represented thousands of individuals in consumer bankruptcy filings.