Should I Reaffirm My Mortgage In A Chapter 7?
Many Homeowners file a Chapter 7 Bankruptcy who are current on their mortgage and want to keep their home. The question is “Do I reaffirm my mortgage?” The answer, almost always, is a big fat NO.
In a Chapter 7 secured debts (like a car note* or mortgage) are generally treated one of three (3) ways:
- Reaffirm the debt. This means that you have the same obligation after the Chapter 7 is over as you had before;
- Redeem for value. This is generally not applicable on a house;
- Surrender the asset. You give up the car or the house and owe nothing.
But, there is a fourth (4th) way when it comes to mortgages-do none of the above and you continue to pay the mortgage.
NO LEGAL REQUIREMENT TO REAFFIRM
Banks and mortgage companies often tell homeowners they have to reaffirm the mortgage debt if they want to keep their home. That is not true. They cannot foreclose on a mortgage that has made all the payments required of them.
Banks will tell people they cannot refinance unless there is a reaffirmation agreement. That is simply not true. If one has a problem with the current lender there is an easy solution. A homeowner can work through a mortgage broker who will submit a refinancing package to lenders. If you otherwise qualify, you’ll find a mortgage lender.
Even if you are trying to get a loan modification, there is no requirement to reaffirm on the mortgage to qualify. This is especially true with the Making Home Affordable programs (HAMP and HARP). The rules were clarified a few years ago that you do NOT need to reaffirm the mortgage to get assistance on your mortgage.
THE GENERAL CONSENSUS OF CONSUMER BANKRUPTCY LAWYERS
Experienced lawyers, who concentrate in Consumer Bankruptcy, seldom, if ever, recommend or approve of reaffirming a mortgage debt. Essentially there is really no upside in reaffirming a mortgage debt, but there is a huge downside in reaffirming.
THE DOWNSIDE IN REAFFIRMING A MORTGAGE DEBT
A mortgage on your home is a debt secured by your home itself. If you reaffirm you are agreeing to be personally liable for the debt after the conclusion of the Chapter 7 bankruptcy. This means if you get in trouble and default after the bankruptcy not only can they foreclosure but the mortgage company can get a deficiency judgment and sue you to collect on it. For example, a judgment of foreclosure is $210,000 and foreclosure auction only nets $150,000: you will owe $60,000!
THE BENEFIT OF NOT REAFFIRMING A MORTGAGE DEBT
If you want to keep your house you just maintain the monthly mortgage payments as well as real estate taxes and required homeowner insurance.
A significant numbers of homes are actually “underwater” meaning the value of the home is less than the mortgage balance. It is not unusual, for instance, to go on the internet and find an estimated value of $200,000 while the amount owed on the mortgage is $250,000. Still many people say they will continue paying their mortgage because it’s their home and they want to keep it.
As long as you do not reaffirm the debt, you have the option of walking away if things don’t work out, and you would not owe a dime. Also, you may be successful in “short” selling your home without negative consequences.
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