A key fact is missing from your question, which makes it impossible for me to make a precise observation about your situation. Accordingly, the following analysis is a general discussion of bankruptcy, reaffirmation, and short sales.
Bankruptcy & Foreclosure, Generally
There are two basic types of bankruptcy available to consumers — Chapter 7 and Chapter 13. A Chapter 7 bankruptcy, often called a "liquidation bankruptcy," completely discharges many unsecured debts if you qualify to file. Most consumers who do not have significant assets or income choose to file for protection under Chapter 7 bankruptcy.
Chapter 7 bankruptcy generally does not stop foreclosure action against a debtor. The automatic stay ordered by the court when the case is filed would prevent a mortgage company from proceeding with foreclosure. However, since secured debts, such as mortgages, are not usually dischargeable in bankruptcy, the court or the trustee will usually grant relief from the stay to mortgage company to proceed with foreclosure if the homeownerÂ’s mortgage remains delinquent. One benefit that filing Chapter 7 can have for consumers is that the delay in foreclosure proceedings created by the automatic stay can allow additional time to bring mortgage notes current. Debtors must keep the loan current. If a debtor misses mortgage payments, the mortgage servicer will likely proceed with foreclosure action.
Chapter 13 bankruptcy, also called a "wage-earners bankruptcy" is primarily designed for those debtors who own significant assets and have a regular income, but who cannot afford their monthly debt obligations. In a Chapter 13, the debtor makes payments to the bankruptcy court for a certain period, usually three to five years, until all of the petitionerÂ’s debts are paid. If the consumer cannot afford to repay all of his debts within the time period specified by his Chapter 13 plan, any debts remaining after all payments are made are usually discharged, meaning the debt is "forgiven." Both bankruptcy chapters create an "automatic stay" when filed, meaning that the debtorÂ’s creditors must cease all collection activity until the bankruptcy case is either finalized or dismissed, unless the stay is lifted by the court.
Chapter 13 bankruptcy has much more direct influence on mortgages and foreclosure actions than Chapter 7. As mentioned, in a Chapter 13, the debtor proposes a repayment plan to the court, with the monthly payments based on his or her income. If the plan is approved, the court would distribute these payments to the creditors included in the Chapter 13 plan until the debts are paid off or until the plan period ends. A consumer can include the delinquent balance on his or her mortgage in a Chapter 13 plan. If the plan is accepted by the court, the mortgage would be brought current and the delinquent amount would be repaid over the course of the Chapter 13 plan.
Chapter 13 is a good option for debtors who experience a temporary financial hardship, causing them to fall behind on a mortgage. It gives debtors time to repay a delinquency and avoid foreclosure.
If you are considering filing for bankruptcy protection, consult with an attorney in your area who can analyze your financial situation and explain whether bankruptcy is a viable option for you, and if so, which chapter is appropriate. To read more about bankruptcy, including the types of bankruptcy, the drawbacks, and benefits, see the Bills.com Bankruptcy page.
A debt reaffirmation is an agreement in which the debtor agrees to repay a debt even if it was or could have been discharged (i.e., forgiven) in the the bankruptcy proceeding. A debt reaffirmation agreement is legal if it is voluntary, made with or without the advice of an attorney, filed with the bankruptcy court, and approved in certain circumstances by the bankruptcy court.
A debt reaffirmation would be used where a debtor who needs his or her vehicle to travel to a job site might be willing to reaffirm a vehicle loan or lease to avoid having the vehicle repossessed by the creditor.
Debt reaffirmation also comes into play regarding a mortgage or deed of trust on real property. When filing a Chapter 7, the debtor must file a statement of intention regarding the property. There are two options: Retain or Surrender. If the debtor selects surrender he or she must quit the property. If the debtor selects retain, then he or she must continue to pay the mortgage payments. If the debtor fails to do so, the mortgage creditor can foreclose. The mortgage creditor will ask the debtor to enter a reaffirmation agreement. However, there is no statutory requirement that the debtor execute (i.e., sign) the agreement. By not signing the agreement, the debtor has a strong argument that he or she no longer has personal liability for the loan. The creditor still has a lien against the property, but no claim against the debtor personally.
There is a cost to this freedom, however. Because the debtor has no personal liability for the mortgage, the debtor's credit report will not reflect the regular payments on the mortgage. Each person needs to weigh the risk and reward of reaffirming a mortgage.
In a short sale, the lender agrees to accept less than the balance owed on the mortgage at sale. The deficiency balance is forgiven, typically, though not always.
If a debtor never reaffirmed a mortgage, then he or she has no personal liability for the mortgage. Therefore, a short sale is unnecessary to avoid liability for a mortgage deficiency balance.
Consult with an attorney in your state who can review your bankruptcy and other mortgage documents to determine if you reaffirmed the mortgage. Your attorney will be able to give you precise advice on your liability and rights in your situation.
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