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Reaffirmation

Following a bankruptcy, should I reaffirm my mortgage?

We filed bankruptcy 10 years ago. The lawyer told us we could keep our home as long as we made payments on it. He didn't mention a reaffirmation agreement. We found out recently that we should have signed one. We intend on paying our home off. We've never missed a payment or made a late payment. We now wonder if we have any legal rights, since our home was discharged in the bankruptcy. Can we sell it? can the lender kick us out? will it be ours after we pay it off?

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Highlights

  • A mortgage consists of two documents: a note (or bond); and the mortgage.
  • A bankruptcy strips liability for the note.
  • Reaffirmation restores liability for the note.

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., canceled or 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.

Mortgage, Note and Bankruptcy

You may wonder why a bankrupt borrower has no personal liability for the home loan, but the lender has the right to foreclose on the property if the bankrupt borrower fails to make his or her mortgage payments.

A mortgage consists of two documents: a note (or bond); and the mortgage itself.

The note is the buyer’s personal promise to make the repayments. If there is a foreclosure against the property and the foreclosure sale does not yield enough to cover the outstanding mortgage debt, the note serves as the basis for a deficiency judgment against the borrower for the balance still due. A Chapter 7 bankruptcy strips personal liability from the note if the homeowner includes the property loan(s) in the bankruptcy filing and the bankruptcy trustee discharges the loan(s).

The mortgage itself is a document that gives the lender the right to have the property sold to repay the loan if the borrower defaults. Since the mortgage gives the mortgagee (the lender) an interest in the land, the mortgage is recorded at the county clerk’s office. A bankruptcy does not touch the creditor's right to foreclose.

Your Reaffirmation Questions

The only advantage I can see to reaffirming your mortgage is your payment history may be reported to the consumer credit reporting agencies — Equifax, Experian, and TransUnion — which may result in a boost to your credit score. However, if you otherwise practice good credit hygiene and pay your credit card bills on time and have a low credit utilization ratio, the mortgage will have only a slight effect on your credit score.

Reaffirming the mortgage will not change your existing rights to your property. Put another way, your bankruptcy did not change your property rights. You can still sell, lease, or gift the property. Reaffirming the mortgage will not give you rights you do not already have.

Consult with your bankruptcy lawyer before you reaffirm the mortgage to understand your rights. Reaffirming your mortgage may result in your mortgage payments being reported to the credit reporting agencies, but doing so will reestablish your personal liability for the loan. I do not see the benefit (a chance at a slightly higher credit score) outweighing the costs (restoring personal liability for the note).

I hope the information I provided helps you Find. Learn. Save.

Best,

Bill

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