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Chapter 7, Reaffirmation, & Short Sale

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Mark Cappel
UpdatedJun 27, 2024

I filed for Chapter 7 and never reaffirmed my first or second mortgage. Do I have liability if I default on these mortgages?

I have been paying my 1st & 2nd mortgage even though it has been forgiven by chapter 7. Can I do a short sale since I am not obligated to pay these two debts?

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 Bankruptcy page.

Debt Reaffirmation

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.

Short Sale

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.

I hope this information helps you Find. Learn & Save.



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Dealing with debt

If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q1 2024 was $17.69 trillion. Student loan debt was $1.60 trillion and credit card debt was $1.12 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

Collection and delinquency rates vary by state. For example, in Alabama, 15% have student loan debt. Of those holding student loan debt, 9% are in default. Auto/retail loan delinquency rate is 7%.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.



LLenny, Jun, 2011
Typically with SHORT SALE CONTRACTS there is the REAFFIRMATION OF DEBT at the end of the contract. The problem is that attorney's and short sale realtors do not care enough about the clients well being for the future. Homeowners are being led down a path that they believe has light at the end of the tunnel, but in reality it's only a light bulb half-way through the tunnel and it gets black again at the end with a short sale. There are ways to remove your upside down mortgage and stay in your home.
wwilma, Apr, 2011
I filed chapter 7 four years ago and am making voluntary payments on my first mortgage. I've lost my job and am having trouble paying now . They won't modify my mortgage. I know they can reposses but I'm wondering how quickly they could put me out or would they have to follow regular foreclosure prcedures?
BBill, Apr, 2011
The fact that you filed for bankruptcy has no impact on the procedures and timeline a mortgagee must follow for a foreclosure.
BBill, Jul, 2010
Consult with an attorney in your state who can review all of your documents relating to your bankruptcy. In particular, ask him or her to review the discharge order. I do not see personal liability for you regarding either mortgage because you never reaffirmed the debts. The key issue for you is whether the second has the right to foreclose, or if that right was stripped in the bankruptcy. If it was, the second acted foolishly when it rejected your offer. If the second was stripped, then you owe nothing, ever, relating to the second.
LLynn, Jul, 2010
I also filed for Chapter 7 bankruptcy and never reaffirmed my first or second mortgage. I have been current on my 1st all along but not on the 2nd mortgage through CitiMortgage. First is $370,000. Second is $117,000. In todays market it would probably be tough to get the full amount. Maybe more like $400,000 to $425,000 but would probably be on market for quite a while. I have tried to offer a settlement on the second and have been discussing this with their recovery division. I offered $30,000 to be exact and this would be done by cashing in our thrift plan. They seemed eager at first. They even sent someone to take pics of inside and outside of house. After about a month they said because they did not get pics of every room up and downstairs they would not discuss a settlement any further. I though this was silly since they were missing only pictures of 2 upstairs bedrooms and a bathroom. The person took the pictures of the room they requested. I told them the offer was good for 30 days and that came and wen June 2010. My question is, if I stay in this house say the next 5 years and never pay on 2nd....does the amount of debt of second accumulate interest, late fees etc. Or does it stay the same as when the bankruptcy was filed and they stopped collecting from our bank account. This was an automatic withdrawal from our account that ceased once the bankruptcy was filed. We filed April 2009 and were relased/cleared September 2009. They no longer send us statements and our credit reflects this debt as written off. Thanks. I look forward to your response.