What happens if I don’t reaffirm my mortgage in a chapter 7 bankruptcy?

A reaffirmation agreement is a document that is executed after your bankruptcy case is filed. It renews your obligation to a secured creditor, who has the right to repossess a vehicle or foreclose on your property if you fall behind on payments post-filing. It also makes you responsible for any deficiency balance after the sale of the property. It basically strips that debt of the bankruptcy protection. However, there are many benefits to reaffirming a debt too, including an easier time refinancing and positive reporting on your credit report.

If you intend to keep a house, vehicle, or piece of property secured by a lien, the creditor may prepare a reaffirmation agreement and forward it to your attorney. It is the Creditor who is responsible for preparing these agreements and they cannot be forced to do to. If you choose to sign a reaffirmation agreement generally your attorney’s office completes the required information, forwards it to you for review and signature, then it gets sent back to the creditor for filing with the bankruptcy court. If your budget (Schedules I and J) shows you can afford the payment and that it is not a hardship, no hearing is necessary (in WDMO and District of Kansas). The creditor files the agreement with the court and you are responsible for that debt regardless of your bankruptcy filing.

Not reaffirming a debt, especially a mortgage can sound like a good idea to you initially. It seems as though you can just pay each month and remain in the property. It is true that state contract law protects you to the extent that if you keep up with payments, the property cannot be taken away. And if something does happen financially in the future, such as illness or loss of income, you can surrender the house or car without having to worry about the deficiency balance. Because if no reaffirmation agreement was filed, it means the debt was discharged. And for the most part, that can be true. But, you need to be sure to speak to your attorney about the best option for you because there can be some consequences to not reaffirming a property in your chapter 7 bankruptcy.

One big problem with not reaffirming is credit reporting. If you don’t reaffirm the mortgage, the creditor will likely stop reporting payments to the credit bureaus even though you are making the payments on time each month. The mortgage debt may appear as being discharged in bankruptcy. So, your credit score may take a hit. This can make getting a new loan difficult. Another major problem can be with refinancing or modification. Many lenders will not refinance or modify a loan if a reaffirmation agreement was never filed. So, you will likely be locked into the original loan terms that you have until you decide to sell the property or let it foreclose. It can leave you with few, if any options if you find that the payments are no longer affordable. At that point your only option may be to surrender the property and walk away. And on that note, there are a few things to keep in mind if you are facing foreclosure. Until the property is transferred out of your name (after the foreclosure sale), you need to keep insurance on the property, keep up with maintenance, winterize and secure the property if vacant, and ensure compliance with city rules and codes. As long as it’s in your name, you are responsible for anything that happens to the property, and those fines and costs imposed by a city code violation, fire, etc. are not dischargeable if they happened after your bankruptcy was filed.

So, overall the best option is to speak to your bankruptcy attorney about your options with reaffirming a debt, especially a mortgage debt. They will be able to give you the best advice for your particular situation.

Contributions by Kelley Snyder, Paralegal

Sources:

http://www.bankruptcylawnetwork.com/refinancing-without-reaffirming-in-bankruptcy/

http://www.bankrate.com/brm/news/bankruptcy/20061121_debts_reaffirmed_a1.asp

http://www.loansafe.org/what-happens-if-you-do-not-reaffirm-your-mortgage-in-bankruptcy

Reaffirmations - Secured Debt

- Written by Lindsey Gardner, Law Clerk, Heartland Bankruptcy

A secured debt consists of debt backed by collateral, for instance a home mortgage is backed by the home itself and a car payment is backed by the car. Debtors may choose to keep their secured property by use of a redemption or a reaffirmation agreement. Redemptions allow debtors to redeem the property by purchasing it from the creditor with a lump sum payment. Reaffirmations allow debtors to ‘redo’ the agreement with the creditor. The Federal Bankruptcy “Code permits reaffirmations of unsecured as well as secured debt.” In Re Kinion, 207 F.3d 751 (5th Cir. 2000).

The new agreement can have the same terms as the old one or set forth a new amount owed and terms of repayment, allowing possibly for better terms to be negotiated. As long as the terms of the new agreement are kept current, the debtor can keep the property. This is especially helpful when the property being reaffirmed is an essential item, such as a car as the only means of transportation. Under reaffirmation agreements the creditor must include certain disclosures about the reaffirmation. 11 U.S.C § 524(c).

As long as an attorney represents the debtor and the debtor's budget shows they can afford the payments, upon signing the agreement it becomes effective immediately. If the debtor is not represented by an attorney, he/she must file the agreement with the court, appear at a court hearing, and get the approval of the bankruptcy judge. Nothing in the Bankruptcy Code stops the debtor from voluntarily repaying any debt; however case law suggests that not reaffirming on property such as a vehicle may be grounds for repossession in some states, including Missouri. In addition, if the debtor reaffirms the debt and subsequently defaults on the payments, the debtor then becomes responsible for the debt as though he/she never filed bankruptcy. Be sure to read all agreements carefully and that the debtor can afford to make any payments agreed to.