Should I Reaffirm My Mortgage in my Chapter 7 Bankruptcy Case?

As a Killeen Bankruptcy Attorney and a Waco Bankruptcy Attorney my clients frequently ask me if they should reaffirm the debt owed on their home mortgage when they file a
Chapter 7 bankruptcy case. In this scary real estate market, many homes with mortgages are underwater, which means that these homes are worth less than what is owed against them. Therefore, reaffirming debt on a home is a serious legal question.  For example, if you file a Chapter 7 bankruptcy case,  your home is worth $200,000.00 and you owe $240,000.00 on it.  You can file a Chapter 7 bankruptcy case, move to another home and get discharged from the debt owed to your mortgage company.

However, as a Waco Bankruptcy Attorney and a Killeen Bankruptcy Attorney, I find that most of my clients that file a Chapter 7 bankruptcy case want to keep their home. Obviously, you must to be able to make the monthly mortgage payments on your home after you file your  Chapter 7 bankruptcy case if you want to keep your home. You must also keep the home insured, and keep the property taxes on the home paid, just like you were required to do before you filed your Chapter 7 bankruptcy case.

When you file a Chapter 7 bankruptcy case, you are discharged from the debt owed to your home mortgage company.  Their lien or mortgage on your property is not discharged and if you want to keep the home you must keep making your monthly mortgage payments.  If you move, get fired, get divorced, get sick…..or experience anything that renders it impossible or too difficult to make your mortgage payments, you can stop making the mortgage payments and let your mortgage company foreclose on your home.  If the home is sold at the foreclosure sale for less than you owe against it, you are not liable for that deficiency.  Continuing to make the mortgage payments after the bankruptcy discharge is received does not reinstate your personal liability on the home mortgage.

Mortgage companies sometimes send us “Reaffirmation Agreements” and we are asked to sign them and have our clients sign them when the clients are in a Chapter 7 bankruptcy case.  A Reaffirmation Agreement “reaffirms” or “reinstates” your personal liability on the home mortgage as if there was no bankruptcy case filed.  If you reaffirm the debt during your Chapter 7 bankruptcy case and then do not pay it, you owe that debt as if you never filed bankruptcy.  If you do not or can not make your mortgage payments, your mortgage company will foreclose on the home and then attempt to collect from you the deficiency after the foreclosure sale.

Do you have to reaffirm your mortgage debt in order to keep your home? Do you have to reinstate that personal liability on your home as if there was no bankruptcy order to keep your home?  The answer is simple….no.

I have yet to see a mortgage company in Texas foreclose on someone’s home, after a Chapter 7 bankruptcy case is filed who was keeping the payments, home insurance and property taxes, just for not signing a reaffirmation before the Chapter 7 discharge.

Chrysler and Ford Motor Credit will repossess your car or truck that you are financing with them if you do not reaffirm their debt.  These companies lobbied Congress in order to get special provisions in the Bankruptcy Code that only apply to car lenders in Chapter 7 bankruptcy cases.  Therefore, many times we do reaffirm debt owed to these lenders if the clients want to keep their cars after their Chapter 7 bankruptcy case is filed.

Home mortgage debt is different. I look at the upside versus the downside. I see no downside to not reaffirming. Some  banks and mortgage companies say they will not inform the credit reporting agencies that you are current on the payments unless you reaffirm their debt. However, you have the right to include accurate information in your credit report. You can add you correct information to your credit report  at least once a year, yourself, without them. They are required to give you at least annual statements reflecting your outstanding mortgage.

The downside?  Big .You reaffirm, something else goes wrong, and you cannot stay current, they foreclose for the $100,000 the house is worth, and chase you for the $40,000 difference. Unless you are getting some fantastic modification, we typically advise our clients not to reaffirm their home mortgage debt.

To learn more about options under Chapter 7 bankruptcy and Chapter 13 bankruptcy, please visit our website at www.centraltexasbanrkuptcy.com

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Erin Shank, Texas Bankruptcy Lawyer

Erin Shank has been practicing exclusively bankruptcy law in Texas for over 30 years. She served as the President of the Central Texas Bankruptcy Bar Association for 5 years. She is also the State Chair for the Western District of Texas for the National Association of Consumer Bankruptcy Attorneys. She teaches other attorneys advanced bankruptcy law matters several times each year at national, international, state and local bar association continuing education seminars. I taught a course entitled “Debtors’ Rights and Creditors’ Remedies” as an adjunct law professor at Baylor Law School for over ten years.

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{ 7 comments… read them below or add one }

Domenic Petti June 15, 2011 at 12:58 pm

This is very usefull info for me and my wife we did are bankruptcy last year never did we evr think about leaving uor home ,always stayed currant in our payments.
Now that we have had a chance to catch our breath we are thinking we should “walk away” from this upside down house. Can we just do that?

Erin Shank, Texas Bankruptcy Lawyer June 23, 2011 at 12:07 pm

You will need to check with the attorney that filed your case.

Lessa July 22, 2011 at 10:50 am

If filing Chapter 7 in Iowa, what is the difference between reaffirmation and retain collateral and continue monthly payments for mortgage and vehicle loans. Do I have to make the choice or are there rules that determine the best selection. I had good credit until last fall when a series of events led to the decision of filing bankruptcy. I want to keep both my house and car, but need more information of what is best and what is decided for me.
Also, I have student loans that are not covered in the bankruptcy; any suggestions?
Thank you for your assistance

Erin Shank, Texas Bankruptcy Lawyer July 22, 2011 at 11:07 am

Since you live in Iowa, I would strongly suggest speaking with an Iowa bankruptcy attorney and most attorneys offer a free consultation. I am in Texas and the state rules vary from state to state. I am not licensed in Iowa. The National Association of Consumer Bankruptcy Attorneys, NACBA, would be a good source of finding a local attorney.

kimberly July 23, 2011 at 6:34 am

i live in new york and I filed for bankruptcy in 2008. I did not reaffirm my mortgage. Now i want to sell my home and buy a new one, i have made all my mortgage payments on time. However it doesnt show on my credit report, so i have no credit and no one will give me a mortgage or even call me back. I have called the mortgage company and they said i would have to call my attorney and file a reaffirmation of my mortgage. my attorney has retired and moved out of the country. Is there any other way to sell my home and get another mortgage?

Erin Shank, Texas Bankruptcy Lawyer July 29, 2011 at 12:46 pm

I recommend you speak with an attorney in New York, Jay S. Fleischman, about this issue. http://www.newyorkbankruptcyhelp.com/

Erin Shank, Texas Bankruptcy Lawyer August 5, 2011 at 10:11 am

I’m sorry, but I am only licensed to practice law in Texas. Each state has their own bankruptcy laws in addition to the Federal bankruptcy laws. I would suggest contacting a bankruptcy attorney in Michigan. The National Association of Consumer Bankruptcy Attorneys (NACBA.ORG) is a great source to find attorneys that stay up to date in all the changes in bankruptcy laws. They have an attorney finder on their website and should be able to refer you to a NACBA attorney in your area of Michigan.

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