The reaffirmation of mortgage debts is possible in Chapter 7 bankruptcy but it's not necessary. Learn what a reaffirmation agreement is how it affects your home mortgage.
Written by Attorney Serena Siew.
Updated April 15, 2021
Just as car loans are secured by the vehicle, mortgages are secured by a plot of land or a home. These are items that creditors can repossess or foreclose on if you don’t make all of your payments. In a reaffirmation agreement, people filing for bankruptcy agree they’ll continue to pay back secured creditors.
Mortgage lenders are “secured” creditors because they can reclaim your property if you default on the loan. On the other hand, unsecured debt like credit cards and student loans are not backed by tangible property.
The Bankruptcy Code requires the reaffirmation of debts secured by personal property (like car loans) and gives filers the option to voluntarily reaffirm their mortgage debt. Here’s what this means for you.
How Does A Bankruptcy Affect My House?
Real estate is a valuable asset that must be listed in the papers filed with the bankruptcy court. These documents or “schedules” give the bankruptcy court an overall picture of the filer’s financial situation. The mortgage on your home is especially important because it is a “secured” debt. That is, your house acts as the “security” in case you cannot pay.
Before 2005, filers could keep their cars and other personal property as well as real property like their home as long as they kept current on their loans. In 2005, Congress eliminated this “ride-through” option for personal property like cars, but not for real estate mortgages.
Chapter 7 Bankruptcy and Mortgages
The goal of filing for Chapter 7 bankruptcy is to have your debts discharged so that creditors can no longer take collection action against you. While the automatic stay temporarily stops creditors from hounding you, a bankruptcy discharge makes that protection permanent and gives you a legal mechanism to enforce the protection. You can sue creditors that try to collect on discharged debts.
A mortgage, although “secured,” is still a debt and thus may be discharged like the rest. Once forgiven, you are “absolved” and no longer personally responsible for paying the mortgage. Reaffirmation agreements, on the other hand, keep filers personally liable for making mortgage payments, even after a discharge. They essentially revive the mortgage as if the person had never filed for bankruptcy.
Reaffirming a Mortgage
Mortgage companies argue that reaffirming a mortgage is the best way to ensure that your payments are reflected on your credit report, though there’s nothing that says you have to reaffirm a loan for them to report your payments. Secured creditors will defend reaffirmation agreements as “win-win” although it is more a victory for them. In fact, some mortgage lenders refuse to refinance without a reaffirmation agreement. Although this may violate the stay on collections that comes with a bankruptcy discharge, it is ultimately up to the courts to decide.
If you’re looking to refinance with a different bank, you can ask your mortgage lender for a payment history, but the new bank you’re working with may not give it as much weight as they would a credit bureau’s history of payments.
So as not to upsell reaffirming a mortgage, remember that living in your house during bankruptcy proceedings is not like getting your cake and eating it, too. Despite being the only point of having cake--or a home--remember that mortgages are the largest chunk of secured debt.
Reaffirmation agreements confirm a person’s responsibility for paying that burden, even after discharge of other debts. Filers who default will still owe the “deficiency balance” left on the mortgage note. A deficiency judgment allows banks to sue filers for the outstanding balance after a foreclosure sale. Debtors must file a new bankruptcy case to keep this from happening.
The Bankruptcy Court and the Reaffirmation of Mortgages
Judges ultimately decide whether to approve reaffirmation agreements on real property. Their stance on reaffirmation of mortgages, in turn, depends on the state. Bankruptcy courts across the country are split on the issue. In some states, reaffirming a mortgage is routine and judges gladly approve the agreements. In others, judges can dress down bankruptcy lawyers for even floating the idea. New Jersey and New York are examples. In such states, no attorney would prepare much less file a reaffirmation agreement destined to be rejected by the court.
If your mortgage company is telling you that all borrowers agree to mortgage reaffirmations, now you know this is false. If you’re worried about what to do, consult a local bankruptcy lawyer who practices in that area. A law firm can tell right away whether mortgage reaffirmation in your state is wise.
What if My Court Won’t Let Me Reaffirm the Mortgage?
Judges who refuse to approve reaffirmation agreements for real estate mortgages often do so out of concern for the filer. After all, there is nothing in the bankruptcy laws that requires a reaffirmation for your home loan. They do this to protect filers from the potential disaster if they can’t make the mortgage for some reason going forward and might get stuck with a deficiency balance.
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Secured debts like mortgages are still debts and therefore can be discharged through bankruptcy. But, the only way to keep the item securing the debt is to continue to pay for them. Reaffirmation agreements for mortgages are possible, but not necessary. They are, however, always subject to court approval. So if your state is not keen on reaffirmation agreements, no mortgage company should require one to refinance. Remember that for every mortgage company that refuses, there are others that may approve. If refinancing is important to you, find a mortgage lender that is willing to help without a reaffirmation agreement.
Want to file Chapter 7 bankruptcy but can’t afford a lawyer? See if Upsolve’s software can help prepare forms to file yourself. If you’re a homeowner and don’t qualify to use Upsolve’s free tool, we can help you find a local bankruptcy lawyer who can advise whether you should reaffirm your mortgage.