Should I Reaffirm My Mortgage in Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy filing offers individuals a structured path to financial relief by discharging many types of unsecured debts. For homeowners, this process introduces a significant decision regarding their mortgage: whether to enter into a mortgage reaffirmation agreement. This agreement is a formal commitment that can impact a homeowner’s ability to retain their property and manage their financial obligations. Understanding the implications of this choice is an important consideration for anyone navigating bankruptcy with a home loan.

Defining Mortgage Reaffirmation

A mortgage reaffirmation agreement is a voluntary contract between an individual filing for Chapter 7 bankruptcy and their mortgage lender. This agreement restores personal liability for a mortgage debt otherwise discharged in bankruptcy. It creates a new, enforceable promise to repay the debt, allowing the individual to keep the property secured by the loan.

The agreement exempts the mortgage debt from general discharge. Without reaffirmation, the individual’s personal obligation is eliminated, but the lender’s lien on the property remains. By signing, the individual agrees to continue making payments under the original or modified loan terms, accepting full personal responsibility for the debt.

Maintaining Your Home Through Reaffirmation

Choosing to reaffirm a mortgage allows a debtor to retain their home and continue making payments. This re-establishes the individual’s personal liability for the mortgage debt, meaning the lender can pursue collection actions, including foreclosure, if payments are not made. Should a foreclosure occur after reaffirmation and the property sells for less than the outstanding debt, the lender can seek a deficiency judgment against the individual for the remaining balance.

Reaffirmation can also influence an individual’s credit report following bankruptcy. Timely payments on a reaffirmed mortgage debt are reported to credit bureaus, which can contribute to rebuilding a positive credit history. This helps demonstrate financial responsibility post-bankruptcy. Individuals often consider reaffirming their mortgage when they desire to keep their home and have the financial capacity to meet ongoing payment obligations.

Choosing Not to Reaffirm

If a debtor decides not to reaffirm their mortgage, their personal liability for the debt is discharged in bankruptcy. This eliminates the individual’s legal obligation to repay the loan, protecting them from a deficiency judgment should the property later be foreclosed upon and sold for less than the outstanding balance. While personal liability is removed, the lender’s lien on the property remains intact. The lender still retains the right to foreclose on the property if mortgage payments are not made as agreed.

In some situations, lenders may permit a “ride-through” where individuals continue to make payments and remain in their home without reaffirming the debt. This arrangement, however, is not universally available or guaranteed and can be subject to the lender’s discretion. Without reaffirmation, any payments made on the mortgage do not appear on credit reports, which can limit credit rebuilding efforts. If payments cease on a non-reaffirmed mortgage, the individual surrenders the home to the lender through foreclosure, but without the risk of further personal financial obligation.

Steps for Reaffirmation

Debtors must gather financial information related to the mortgage, including the original loan amount, current outstanding balance, interest rate, payment schedule, property address, and lender contact information. The official form for a reaffirmation agreement is Official Form 427. Both the debtor and the creditor must sign this agreement. The agreement must then be filed with the bankruptcy court within 60 days after the first date set for the meeting of creditors.

Court approval of the reaffirmation agreement is required. A court hearing may be required for approval, particularly if the debtor is not represented by an attorney or if the agreement appears to create an undue financial hardship. The court assesses whether the agreement is in the debtor’s best interest and whether the debtor has the ability to make payments without undue hardship. Debtors can rescind the reaffirmation agreement at any time before the bankruptcy discharge is entered or within 60 days after the agreement is filed with the court, whichever date is later. Notice of rescission must be provided in writing to both the creditor and the court.