What Does Reaffirming a Mortgage Mean?

Mortgage reaffirmation is a term commonly encountered in the context of bankruptcy proceedings. It involves a specific legal action taken by an individual who has filed for bankruptcy, particularly Chapter 7. This process allows debtors to make choices regarding their home loan, influencing their financial obligations and property ownership moving forward.

Defining Mortgage Reaffirmation

Mortgage reaffirmation is a voluntary agreement between a debtor and a mortgage lender. In this agreement, the debtor promises to remain personally responsible for a mortgage debt that would otherwise be legally eliminated through a Chapter 7 bankruptcy discharge.

This process applies specifically to secured debts, where an asset like a home serves as collateral for the loan. While bankruptcy discharges personal liability for debts, the lender’s lien on the property remains. Reaffirmation allows the debtor to retain the property.

Reasons for Reaffirming a Mortgage

A primary motivation for a debtor to reaffirm a mortgage is the desire to keep their home. Without reaffirmation, while personal liability for the debt is discharged, the mortgage lender still holds a lien on the property. This means that if payments are not continued, the lender retains the right to foreclose on the home to recover the outstanding debt, even after the bankruptcy is complete.

Another benefit of reaffirming a mortgage is the potential to rebuild credit. When a mortgage debt is reaffirmed and payments are made consistently and on time, these payments are reported to credit bureaus. This positive payment history can help improve the debtor’s credit score following bankruptcy. Conversely, if the mortgage is not reaffirmed, lenders cease reporting payments to credit bureaus, which limits the ability to use those payments for credit rebuilding.

Steps in the Reaffirmation Process

The process of reaffirming a mortgage begins with a formal document known as a Reaffirmation Agreement. This agreement must contain specific details, including the original loan terms, any new agreed-upon terms, and disclosures about the debtor’s ability to make the payments. It also requires a statement of the debtor’s current income and expenses to demonstrate financial capacity. The mortgage lender provides this agreement, or it may be prepared by the debtor’s attorney.

Once the agreement is prepared, the debtor must sign it, often after consulting with legal counsel. The signed Reaffirmation Agreement must then be filed with the bankruptcy court before the bankruptcy discharge is officially entered. A bankruptcy judge reviews the agreement to ensure it is in the debtor’s best interest and that the debtor has the financial ability to make payments without undue hardship. If the debtor is not represented by an attorney, the court will schedule a reaffirmation hearing where the judge directly questions the debtor about their understanding and capacity to pay. If the judge approves the agreement, a court order is issued, making the reaffirmation legally binding.

Outcomes of Mortgage Reaffirmation

If a mortgage is reaffirmed, the debtor remains personally liable for the debt. This means that if the debtor defaults on payments in the future, the lender can pursue collection actions, which may include seeking a deficiency judgment if allowed by state law after a foreclosure. The debtor continues to make payments, retains the property, and these payments are reported to credit bureaus, aiding in credit score improvement.

Conversely, if the mortgage is not reaffirmed or if the reaffirmation agreement is denied by the court, the debtor’s personal liability for the mortgage debt is discharged in bankruptcy. Although the debtor is no longer personally obligated to pay, the lender’s lien on the property remains intact. This means that while the debtor cannot be sued for the debt, the lender can still foreclose on the property if payments are not made. In this scenario, payments made post-bankruptcy do not contribute to rebuilding the debtor’s credit score.