Protecting your Home: Reaffirmation of Mortgage Debt

Upon filing for bankruptcy, the assisted debtor has the option of discharging mortgage debt, meaning that they are not obligated to continue to make a monthly mortgage payment. Of course, it is a near certainty that the secured creditor will foreclose on the mortgage and take the debtor’s house. Occasionally, during the course of a bankruptcy proceeding, a debtor will determine that it is in his or her best interest to keep their primary residence, and continue to pay the mortgage.

Reaffirmation is an undertaking not to be considered lightly. Once you receive a discharge under Chapter 7, you may not file bankruptcy again for 8 years. So, if you experience economic hardship after you have received your discharge and re-obligated yourself to pay the mortgage, you may be held personally liable for any deficiency in the event of a foreclosure. This could mean liens, wage garnishments and personal property attachments.

If you and your attorney believe it is in your best interest to reaffirm mortgage debt, you must execute a reaffirmation agreement: a contract between you and your creditor indicating that you wish to remain liable on a debt. The reaffirmation is complete when the creditor prepares the formal reaffirmation agreement, which the debtor reviews and signs, and is then filed with the bankruptcy court by the creditor.

Unfortunately, you cannot force a creditor to reaffirm a debt – you can only indicate your willingness to do so. A creditor’s refusal to reaffirm happens more often than you may think. Unlike personal property, the bankruptcy law does not require an executed reaffirmation agreement for a debtor to retain real property securing a debt. (Put another way, if your lender is unwilling to reaffirm your car loan, you can either pay off the loan in full or allow the lender to repossess the car. If your mortgage company refuses to reaffirm, there is no requirement that you must turn the house over to the bank unless the bank initiates a foreclosure). In the current market, lenders will rarely, if ever, attempt to foreclose on a loan if the creditor is current with the payments and remains current on the mortgage. Practically speaking, the lender wants to continue to earn interest on the loan and not inherit the burden and expense of foreclosing the mortgage and auctioning your property.

So, even if your lender refuses to reaffirm despite your intention to do so, if you stay current, you can keep the home. If the lender attempted to foreclose at a later date (say, when you had significant equity accumulated after paying down the principal), certain equitable remedies (e.g., latches) would provide you with a defense to a foreclosure action.

Often, the greatest impact of a bank’s refusal to reaffirm mortgage debt is that after discharge, subsequent “on time” payments will not be reflected on your credit report, thus hampering your ability to repair your credit post-discharge. To get 'credit' again, you may want to refinance, and you would start fresh with a new loan.