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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Without a reaffirmation, can homeowner walk away?
Bankruptcy Adviser

Reaffirming a mortgage

Dear Bankruptcy Adviser,
I stated that I wanted to reaffirm my mortgage in court before my case was discharged, but now the mortgage company says they did not receive my agreement and I do not have a reaffirmation with them. I pay my payment timely, and if I do not have an agreement, what liability/status do I have? The only answer I can get from the company is "continue to pay and you can continue to live there." Do I have a legal obligation to stay, or can I move and not be charged with foreclosure?
-- Lue

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Dear Lue,
I am very glad to hear that you did not reaffirm your mortgage loan. The potentially negative consequences would far outweigh the benefits. While you can keep your home and continue to make payments, you can also walk away if making the mortgage payments becomes impossible.

I know people might be upset with anyone suggesting that you ought to walk away from your legal obligations. However, there is nothing normal about what is occurring in our society. The housing meltdown has resulted in unforeseen and unmanageable consequences. And you should never feel obligated to achieve the impossible -- make your mortgage payment at the cost of food on your table.

Let me explain your situation for others to better understand:

A reaffirmation agreement is an agreement by a Chapter 7 filer (i.e., you) to keep the terms and conditions of a contract that otherwise would have been eliminated in the bankruptcy proceeding. Many filers decide to reaffirm their house and cars, thus continuing with payments while keeping the property.

The purpose of the agreement is two-fold: (1) Some creditors interpret the bankruptcy code to require reaffirmations so that the filer can keep the property; (2) The creditor will start sending statements again and report future payments to the credit bureaus. This usually allows you to rebuild credit more quickly post-bankruptcy.

In general, home mortgage lenders do not require you to reaffirm mortgage loans. That does not mean that the mortgage balance is eliminated in your bankruptcy, thus paying your house in full. That is wishful thinking. However, in most states, like in California, failing to execute a reaffirmation agreement on your home mortgage means that you can walk away at any time and not be liable for the remaining mortgage balance (aka deficiency balance).

Please make sure to keep your property insurance current if you decide to walk away. Do not compound the foreclosure with potential nondischargeable liability from some random accident that could occur on your property between the time you walk away and when the bank officially takes back ownership.

Going forward, adhere to the terms of the original agreement that existed prior to the bankruptcy. As long as you continue to make your payments, the mortgage lender cannot force you from your home.

Bankrate.com's corrections policy -- Posted: Oct. 7, 2008
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