Keep paying mortgage in bankruptcy

2 min read

Dear Bankruptcy Adviser,
I filed for Chapter 7 bankruptcy in May 2009 with an attorney. I intend to reaffirm my house and my car, and it was stated in my paperwork. When I met with the paralegal at my attorney’s office to sign the reaffirmation agreement for my car, I was told that the courts do not recognize reaffirmation agreements for real estate, and there is no point to sign. If I kept my payments current, it’s the same as reaffirming the mortgage. Is this true? Also, I thought that if you didn’t sign the reaffirmation agreement with the mortgage company, the loan was then discharged in the bankruptcy. Any advice?
— Stacey

Dear Stacey,
This question is difficult to answer for all 50 states because each state has different foreclosure laws.

First, a definition for readers who don’t know what reaffirmation in bankruptcy means. A reaffirmation agreement refers to an agreement between you, the debtor, and the lender/creditor with which you reaffirm debt, or agree to re-establish the loan or loans that existed before filing for bankruptcy. That debt would otherwise be discharged, or eliminated, in your bankruptcy. In essence, you are waiving your right to discharge that particular debt and, as such, agree to pay it after your case is over.

In the case of a home mortgage, your bankruptcy eliminates your liability to pay on that debt in the event that you walk away from the property. Basically, you are stating that you can no longer afford the mortgage loan and want to surrender the property to the bank that holds the home mortgage.

But your attorney may be correct when he says that there is little value in reaffirming a first mortgage loan. In some states, however, you could be liable for some of the balance owed on your home mortgage if you were to walk away from your house after signing a reaffirmation agreement. Therefore, reaffirming the debt could cause future liability if you walk away after filing for bankruptcy.

Various mortgage lenders require you to reaffirm your mortgage loan in order to receive future statements and have future payments recorded on your credit report. As far as I have seen, no lender has foreclosed because the owner did not complete one, but you may never get a mortgage statement update again.

However, to keep the property, you must make monthly payments until the loan is paid in full. Bankruptcy eliminates your liability, but not the lien that is secured by your home. Every homeowner would file for bankruptcy if he could keep his home and eliminate the mortgage loan. The only exception to this rule is that you could eliminate a junior lien — a second, third or subsequent mortgage — in a Chapter 13 bankruptcy. You ought to consult with a bankruptcy attorney to discuss this option.

There is little or no risk to reaffirming the home mortgage if you can’t be sued and decide to walk away from the house after the bankruptcy is over. Make sure you understand your state foreclosure laws prior to reaffirming that loan.

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Justin Harelik writes The Bankruptcy Adviser for He is an attorney with Price Law Group in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.