Should you reaffirm your mortgage when going through bankruptcy?

Category: Bankruptcy

Partner Ron Holmes

Bankruptcy is not an easy process and when you’re going through it, you have a lot on your plate and have to make tough decisions. One of the big questions you might have is whether or not to reaffirm your mortgage. A reaffirmation agreement is a separate agreement between you and your lender whereby you agree to be financially responsible for the debt even though you filed bankruptcy. This may have been your intent all along and it might seem like a good way to keep your home and work towards a brighter financial future. However, as a bankruptcy lawyer and a licensed Realtor with over 20 years of experience in real estate, I advise my clients against reaffirming a mortgage. Here’s why:

1. Reaffirming a Mortgage is not required under the Bankruptcy Code

Don’t panic, you can still keep your house even if you don’t reaffirm. As long as you keep up with your payments and you are not in default, lenders will have no right to foreclose on the house. Mortgage companies want money, not houses, so keep the payments current and you will be fine.

2. If you reaffirm the mortgage, you are financially responsible for the debt after bankruptcy.

The main reason to seek bankruptcy relief is to obtain a discharge. This is like hitting the “reset” button on your finances. However, when you reaffirm any debt, including a mortgage, that particular debt doesn’t get discharge or wiped away, it sticks around. Not only are you personally liable under a reaffirmation agreement, the house is still security for the outstanding loan. So, if down the line, you hit another rough patch, you’re still personally on the hook for your mortgage. If you don’t reaffirm, the worst the mortgage company can do against you is foreclose. They cannot hold you responsible for any deficiency following foreclosure because the discharge protects you.

3. It’s not all good news.

One downside to not reaffirming the mortgage is that on-time payments won’t show up on your credit report. That is a bummer but not worth the risk of reaffirming. It might slow down the repair of your credit score a bit. Houses and cars really don’t boost your credit score that much anyway. FICO considers these to be necessities and on-time payments do not boost your score significantly. In the grand scheme of things, keeping your financial obligations lower and having more options is worth the trade-off.

Deciding whether to reaffirm your mortgage is a big decision with long-term effects. Don’t just take the mortgage company’s word for it. It’s important to have a serious discussion with a experienced lawyer who understands both bankruptcy and real estate to make sure you’re making the best choice for your future. Your home is often your most valuable asset and your largest financial obligation, and how you handle it during bankruptcy can make a big difference in your financial recovery journey.