The Home Mortgage Reaffirmation Trap

This is a difficult question to answer because reaffirmation defeats the whole point of most bankruptcy cases, which is to obtain a discharge of your debt.  By reaffirming any given debt, even though you’ve received a discharge in bankruptcy the reaffirmed debt survives discharge and if you default later you can be sued, the creditor can obtain a judgment against you, and can seize your wages and your assets.  It is not a matter to be taken lightly.

Sometimes in bankruptcy you have no choice about reaffirming obligations; this happens most typically when you have a car loan.  Under the bankruptcy code you need to reaffirm your car loan otherwise the creditor can repossess the car after bankruptcy, even if you’re current on the payments.

But a home loan does not need to be reaffirmed. 

For most people this is a good result, because a home mortgage is typically the largest debt that debtors have when they come into bankruptcy. Unfortunately once you discharge your mortgage loan the lender can’t report any activity on that home mortgage loan to the credit bureaus.  As a result both negative and positive conduct in repaying that home mortgage will not be reported.

This can be a real problem for many home owning debtors who want to improve their credit scores after they file bankruptcy.  After all, in order to get the fresh start that bankruptcy offers the ability to repair your credit is critical to the process.  Thus, even though by maintaining the payments on a home they won’t lose the home, provided there’s enough room in their homestead exemption or there’s no equity in the property, they won’t necessarily get the benefit on their credit report of their good payment history after bankruptcy.

Still, bankruptcy lawyers are reluctant to advise their clients to reaffirm a home loan.

This is because a home mortgage is usually the largest debt that most people will incur during their lifetimes. If a client has suffered any significant income diminishment, job loss, or other post-bankruptcy financial struggle then the ability to let go of an expensive mortgage payment may become critical. If that debt has been reaffirmed, however, and the lender forecloses on the home for less than the amount of the debt owed, then the client won’t be able to get out from under that deficiency for years. This disastrous result would defeat all the value of the fresh start discharge they earned in their bankruptcy.

[gravityform id="2" title="true" description="false" ajax="true" tabindex="200"]