Reaffirming Your Mortgage in Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy can provide much-needed relief from overwhelming unsecured debt like credit cards, medical bills, personal loans etc. But what happens to your mortgage in Chapter 7 bankruptcy? Can you keep your house if you file Chapter 7? Let’s break it down.

What Happens to Your Mortgage in Chapter 7 Bankruptcy?

When you file for Chapter 7 bankruptcy, you are essentially asking the court to discharge your personal liability for unsecured debts like credit cards, personal loans etc. This means you are no longer legally obligated to pay those debts.

However, things work a bit differently for secured debts like mortgages and car loans. Even after bankruptcy, creditors can still repossess the home, car etc. if you stop making payments. This is because the loan is secured by the asset itself.

So if you want to keep your home after filing Chapter 7, you need to continue making the mortgage payments. Otherwise, the lender can foreclose on the property.

What is a Mortgage Reaffirmation Agreement?

A reaffirmation agreement allows you to reaffirm (or re-promise) your commitment to repaying a debt that would otherwise be discharged in bankruptcy. Essentially, it reinstates your personal liability for that debt.

When it comes to mortgages, the reaffirmation agreement states that you will remain personally responsible for repaying the mortgage loan, even after your Chapter 7 discharge. This allows you to keep the property without the lender immediately foreclosing on it.

Should You Reaffirm Your Mortgage in Chapter 7 Bankruptcy?

Reaffirming a mortgage in Chapter 7 is always optional – the lender cannot force you to reaffirm. You need to weigh the pros and cons carefully before deciding if reaffirmation is right for you.

Pros of Reaffirming Your Mortgage

• Allows you to keep your home without the lender foreclosing right away
• May be the only way to keep your home if you can’t refinance the mortgage
• Lets you take advantage of any equity you have built up in the home
• Avoids disruption and costs of moving to a new home

Cons of Reaffirming Your Mortgage

• You remain personally liable for the mortgage debt even after bankruptcy
• If you default later, lender can foreclose and pursue deficiency judgment
• May be difficult to get court approval if unaffordable for your income
• Prevents a fresh start as you still owe this large debt

As you can see, the implications are significant. Reaffirmation gives you the chance to keep your home, but leaves you still owing that debt for many years. It’s not a decision to make lightly.

How Does the Mortgage Reaffirmation Process Work?

Here are the typical steps in the mortgage reaffirmation process:

1. Lender sends reaffirmation agreement after you file Chapter 7 bankruptcy
2. You review terms and decide if you want to reaffirm
3. If yes, you and your lawyer sign the reaffirmation agreement
4. The agreement is filed with the bankruptcy court for approval
5. Judge reviews and approves (or denies) the reaffirmation agreement
6. If approved, agreement takes effect after your discharge

Some key things to note:

• You are not automatically required to sign the reaffirmation agreement
• The court will review the agreement and ensure it does not impose undue hardship
• You have 60 days after filing to change your mind and rescind reaffirmation

What are the Requirements for Mortgage Reaffirmation?

For a mortgage reaffirmation agreement to be approved by the bankruptcy court, certain requirements must be met:

• You must have below-median income based on where you live and family size
• Mortgage payment must be affordable based on your income and expenses
• Reaffirmation cannot impose undue hardship or burden
• Agreement must be filed with court and you must attend hearing
• You must have legal representation approving the agreement

The court will look carefully to ensure reaffirming your mortgage is truly in your best interest and won’t jeopardize your fresh start after bankruptcy.

Alternatives to Mortgage Reaffirmation

Reaffirming your mortgage is not the only option to keep your home after Chapter 7 bankruptcy. Here are some alternatives to consider:

Continue Making Payments Without Reaffirming

You can voluntarily keep making mortgage payments without signing a reaffirmation agreement. This allows you to keep the home while retaining the right to walk away if you can no longer afford payments.

Refinance or Modify the Mortgage

If you have sufficient income and equity, you may be able to refinance into a new affordable mortgage after bankruptcy. Or you can ask the lender to modify the terms of your existing mortgage.

Catch Up on Delinquent Payments

If your mortgage is delinquent, catching up on the missed payments before bankruptcy may convince the lender to let you keep the home without reaffirming.

Sell the Property

If you have substantial equity but can’t afford the payments long-term, you may want to sell the home and pocket the equity instead of reaffirming the mortgage.

Surrender the Property

If you have little or no equity and can’t afford the payments, surrendering the property to the lender through bankruptcy may be your best option for a fresh start.

Tips for Deciding on Mortgage Reaffirmation

Here are some tips that can help you make the right decision regarding reaffirming your mortgage in Chapter 7 bankruptcy:

• Be current on payments before filing bankruptcy, if possible
• Consult a bankruptcy attorney and housing counselor
• Calculate your monthly surplus after expenses to determine affordability
• Assess how long you plan to stay in the home
• Consider all alternatives before deciding to reaffirm
• Negotiate the reaffirmation agreement terms with lender
• Make sure reaffirmation won’t jeopardize your fresh start

Don’t rush into signing a mortgage reaffirmation agreement without understanding the consequences. Carefully weigh the pros and cons for your situation.

What Happens if the Court Denies Your Reaffirmation Agreement?

If the bankruptcy court decides that reaffirming your mortgage would impose undue hardship, the judge can deny approval of the agreement. If this happens, you have three options:

1. Continue making payments voluntarily without a reaffirmation agreement
2. Renegotiate the agreement terms and re-file for approval
3. Surrender the property to the lender

Talk to your attorney if the court denies a reaffirmation agreement – they can help you explore your options and next steps.

Is Mortgage Reaffirmation the Best Option for You?

The decision to reaffirm your mortgage in Chapter 7 bankruptcy is complex. On one hand, it allows you to keep your home. But on the other, you remain saddled with this large debt.

Every situation is unique. Speak with an experienced bankruptcy lawyer to understand all your options. They can help you determine if reaffirming your mortgage makes sense or if an alternative like surrender or refinance is preferable.

With the right guidance, you can make an informed choice – one that hopefully lets you keep your home without derailing the fresh start bankruptcy is meant to provide.