Bankruptcy involves making a lot of decisions, some of which are trickier than others. Reaffirmation agreements, for example, are complicated by many pros and cons. It’s not likely your mortgage lender will foreclose if you refuse to reaffirm -- at least not on that basis alone -- but there remains an outside chance exists that you could lose your home without one.
How Reaffirmation Works
Your bankruptcy discharge extinguishes the promissory note you signed at the time you took out your mortgage. You no longer owe it unless you reaffirm the loan, and you can’t keep the home unless you keep paying on the note even though you're no longer legally obligated to do so. Reaffirming the debt gives it new life -- you're once again legally obligated to pay it. If you don’t make the mortgage payments, the lender can foreclose and your bankruptcy won't stop this from happening. You’d also still be liable for any deficiency balance after the property’s sale.
Reaffirming your mortgage may not be possible in all states and under all circumstances. It requires the consent of both your lender and the court.
Your lender’s consent usually hinges on whether you’re current with your payments, but some lenders just don’t want to be bothered with the fuss of creating and signing a reaffirmation agreement. With or without one, their rights remain much the same -- they can foreclose if you default.
Court approval may depend on whether your property is underwater --meaning that the debt is larger than your home’s fair market value -- and whether the judge believes you can financially handle the payments after your bankruptcy is discharged. Your equity in the property can’t exceed the amount of the bankruptcy homestead exemption available in your state.
The Reaffirmation Process
The bankruptcy court only has the power to approve your reaffirmation agreement if you have an open case and haven’t yet received your discharge. You can submit your signed agreement to the court during the proceedings. If you have an attorney and he signs it as well, you may be able to avoid a court hearing. Otherwise, be prepared to appear before the judge and answer some questions. According to the law firm of Shaev and Fleischman, some judges won’t reaffirm a significant debt like a mortgage when state law prevents the lender from foreclosing as long as you keep up with your payments. Check with a local lawyer to learn where your state stands if you’re trying to make a decision.
If you receive a discharge before you’ve decided on reaffirming, you must file a motion with the court, seeking permission to reopen your case. If the court grants your request, you then can file the reaffirmation agreement and seek the judge’s approval.
If You Don’t Reaffirm
Most fallout from not reaffirming your mortgage is more aggravating than serious.
- Although your bankruptcy wipes out your liability for the promissory note, your mortgage itself -- the lien against your property -- lives on. They're two separate things. This gives your lender the power to foreclose -- but it can foreclose even if you do reaffirm. You generally must default on the loan before the lender will take such an action, but if you don’t reaffirm, you’ll live in a sort of legal limbo. Your lender might take your home even if you do make the payments because you're no longer obligated under the terms of the promissory note.
- Your lender won’t report any of your payments to the credit agencies. If you don’t reaffirm, the account no longer legally exists so there’s nothing to report. This can make it more difficult to begin repairing your credit post-bankruptcy.
- Your lender probably won’t bother sending you monthly statements if you don’t reaffirm the mortgage. Don’t be tricked into thinking this means no payment is due.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.