Most people who file for bankruptcy opt to have all qualifying debts discharged. However, that isn’t always the case. There are situations in which a debtor opts to reaffirm one or more debts. Reaffirming a debt does not discharge it in bankruptcy, so you are still responsible for payments. There are obvious downsides to reaffirmation and a handful of benefits that don’t apply to all filers.
If you’re filing for bankruptcy in Mobile, it’s important to know your options for your home and mortgage. Call Padgett & Robertson at 800-303-1416 to set up a consultation with our team now.
What is Mortgage Debt Reaffirmation?
When you reaffirm a debt, you agree to continue being responsible for the mortgage after your bankruptcy is granted. However, you can’t simply agree to reaffirm a debt. If you choose to pursue this option, it must be approved by the bankruptcy court.
People interested in keeping their home during bankruptcy may look into a reaffirmation of their mortgage debt. Your mortgage is a secured debt. If the debt is wiped out in bankruptcy, that doesn’t mean you get to keep your home—the lien on your home allows the lender to seize it if you do not continue making payments. If you do continue making payments and do not fall behind, you may be able to keep the home. However, if you do not reaffirm, the lender may not report the payments to the credit bureaus.
Benefits of Reaffirmation
In most situations, the benefits of reaffirmation are limited. If the bank offers more favorable terms for your loan or otherwise sweetens the deal, reaffirmation may be a suitable option for you. Additionally, if you have fallen behind on payments and are at risk of foreclosure, reaffirming may give you a second shot at staying up-to-date on your mortgage. Borrowers may find this an appealing option if, for example, they bought a home in 2021 at an interest rate of 3%—any home purchase in the near future would be closer to 7% and possibly put homeownership out of reach for them.
However, reaffirming your mortgage comes with significant risks.
The Risks of Reaffirming Your Debt and Your Alternatives
The biggest risk associated with reaffirming your mortgage debt occurs if you end up falling on hard financial times. Imagine this: you’ve chosen to reaffirm your mortgage, with the hopes of your payment history boosting your credit score as you bounce back from bankruptcy. You unexpectedly lose your job one to two years after bankruptcy and quickly fall behind on mortgage payments.
Eventually, the bank decides to foreclose. But they don’t just seize the house and call it a day. Because you reaffirmed the debt, they can hold you personally responsible for any shortage between what is owed and what they get from selling the house. And because you filed for bankruptcy so recently, you cannot file again for several years—and you are on the hook for whatever the gap is between the amount owed and the sale price.
If you truly want to keep your home after bankruptcy, it’s important to talk about the risks and your other options with your Fairhope bankruptcy lawyer. If you are in a position to file for bankruptcy, walking away from your home and finding less expensive options may be the better option for you.
Making the Best Choice for Your Family
There are no obvious answers when it comes to reaffirming a mortgage. Everything depends on what drove you to bankruptcy in the first place if you are able to continue making mortgage payments, how much equity you have, and if the court is even likely to grant a reaffirmation. If keeping your home is one of your top priorities as you seek a fresh start, discuss this with your lawyer at your very first consultation.
Discuss Your Legal Options with the Team at Padgett & Robertson
Considering Chapter 7 or 13 bankruptcy in Mobile? It’s time to set up a meeting with the team at Padgett & Robertson. We’re here to help you figure out your next steps and help you find relief. Call us at 800-303-1416 or get in touch online to schedule a consultation.