What Happens if I Don’t Reaffirm my Mortgage in Chapter 7?

by Editor on December 28, 2008

As much as it would be nice to believe that everything about bankruptcy is predictable, in fact, there are many gray areas where your treatment depends as much on the parties involved as the situation itself.

One such situation arises if you file Chapter 7 but do not enter into a formal written reaffirmation with your mortgage company.  Reaffirmation, as you may know, is the process by which you renew your contractual obligations with your lender.  In the case of mortgage debt, if you do not reaffirm, in theory you will no longer have any personal liability with your mortgage lender.

Section 521(a)(2) of the Bankruptcy Code requires all Chapter 7 debtors to submit a statement of intention in which they assert their agreement to reaffirm or surrender secured property.  In theory, if you do not reaffirm your mortgage, Section 521(a)(6) provides that the automatic stay shall be lifted and that the creditor can foreclose on the property.

In reality, however, some debtors submit a statement of intention providing for surrender, but they continue to make payments and remain in the property.  In other cases, debtor submit a statement of intention providing for reaffirmation but they never execute the documents.  Often, there is no equity in the property and the mortgage lender would rather have the monthly payment than to foreclosure and add yet another home to their inventory of houses.  In yet another scenario, your budget may not support a reaffirmation because it does not show enough cash available to pay the mortgage and your attorney may advise you not to submit reaffirmation paperwork.

If you do not reaffirm your mortgage, you will have no personal liability to pay the debt, but the lender retains a lien interest on the property.  Because there is no personal liability, most lenders will not report timely payments as a positive on your credit reports.  Should you fall behind at some point in the future, or if property values were to rise unexpectedly, the mortgage lender would arguably be within its rights to initiate foreclosure proceedings months or years from the end of your bankruptcy.

The point here is that if you choose not to reaffirm your mortgage obligation, you need to discuss with your lawyer what such a decision means, both in the near term and in the long term.  Do not assume that “things will work out” because that does not always happen.  Proceed with a plan and understanding of your situation.

{ 4 comments… read them below or add one }

robert March 3, 2010 at 4:48 pm

i feel behind on my mortgage payments due to unemployment. the mortgage company stated they can not modify my loan until i get my bankrutcy reaffirmed. is this true to my benefit, or is it a trap

Rebecca Stephens June 3, 2010 at 9:50 am

When I filed bankruptcy, my brother was on my mortgage was it possible that my mortgage was not processed during the bankruptcy? I believed that it was processed, but have no records showing that it was reaffirmed. HELP!

Jen June 29, 2011 at 3:50 pm

We declared bankruptcy in 7/2006 in Illinois. Our nine year old daughter was diagnosied with cancer before it was finalized. We wanted to reaffirm the debt. We signed papers to reaffirm car(for sure) and mortgage I think. The car was never reaffirmed becouse the third party never signed off on it. We have papers to prove we did ask for the car loan to be reaffirmed. The car we paid off quickly and we did received the title. We want to do the same with our 1st mortgage(124,000) and 2nd mortgage(28,000). The loan is closed(discharged in Ch. 7) and shows as unaffirmed. The lawyer says he was making it so we can “walk away” but we don’t want to. We have been on time with payments since 2006 plus sending an additional $500 a month to reduce our debt. We have built up an emergency fund, reestablished our credit, don’t carry any credit card debt and now want to pay this mortgage in 7-10 years. The lawyer says we can ask for a pay off. We are still listed as deed holders according to him. We would like to refinance both into one loan. What can we do?

lisa July 31, 2011 at 9:03 pm

i file chapter 7 in feb 2011 due to unemployment, after i contact the bank to talk about loan mod. they ask for all the paper work and letter auth to talk to me.i fax it all in. my brother is also on the loan but he didnt file for chapter 7. i didnt reaffrirm my mortgage loan. i just got discharge june 11. my mortagage is year behind. can i still reaffirm loan and try to get loan mod approve..i call the bank and they say underwriter looking at loan mod. no word. also i went back to work.. we show enough income now. i just want to pay my mortgage again and keep the house.. they can add past dues on to back end of the loan, if they lower my payment.. can some please help? what options do I have?

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