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.