For homeowners in Chapter 7 Bankruptcy cases, the decision of whether or not to reaffirm their home loan is one of the most important decisions that can be made in the case. Please remember this: You do not have to reaffirm your loan(s) to keep your house! We discussed the basics of Reaffirmation Agreements in this post, but basically it means you are agreeing to waive your discharge for a particular debt and pay it back pursuant to the terms of the original agreement or perhaps new terms as stated in the reaffirmation agreement. In this post, we’ll go into a little more detail on reaffirming home loans. The short answer to the question is that rarely is it a good idea to reaffirm a home loan and most Bankruptcy lawyers will generally warn clients about doing so. There are a few reasons for this. First, since a discharge of debt is probably the most important reason for filing for Bankruptcy, it defeats the purpose to emerge from the case still owing what is probably your largest debt. Second, your lender wants your money more than your house. If you have a reasonably good payment history, can make your payments going forward, and don’t have a history of prior Bankruptcy cases, your lender will almost certainly be glad to continue taking your payments. Third, a discharge of the debt means that if something happens in the future, such as unemployment or unanticipated medical bills, you will never be personally liable for that debt. You can return the house to the lender with no further damage to your credit (other than perhaps a foreclosure).
If you reaffirm the loan and and something happens down the road that affects your ability to make payments, you are in a bad spot. Your late or missed payments will be reported and your credit further damaged. If you lose the house, the lender may be able to get a deficiency judgment against you and garnish your accounts and wages. Remember, unless eight years has passed you can’t file another Chapter 7 case (though a Ch. 13 might be a possibility). All of this could have been avoided by not making the mistake of reaffirming the loan. Is there a benefit to reaffirming a home loan? Sure – for the lender. Note that many judges will not even approve a reaffirmation unless the lender agrees to give something in return, such as forgiveness of principal, lower interest rate, or both.
In recent years, I have had two cases in which I did not strenuously object to a reaffirmation. Each case involved debtors who were in Chapter 7 because of past business debt, had good, stable employment and a good income and they lived well within their means. In one of the cases, the client’s spouse (who did not file) also had a good income and either of them could have supported the household if the other lost their job. Could they have kept the houses without reaffirming? Almost certainly.
If a Bankruptcy filing is possible, and you own a home, make sure you meet with a good Bankruptcy lawyer early in the process and discuss your home in the initial consultation. If you are in Metro Atlanta or Georgia, contact us to set up a meeting.