Posted by Rod Kight | June 19, 2013
Should you reaffirm your home mortgage?
As an Asheville Bankruptcy Attorney I am often asked if people should reaffirm their mortgage debt. Your mortgage company may be telling you that you need to reaffirm your mortgage debt. This is almost always incorrect, wrongheaded, and generally not a good idea. I have previously discussed reaffirmations in the context of retaining a financed vehicle, something which does often make sense. Here’s my blog post about reaffirming a car loan: http://kightlaw.com/can-i-keep-my-car-if-i-file-bankruptcy-part-2-debt/
Here’s what it means to reaffirm a debt: A reaffirmation agreement is an agreement you enter into with a creditor after filing your ch7 bankruptcy case. In the reaffirmation agreement you agree to be bound by the lender’s debt notwithstanding the bankruptcy discharge. Theoretically, any debt can be reaffirmed if there is some compelling reason for reaffirming it. In reality, the only debts that are routinely reaffirmed are secured debts, namely car loans. But can you reaffirm your home mortgage loan? Yes and no.
As a NC bankruptcy attorney I know that there are cases stating that a mortgage generally may not be reaffirmed. Courts in other states differ and so reaffirming a home mortgage is allowed in some areas of the country. The bigger question is whether a mortgage SHOULD be reaffirmed. In my experience, the answer is almost always “NO.” Here’s why: In a vehicle reaffirmation the upside is that you can keep your car. Another upside is that lenders will sometimes reduce the interest rate and/or the payment amount on the debt. The downside is that if
you get behind on payments, the lender will repossess the car and sell it at auction. If the auction sale price is less than the amount owed you will be responsible for paying the difference. With a car loan this is not a big risk. However, with a home loan the risk is enormous. Take this typical scenario:
Let’s say that a bankrupt debtor owns a home worth $150,000 and has a $150,000 mortgage. If the debtor reaffirms the mortgage loan then she is bound by the debt, notwithstanding the bankruptcy discharge. If the debtor suffers a hardship and cannot maintain payments the mortgage company will foreclose on her house. It is not uncommon for houses to sell at foreclosure for 1/3 to 1/2 their market value. Moreover, mortgage companies tack on late fees, penalties, accrued interest, and attorney fees- usually 15% of the debt. So, under this scenario it would not be unusual for the mortgage- including add ons- to exceed $185-200,000. If the house sells for 2/3 of its market value price then it will sell for $100,000. This leaves $85,000- $100,000 due and owing after the foreclosure. If the mortgage debt was not reaffirmed in bankruptcy then the debtor will not owe it. However, if the debtor did reaffirm the debt then she is now stuck with an enormous debt that she presumably cannot pay.
As an Asheville debt lawyer and NC bankruptcy specialist I have counseled hundreds of clients (maybe even a thousand!) on reaffirmation agreements. If you have more questions please contact us. We’d enjoy speaking with you and answering your questions.