I recently got a phone call from a client. She got a letter from her mortgage company giving her the “opportunity” to reaffirm her mortgage. She wanted to know whether she should do this. I told her, “Absolutely not.” In the overwhelming majority of cases, it makes absolutely no sense to reaffirm a mortgage debt. Why? The Bankruptcy Code is written in such a way so as to make a mortgage reaffirmation bad news with a very small upside.
When the Bankruptcy Code was rewritten in 2005, additional provisions were inserted dealing with the reaffirmation of personal property, such as jewelry, cars, etc. A “reaffirmation” means that you sign a document, that must be approved by the Court, making you permanently liable for the loan, regardless of what happens, as if you had never filed for bankruptcy. You might say, “I want to keep my house, so I need to reaffirm the loan.” But this is not true. Unlike some personal property, you don’t need to reaffirm a mortgage to keep your house. So long as you keep your payments current, you keep the house, regardless of whether you reaffirm the mortgage or not.
What’s the benefit of not reaffirming? No matter what happens, so long as you have the mortgage you scheduled in your bankruptcy (even if it’s been sold but not if it’s been refinanced) the lender can’t go after you personally for any shortfall or deficiency. If you fall behind, it won’t show up on your credit record, and if there’s a foreclosure, the lender can’t go after you for any shortfall. This is true for the length of the mortgage. And if the payments are current, you keep the house.
What’s the down side of reaffirmation? If you fall behind on payments for any reason, the mortgage company can make a negative credit report, and if there’s a foreclosure, in those states that allow deficiency judgments, can go after you for any unpaid principal, interest, late fees, lawyer’s fees, costs, etc. as if you had never filed for bankruptcy.