Should I Reaffirm my Mortgage in Bankruptcy?

It may work differently in other states, but here in Massachusetts people do not tend to reaffirm mortgages in Chapter 7 bankruptcy.  First of all, reaffirmation only exists in Chapter 7.  It does not exist in Chapter 13 or 11.  Reaffirmation is a voluntary procedure that can happen within a Chapter 7 case in which a debtor re-assumes legal liability on a debt that would be discharged in the normal course.  They are not very common, but when they do happen, they are usually done with mortgages.

Wait, I’m keeping my house and paying on the mortgage, did I reaffirm?  Probably not.  90 plus percent of bankruptcy debtors in Massachusetts who want to keep their homes just “keep and pay.”  That means they keep their house and pay on their mortgage.  The twist with reaffirmation is that it revives your discharged personal liability on the mortgage while this is wiped out in the keep and pay option.  Liability on a secured debt comes in two forms: the lien and the personal liability.  A bankruptcy discharge removes the personal liability, even on a mortgage, but the mortgage lien remains.  That prevents people from getting free houses by virtue of their bankruptcy discharge.  If a mortgage liability is reaffirmed, both the lien and the personal liability stay in place, and not just the lien.

So why isn’t reaffirmation more popular?  First, it’s a separate process that costs more in legal fees.  Second, it keeps you on the hook for the debt. So, if you ever stop paying and the property gets foreclosed you may be subject to a deficiency judgment.  There are simply not too many benefits from reaffirming.  If there is one, it’s that you get the convenience of the mortgage servicer handling the debt normally, i.e. sending you statement, allowing online access to the account, etc.  When a mortgage is not reaffirmed, this may not happen.  However, you can also get these benefits by refinancing the mortgage a few years after your bankruptcy case.

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