SHOULD I REAFFIRM ON MY MORTGAGE?
To understand reaffirmations, you need to know that there are 3 parts to your home ownership:
1. The deed. This is the "title" that proves you own your home. You own your home even if there is a mortgage. This brings us to:
2. The mortgage. This is what protects the lender. It is a lien against your home, and bankruptcy does not remove this lien. Bankruptcy or no bankruptcy, if the lender is not paid it can foreclose and sell the property.
3. The note. This additional document, which you signed when you took out the mortgage, says you are personally liable to the lender for the amount of the mortgage. It is a promissory note. Once you receive your bankruptcy discharge you no longer owe the lender on this note UNLESS you reaffirm the debt.
Mortgage companies want you to reaffirm on your debt so you will still be responsible for the payments. But should you reaffirm? You can keep the home as long as you pay for it, with or without a reaffirmation.
For many people, a compelling reason to reaffirm is so that the mortgage company will continue to report your payment status on your credit reports. But this means it will continue to report all information, both good and bad.
And when you apply for another loan the new lender looks at your debt to income ratio. Too much debt and you might be denied credit.
However, most mortgage companies won't send you monthly statements unless you reaffirm, and they won't let you refinance the loan. Some mortgage companies won't even talk to you.
Here are some pros and cons of reaffirming on your mortgage:
PROS OF REAFFIRMING
- You have the comfort of having your status formalized, and of receiving your usual monthly statements.
- Your payments should get reported to the credit reporting agencies.
- Your mortgage company is more likely to allow you to refinance at a later date.
- Once the reaffirmation is filed with the Court, you should be able to communicate freely with your mortgage company.
CONS OF REAFFIRMING
- Bankruptcy judges and trustees don't like reaffirmations because they want you to get a fresh start.
- You are on the hook for the amount you still owe to the mortgage company. You can't change your mind once the bankruptcy is over.
- The amount you still owe the mortgage company will affect your debt-to-income ratio, and might hurt your ability to obtain credit.
PROS OF RETAIN AND PAY
- You can change your mind later and still let the house go. The choice will be yours, not your lender's.
- Your late payments won't be reflected on your credit report.
- Your debt-to-income ratio also will be reduced on your credit report.
CONS OF RETAIN AND PAY
- Your mortgage will show on your credit report as a charged-off debt. But, this could be a good thing if your debt to income ratio is too high. Also, late payments won't drag down your credit rating.
- Your mortgage company is less likely to refinance at a later date. This doesn't stop you from refinancing with someone else. It is probably inevitable, though, that you will find it more difficult to get financing.
- Your mortgage company won’t send you statements any more. Be sure you know ahead of time what your monthly payments are and where the payments are to be sent.
Note: as of this date you can still apply for most loan modifications even if you don't reaffirm.
This informational is for general information only, and is in no way intended to create an attorney-client relationship. Depending on where you live, here are large difference in bankruptcy laws and how they are applied. Please contact an attorney knowledgeable in the bankruptcy laws in your state.