Guest Post by Michael Goldstein, attorney in Massachusetts.
You are in a Chapter 7 bankruptcy to eliminate your overwhelming debt. As part of your debt, you owe money to a mortgage company for your home. What many people do not realize is even if you are keeping your house, the underling mortgage will be discharged with the rest of your debts. When you file the bankruptcy, there is a form called a statement of intent. On this form you can do one of two things if you are planning on keeping your home. First, you can simply retain the property and continue to pay pursuant to the contract with the lender. This choice will allow you to stay in the home for as long as you are current on your mortgage. The second option is to reaffirm your debt and take it outside of the bankruptcy, so that the mortgage will not be discharged.
The first option is far and away the better option in almost all cases. When you retain your real estate and continue to pay you keep your house until the mortgage is paid off. However, if for some unfortunate reason, you can not continue to pay on the loan or you simply decide there is no equity and you do not want to stay in the house and keep paying: you can walk away. If you do stop paying and even if 5 years down the road your house is foreclosed upon, the lender can not pursue you for the money. If the bank sells the property for less then you owe on it that is the bank’s problem now. You have been discharged of your obligation. Now there is one downside, which is that the lender does not need to continue to report your timely payments on your credit report.
So you decide that it is absolutely imperative that you get “credit” for your monthly mortgage payments. What can you do? You can if it is shortly after filing your bankruptcy case file a motion with the Judge to allow you to reaffirm your mortgage. In simple English, this means that you will not seek a discharge of the debt. The lender will treat you like the bankruptcy is not in place and will report your credit history to Experian, Equifax and Transunion. However, there is one down side to this and it is a big down side. If you default on the mortgage in the future, the bank can sue you to recover its money including all the legal fees they pay to their high priced foreclosure attorney, real estate agents, unpaid mortgage principal, interest, escrow payments, late fees and penalties.
It should also be pointed out that in some loan modifications that take place during the term of your bankruptcy, the lender will require you to reaffirm the debt. If this is the case, you need to speak to your lawyer and if you don’t have one, you should consult with a bankruptcy attorney in your state.
Additionally, it should be noted that in order to reaffirm a debt, you will need to go before a bankruptcy court judge and he or she will ask you why you need to do this. There will be a presumption of undue financial hardship on you and you will need to convince the Judge that you should be allowed to do this. The Judge may or may not grant your request, as they are going to try to protect you from yourself.
When you compare the two options there really is only one choice. That is to never, ever reaffirm a debt on real estate unless there is a darn good reason for it. As with any articles relative to the law you read online, always check with a local bankruptcy attorney to ensure that the laws in your state do not differ or add some additional protection.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
If you enjoyed reading “Why Reaffirming Mortgages Is a Very Bad Idea,” please browse our other articles on our main Michigan Bankruptcy Blog.Tags: chapter 7, detroit bankruptcy lawyer, Michigan bankruptcy attorney, mortgages in bankruptcy, Reaffirmation Agreements
Comments Off on Why Reaffirming Mortgages Is A Very Bad Idea