Similarly to the question of whether a pre-approval affects credit scores, whether or not to reaffirm a mortgage is a debate frequently misunderstood by the public.
The fact is, if you don’t reaffirm your mortgage, it may become difficult to repair your credit score post-bankruptcy, and you may need help from the best credit repair services in Chicago.
What Is a Reaffirmation Agreement?
Certain debts, such as a home mortgage, can be excluded from bankruptcy protection. This means that the loan lender “reaffirms” the debt by executing a new contract that reinstates your financial liability. By reaffirming your mortgage, you are waiving the protection you would receive through the bankruptcy discharge and will be held personally liable for the debt.
Many individuals who want to keep their home or property as collateral for a debt don’t see a problem with reaffirming, but reaffirmation agreements are complicated by many pros and cons. It is not likely that your mortgage lender will foreclose if you refuse to reaffirm, but there is the chance that you could lose your house unless you do so.
However, many lenders will not reaffirm your mortgage simply because it’s not a common practice. This does not affect your home ownership, does not change what you owe, and has no impact on your agreement to continue staying in your home as long as you keep making timely payments.
How Reaffirmation Works
Filing for bankruptcy extinguishes the promissory note you signed when you took out your mortgage. This means you no longer owe this amount until you reaffirm the loan, and you can only keep your home if you keep paying on the note.
Reaffirming the debt means you are legally obligated to pay it. If you reaffirm your mortgage and do not make the mortgage payments, the lender can foreclose. Filing for bankruptcy will not stop this from happening.
The bankruptcy court can only approve your reaffirmation if you have an open case and haven’t yet received your discharge. If you have an attorney, you might be able to avoid a court hearing, but generally, you’ll have to appear before a judge and answer questions about your case.
Typically, judges will not reaffirm a significant mortgage debt if state law prevents the lender from foreclosing, as long as you keep up with your payments.
What You Should Know
Here are some essentials to remember if you’re considering reaffirming your mortgage:
1. The lender’s consent usually depends on whether you’re up to date with your payments. Some lenders simply don’t wish to be bothered with creating and signing a reaffirmation agreement; because their rights remain pretty much the same with or without one and they can foreclose if you default, lenders generally do not agree to create a reaffirmation agreement.
2. The court’s approval depends on whether your property is underwater–meaning the debt owed is larger than your home’s estimated market value–and whether the judge believes you can handle the payments after discharging bankruptcy.
What Happens if You Don’t Reaffirm?
Bankruptcy involves making tough financial decisions—choosing not to reaffirm your mortgage agreement can be one of them. If you make this choice, you should know what will happen afterward.
Although filing for bankruptcy wipes out your liability for the promissory note, it does not remove your mortgage. This means that your lender can foreclose even if you do reaffirm. You will likely have to default on the loan before the lender takes such an action, but if you don’t reaffirm, you’ll live in a legal gray area. Your lender can take your home even if you make all your payments, as you are no longer obligated under the terms of the promissory note.
Your lender might stop sending you monthly payment statements if you don’t reaffirm your mortgage. This does not mean that no payment is due, so make sure to stay on top of your monthly payments to avoid losing your home.
If you choose not to reaffirm, your lender will not report any of your home payments to the credit agencies. This is because your account no longer legally exists because you did not reaffirm, and there is, essentially, nothing to report. This can make it challenging to repair your credit post-bankruptcy.
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