In Chapter 7 bankruptcy cases, clients with secured loans (such as their car or home loan) must decide whether to “reaffirm” the debt on the loan. After the Chapter 7 bankruptcy is finished, a signed reaffirmation agreement allows the creditor to treat the loan as if the bankruptcy had never occurred. In order to keep some types of property, a reaffirmation agreeement is required. For example, if a client fails to sign a reaffirmation agreement on a car, then the creditor can repossess the car after the bankruptcy is over, even if the client is current on their payments.
However, a reaffirmation agreement is not required to be signed on a home loan or mortgage. Clients are often interested in signing a reaffirmation agreement on their home, figuring that they never intend to default on the loan, and that the reaffirmation agreement will be helpful in reestablishing their credit.
Many mortgage companies will stop reporting the status of payments to credit bureaus after a Chapter 7 discharge. The reason they stop reporting to credit bureaus is because there is a chance thatIf they continue reporting the payment history, then it will be considered an attempt to collect a discharged debt. This could subject them to a violation of the discharge order with the bankruptcy court and could be construed as a violation of the Fair Credit Reporting Act. For these reasons, the payment history on a mortgage may not show up on credit reports after Chapter 7. In these situations, I recommend clients get a payment history from the mortgage company (or their own bank), and submit their own payment history to the credit bureaus. Once the credit bureaus receive the payment history, the mortgage company must either dispute the records within thirty days, or acknowledge that the client’s records are accurate. This process should be done every year after the bankruptcy.
In most cases, the risk of defaulting on the loan in the future is greater than the possible benefit to the client’s credit score. After bankruptcy, clients sometimes lose their job, become disabled, or get divorced, which has the effect of making the mortgage payment unaffordable. In those situations, if the client is unable to sell the home, then the mortgage company will foreclose on the property. If the property sells at a foreclosure sale for less than the balance owed on the mortgage, then the client could be sued for the remaining balance.
However, if the clientdid NOT reaffirm the debt, then the client could walk away from the home without worrying about the possibility of a foreclosure. The mortgage company simply could not pursue the client for a deficiency, since there was no reaffirmation agreement.
I recently received a call from a former client facing this exact situation. The clients have moved from Arkansas, and can’t afford to continue making payments on the home. They have been unable to keep the home rented, and wanted to know their options. I was able to advise them that they did not have any further liability on the loan, and could surrender the property or allow the mortgage company to foreclose without worrying about a possible deficiency claim. If they had signed a reaffirmation agreement, then their options would have been much more limited.
If you have questions about reaffirmation agreements or rebuilding your credit after bankruptcy, please call. Chapter 7 bankruptcy is a beneficial tool to help a person get back their financial freedom, as long as they don’t handcuff themselves to an unwise reaffirmation agreement.