Reaffirming Home Mortgages

Recently I have gotten several calls from clients who have been told by some anonymous person at their mortgage company: "You should have reaffirmed your mortgage".

First off, what is reaffirmation?   It is a procedure under the Bankruptcy Code in which you sign a formal agreement stating that, even though you filed bankruptcy, you are still personally obligated to pay the debt.

How does this apply to mortgages?  Some background:  A mortgage is actually two things.  One is the promissory note, in which you promise to pay Wells Fargo Bank N.A. $100,000 at 4% interest over thirty years.  The second thing is the mortgage itself, which says that you put up a particular piece of real estate as collateral to secure the payment you promised to make in the promissory note.

A chapter 7 bankruptcy discharges the personal obligation to pay, but does not remove the lien from the real estate.  (Some mortgages can be removed through a chapter 13, but that is a different issue).

So, if you own a house and file bankruptcy and get a discharge, the end result is that you still must pay the mortgage to keep the home -- if you do not, the mortgage holder will foreclose its lien and take the home. However, if you have not reaffirmed, the mortgage holder cannot pursue you for any deficiency if the house does not bring enough to cover the amount owed on the mortgage.

If you have reaffirmed the debt, however, the mortgage holder could pursue you for any deficiency.  (This is not terribly likely, since most conventional mortgages in Minnesota are foreclosed by advertisement, with a six month redemption period -- but again, this is a subject to a different post.)


What are the benefits of reaffirming a mortgage debt?:

1)  If you do not reaffirm your mortgage in a chapter 7 bankruptcy, the lender may may not let you refinance with them in the future.  Wells Fargo Bank N.A., I am told informally, does this.  My response is:  Try a different bank.  There are dozens of them. 
2) The lender may (likely will) refuse to report your ongoing payments to the credit reporting agencies.  The work-around is to pull a payment history from the mortgage company and then pull a credit report (through (www.annualcreditreport.com) and  dispute the credit reporting agency report if your payments do not show up.

I hope the real estate market has stabilized, although I do not know for sure;  if so, it may be somewhat less scary to reaffirm a home mortgage.  However, you must realize that, if you reaffirm, you are putting yourself back on the line personally for a very large obligation, with no real benefit other than the two minor points noted above.  If the real estate market turns sour again, or the if the mortgage company chooses to foreclose by action, they can hold you liable for a very large deficiency, even though you filed bankruptcy.