Ain’t No Reason To Reaffirm Your Mortgage, But There Certainly Is For Your Automobile

Let’s begin by defining reaffirmation:  A reaffirmation is an agreement made between a debtor and the creditor to re-pay a debt, whether it is the entire debt or part of the debt, that would be discharged in a Chapter 7 Bankruptcy.

Why would you agree to pay a creditor whose debt can be discharged? The answer requires understanding the difference between an unsecured and a secured debt.  An unsecured debt is simply a  promise to pay, whether orally or in writing. There is no collateral to secure the debt and the discharge that you receive when your Chapter 7 is completed, discharges the promise that you made to the creditor.

A secured debt has the same promise to repay as an unsecured debt but a secured debt also has collateral that secures the promise.  That collateral can be taken back by the creditor if you do not pay the debt. An example is a loan to finance the purchase of an automobile. The lender has a lien against the title to the vehicle. The lien rights allow the lender to repossess the vehicle if payment is not made.

What happens to a secured debt when you file a Chapter 7 Bankruptcy?  Let’s use that automobile loan as an example.  The completion of the Chapter 7 Bankruptcy discharges your personal obligation to pay on the promise, but the lien rights SURVIVE the bankruptcy. This means that you have to make a decision to either return your automobile or keep it and pay for it. If you return or surrender your vehicle, the Chapter 7 Bankruptcy discharge protects you from ever owing any money to the lender.

There are two ways to pay for your automobile. The first is to pay for it by redeeming the vehicle, making a one-time lump-sum payment equal to the value of the vehicle, which is a very uncommon situation. The second is to sign a reaffirmation agreement, agreeing to make the regular monthly payments until the vehicle is paid, after which you will receive the title. To keep your vehicle, even though you filed a bankruptcy, you will need to pay for it since the lien rights survive the bankruptcy.

What about your mortgage? Many clients ask me about reaffirming their mortgage. They think that it is required and is something that they should do. My response is that there is almost never a good enough reason to reaffirm a mortgage. Why? The mortgage lender will not foreclose as long as you make the mortgage payments. It may be a hassle to deal with the lender without the reaffirmation; your credit report may not reflect that you are making mortgage payments so that the payments do not help increase your credit score.; but the advantage of never having to worry about being personally responsible for the debt far outweighs any possible negatives. In our current times, when so many homeowners are “upside-down” on their home, and so many homeowners are considering whether it makes sense for them to keep their home ( Will there ever be equity in my house? How long will it take?), knowing that any time after your bankruptcy is completed you decide not to continue mortgage payments, clients have told me that it is a wonderful feeling knowing they never have to worry about “getting stuck” for the mortgage payments.

If you want to learn more about bankruptcy proceedings, contact an attorney at Joseph Wrobel, Ltd. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’s Facebook page and Follow Joseph Wrobel. Ltd. on Twitter. If you need legal assistance please call Joseph Wrobel, Ltd. by dialing (312) 781-0996 to talk to an attorney.