During the Chapter 7 bankruptcy process one of the most important decisions a person can make will happen within 30 days of the filing. Generally, the filer will have 30 days to decide whether or not they plan on reaffirming the debt. A reaffirmation is when a person who filed a Chapter 7 bankruptcy takes legal responsibility for the debt owed. The reaffirmed debt will not be discharged. In other words, the debt which is reaffirmed (mortgage or car note) will still be owed once the bankruptcy is over.
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Most people wanting to keep their home after filing a Chapter 7 bankruptcy assume reaffirming the debt is a good thing. However, after speaking with their bankruptcy attorney the opposite is true. Many Chapter 7 filers are advised by their attorney not to reaffirm the mortgage. The reason for the recommendation is the reaffirmation will leave you personally liable for the debt after the bankruptcy has discharged.
An additional reason for not reaffirming the debt is because the property value is upside down. Being upside down or having negative equity is when the value of the property is worth less than the amount of the mortgage. Most buyers who purchased a piece of property with little or no money down during the real estate boom are upside down. These are the 2 most common reasons for not reaffirming the debt.
Another popular concern among people who are considering reaffirming the debt is what will happen to the house if they decide not to reaffirm. A common misconception for those choosing not to reaffirm is the fear of losing the property and being forced to live on the street once the bankruptcy is discharged. This is simply not the case. The truth is the filer can still live in the house if the monthly mortgage payment is sent to the bank. The filer can choose not to reaffirm, have the bankruptcy discharge, and still have a place to live.
So the question of why would anyone reaffirm the debt still remains unanswered? The reaffirmation can help the person who filed in a different way. Let's say the person who filed the bankruptcy wants to continue to live in their house. Through the reaffirmation process, the filer can negotiate a lower interest rate or a principal reduction. Lowering the interest rate or reducing the principle balance will reduce the monthly payment. The reaffirmation process can be a powerful negotiating tool for the person who filed a Chapter 7 bankruptcy.
A bank or lending institution would rather have a person make a lower payment as opposed to maintaining a vacant property. The year is 2013 and in today's housing market, banks do not want another upside down property in their portfolio. Banks are required to maintain every vacant property in the portfolio. The maintenance fees and property preservation expenses banks incur on vacant properties accrues monthly and is very expensive. Both parties will win if the filer decides to reaffirm the property at a lower interest rate.
Thank you for reading.
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