24 Sep Reaffirmations in Bankruptcy – Mortgages Part TWO
Reaffirmation is the process used by an individual who has filed bankruptcy to keep their secured assets and continue to pay the secured debt.
Mortgage debt is a complicated area involving reaffirmation. It is important to review this in your state as property and foreclosure law varies from state to state. In Ohio it works like this.
There are three parts to real estate ownership in Ohio.
1. The deed: This is the document that creates ownership in the real estate. The filing of the bankruptcy does not change the ownership interest in the property
2. The mortgage: This is what secures the lender and makes them happy. A mortgage is a lien ( in rem ) against the real estate. The bankruptcy does not change this. Upon completion of the bankruptcy the lender still has a lien on the house and is still secured by the house. If the lender (the mortgage company) is not paid then they can foreclose and sell the property.
3. The note: This is the personal liability (in personam) of the individual borrow to the lender. If the house was to blow away the borrower would still owe the money to the lender. Bankruptcy alters this relationship. Upon the receipt of the discharge in the bankruptcy the borrow ( the debtor) no longer personally owes the lender on the note.
The lender seeks reaffirmation on the note by the debtor ( borrower) so it can be further protected. However in most cases there is no reason for the debtor to reaffirm on the note. Why would you recreate your personal liability to the lender? The debtor can keep their home so long as they stay current on the mortgage. Even if you do not reaffirm on the house you need to keep current on the mortgage, otherwise the mortgage company will foreclose.
The advantage to not reaffirming is pretty easy to see. The debtor keeps their home so long as they pay for it. However if things go bad and they no longer can pay for it, then the debtor can walk away from the home without owing any money even after the foreclosure sale.
The disadvantages of not reaffirming are created by the mortgage companies and lenders.
1. Some mortgage companies will no longer report to the credit bureaus
2. Some mortgage companies will refuse to modify the mortgage or work with the borrower if they have future trouble making the payments
I only recommend reaffirming on the note if the lender will grant the debtor some special consideration, usually a significant change in the interest rate, balance or the terms of the note
Generally it is not a good idea to reaffirm on a note for real estate.
For information on reaffirming a car, see Part Three Reaffirmations of Things With Wheels
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