20 Jul Top 3 Reasons Not To Reaffirm a Mortgage in Bankruptcy
Bankruptcy debtors should not reaffirm a mortgage. Reaffirmation of debt in bankruptcy prevents the debt from being discharged, a process explained in greater detail by Kevin Gipson in Chapter 7 Bankruptcy and the Reaffirmation Agreement. Yet, lawyers continue to debate whether to reaffirm a mortgage, without compelling argument on the affirmative side, even though state laws protect a homeowner, who continues to make voluntary mortgage payments without reaffirming the mortgage, from foreclosure, so long as payments are current or brought current within a reasonable time.
So why should one reaffirm? Distinguished Missouri bankruptcy attorney Wendell Sherk once said “[T]he only reason to sign them is in order to get continued reporting of good payment status on the credit reports”. In practice, mortgage companies dangle the prospect of reporting future good payment history to credit bureaus as a way for bankruptcy debtors to improve the credit score or qualify for future loans. If that is the only reason to sign, then that is actually a compelling reason not to sign.
The unsaid corollary of that offer is that same mortgage company will report all information, good and bad, to the credit bureaus. And that information, both the good and the bad, can damage a credit score or derail a loan application.
The more accurate part of the reporting argument is that the borrower should not want mortgage payments reported to the lender, because:
1. The debt to income ratio is minimized by not reaffirming the mortgage;
2. The likelihood a borrower actually makes mortgage payments on time is small;
3. The borrower can make the payment late, miss a payment here or there, catch up payment, pay whatever late fees accrue, all without risking a negative tradeline on the credit report.
A credit score is one factor lenders use in evaluating loan applications. While the exact formulas various lenders use are not publicly known, a major factor in the loan application process involves the total amount of unpaid debt in relation to a person’s income. Low debt and high income is better than not. After bankruptcy the mortgage debt is discharged unless the debt is reaffirmed. By not reaffirming, a person effectively lowers the total amount of outstanding debt, thus lowering the ratio of debt to income.
Failure to pay on time is a huge factor and perhaps the number one cause in lowering a credit score. Consumers who live paycheck to paycheck or on fixed income often face financial setbacks that make it hard and sometimes impossible to pay all bills when due. The more information that gets reported, the greater chance that information will contain a negative report.
The homeowner has an unofficial flexible due date, limited not by a specific date on the calendar, but by the logistics of how long it takes a lender to react to a payment default. If a payment is late the borrower can catch up the payment before the lender can foreclose. While state laws vary as to the specific length of time a borrower is permitted to cure a delinquency, and late fees will probably be added, the informed homeowner can float a payment within this time frame to suit one’s ability to pay. By not reaffirming a mortgage, late mortgage payments are not reported to the credit bureau and do not lower a credit score.
Wouldn’t it be a better world if all creditors did not report payment history?
Andy Miofsky, Esq.
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