Often clients say that they don’t want to declare bankruptcy on their home – just on their credit card or medical debts. On one hand, such a demand is not legally possible; all assets and debts are included in a Chapter 7 bankruptcy petition; on the other hand, a reaffirmation agreement can remove a home mortgage from the effects of the bankruptcy proceeding.
In general, reaffirmation agreements aren’t a good deal for the individual; it is a knowing waiver of the right to a personal discharge of indebtedness. To understand the effect of a bankruptcy discharge on a secured debt such as a home mortgage, one must understand that a home lender generally has two important collection rights: in rem, and in personam.
In a Chapter 7 proceeding, the bankruptcy discharge eliminates the individual’s in personam liability and the home lender is left only with in rem collection rights. What this means is that if an individual in Chapter 7 is current on the mortgage payment and wishes to remain in the home, the individual must continue to make the contractual payments. If the individual no longer wishes to keep the home, the individual may turn over the keys and walk away from the debt (and the home).
When a client wishes to execute a reaffirmation agreement on a home to “remove it from the bankruptcy”, there are five criteria upon which to evaluate whether a reaffirmation agreement is appropriate:
(1) Is the individual current on payments?;
(2) Can the individual afford to make the payments in the future?;
(3) is the home worth substantially more than the amount owed on the mortgage?;
(4) is it a “forever home” whereby the individual may want to preserve the right to refinance the loan at a later date with the same lender, which will likely offer lower cost refinancing alternatives?; and
(5) does the individual need the positive payments reflected on their credit report so that a future financing agreement, such as the purchase of a new automobile, may be obtained at a more reasonable rate of interest?
If these five criteria are not present, a home reaffirmation agreement should generally be avoided.
Are you considering whether or not a reaffirmation agreement in a Chapter 7 proceeding can be convenient for you?
Book your free consultation here or send an email at johnson.legal.services.pllc@gmail.com to discuss the details of your case.
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