Once you begin the process of filing for a Chapter 7 bankruptcy, you may get a letter from your mortgage company, offering you the "opportunity" to re-affirm your loan.
Los Angeles Chapter 7 bankruptcy Attorney Vincent Howard of HOWARD LAW knows that, while every situation is different, this is usually a bad idea, particularly while the housing market is still fragile and many people are still underwater on their properties.
It all comes back to the question many people want answered when they first file for bankruptcy: While I be able to keep my home?
The answer depends on your situation.
Re-affirming the loan is one way to keep your house. It is essentially a promise that even though you could utilize the bankruptcy to discharge the debt you owe on your home and walk away from it, you are choosing to continue with your original mortgage agreement. You can also do this with other types of personal property debt as well, such as jewelry or cars, etc.; It is you promising to be liable for the debt, regardless of the fact that you could discharge it. With regards to those debts, it will be as if you never filed for bankruptcy protection.
Generally, the only time a mortgage company will allow this is if you are current on the payments.
But it's probably not wise unless:
- You are sure you can continue to keep up with the payments, insurance and taxes once your bankruptcy is discharged;
- The bank offers you an amazing loan modification deal.
A year or two ago, we would have said the latter was fairly impossible. Now, however, banks and mortgage lenders have been given federal government incentives to work with people in lowering their principal balance to a more reasonable amount. However, this still isn't always easy, and if that's the direction you want to go, it helps to have an attorney who is experienced both in the bankruptcy and foreclosure process to advocate and protect your interests.
But what you also need to understand is that re-affirming your mortgage is not the only way to keep your house. Generally, if your payments are current, you can remain there and keep it - regardless of whether you re-affirm it or not.
What's more, if you choose not to re-affirm the loan and the mortgage is scheduled in with the rest of your bankruptcy, the bank can not hold you personally liable for any shortfall or deficiency if you fall behind on payments and the bank must either sell or foreclose. And if you stay current on it, you can keep it.
Usually the better option, if you want to keep the house but need the payments lowered, is to separately apply for a loan modification. This may allow you to secure more favorable terms during the life of the mortgage, without risking the possibility of significant liability if the home does happen to be foreclosed upon later.
If you have questions about what your best options are for keeping your home in a bankruptcy, we have answers.
What Happens to Mortgage, Home After Bankruptcy? Oct. 2, 2012, By Justin Harelik, Bankrate.com
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Some Bills Won't Help Re-Establish Your Credit, Oct. 2, 2012, Los Angeles Bankruptcy Lawyer Blog