I have been getting a lot of questions recently about reaffirmation and about the consequences of not reaffirming a mortgage loan. I have previously written about the consequences of not reaffirming a mortgage debt. The 2005 BAPCPA changes to the Bankruptcy Code attempts to force debtors to choose between reaffirmation or surrender of their collateral. The trend I am sensing both here in the Northern District of Georgia and elsewhere around the country suggests that bankruptcy judges are not particularly inclined to force this issue. In cases where the debtor cannot or will not sign a reaffirmation there seems to be a judicial acceptance of the old “stay and pay” process.
In those cases where a debtor does not reaffirm, there seems to be some confusion as to how this decision affects the debtor’s rights. I received the following question from Heather, who asks the following:
I claimed Chapter 7 bankruptcy back in 2004. Sadly enough I just now looked closely at a credit report. My mortgage wich I had maintained through the bankruptcy and have done so for the past 5.5 years said it was discharged on the bankruptcy. Which rose many questions! I called the mortgage holder and they said I never reaffirmed my mortgage. I don’t know if I did or didn’t my original mortgage was with one company who sold it to another in 2006. I no longer live in this house, it is an income property, which I also have on the market. Am I going to run into trouble selling this? And my mortgage is directly withdrawn out of my account each month if “technically” it was discharged are they able to continue to take that money every month? I have sunk a lot of time and money into this property if it “technically” isn’t mine. What would I lose by stopping payment on it. I’ve already suffered the credit report deduction for 5.5 years and have managed to get my score to fair standard even with that on there. what more can it do to me and where should I go from here. Thanks
Here is my response: Not reaffirming a mortgage obligation means that you are not personally liable on the promissory note associated with the security agreement. The property remains encumbered by the mortgage obligation and you continue to maintain and grow your equity interest in the property. Your title interest does not change.
The biggest difference – you are no longer personally liable on the note. This is a positive development in that you cannot be sued personally if you were to abandon the property and a foreclosure sale generated less than what was owed, or if the property burned down and there was no insurance.
The negative about not having personal liability – your credit report will not reflect any positives arising from the payments that you do make. As you, personally have no obligation to make any payments, you are not personally accessing any credit.
If you were to pay off the mortgage, you would get the title just as you would otherwise. You can still apply to reaffirm the debt and get back into a more traditional security note + promissory note situation. You can also sell the property as you do have title interest.
As far as where to go – you will have to decide if the benefit of building credit through a positive mortgage payment history following a refinance outweighs the benefit of not having personal liability on a mortgage.