As a general rule, I do not think it is ever a good idea to reaffirm a mortgage in a Chapter 7 bankruptcy case. When you reaffirm a debt, you basically re-obligate yourself on it and make yourself personally liable for something you could have eliminated in a Chapter 7.
However, most of my clients insist on reaffirming their first mortgage because they want to rebuild their credit score by making all future house payments on time. As a Georgia bankruptcy attorney, the reason I am willing to go along with reaffirming a first mortgage in some cases is because first mortgage companies almost never sue you on foreclosure deficiencies. In Georgia, it is extremely difficult to confirm a foreclosure sale. For more on this topic, please click here.
What happens to the house when you don’t reaffirm?
In most bankruptcy cases, you can remain in the house as long you stay current on the mortgage payments. However, it is important to note that the mortgage company will no longer report your payments to the credit score agencies. As a consequence, you get no bonus points with your credit score for making your mortgage payments on time.
What happens to the second mortgage if I don’t reaffirm?
In contrast to first mortgages, the second mortgage company will almost always pursue you for the deficiency. For this reason, I will not let my Chapter 7 bankruptcy clients reaffirm a second mortgage. While you still have to pay it if you want to keep the house, they will never be able to sue you for a deficiency if you walk away from the house in the future.
It is important to note that you can only file Chapter 7 bankruptcy once every 8 years. What happens if you reaffirmed a second mortgage after filing Chapter 7 and then subsequently lost the house to foreclosure? In Georgia the most likely answer is that you would be sued and your wages would be garnished. Don’t ever reaffirm a second mortgage.
What is the worst thing that could happen to me if I don’t reaffirm the second mortgage?
The worst thing that could happen is that your house could get foreclosed by the second mortgage company. While this is possible in theory, I’ve never seen it happen in Georgia because the second mortgage company would have to pay off the first mortgage if they chose to foreclose.
In this economy, what second mortgage company is crazy enough to pay off a first mortgage to protect their interest? In most of the bankruptcy cases I see, the consumer usually owes between $100,000.00 to $400,000.oo on the first mortgage and second mortgages usually range from $10,000.00 to $50,000.00. What second mortgage company would be willing to risk $100,000.00 to foreclose and protect their $10,000.00 interest? The only way this could ever happen is if there is a huge amount equity in the house.
The bottom line is that every Chapter 7 bankruptcy debtor should spend time with their bankruptcy attorney carefully considering whether or not they want to reaffirm any specific debt.