What Does it Mean to Reaffirm Your Mortgage in Bankruptcy?
To reaffirm your mortgage is a topic that comes up quite often and seems to be very misunderstood. Certain debts, such as an automobile or your home mortgage, have the opportunity to be “excluded” from bankruptcy protection.
This means that the lender (car or home loan) will “reaffirm” the debt by executing a new contract that reinstates your financial liability in the event of default at a later date.
Most lenders will not reaffirm your mortgage. It’s simply not a standard practice. This absolutely does not affect your ownership, does not affect what you owe, and does not affect your ability to stay in the home should you continue to make your payments on time.
Don’t Reaffirm Your Mortgage?
The answer to this question is actually quite simple, and the decision is completely yours to make.
If you think that at any time in the future you may be at risk of not being able to afford your mortgage payments or if you no longer want to live in the home and would be prevented from selling because you own more than the home is worth, you most likely would NOT want to reaffirm your mortgage.
By NOT reaffirming the mortgage, the lender cannot sue you for their losses or report the losses to the IRS in the form of a 1099, which would mean you have to pay taxes on the loss as income.
There is really no upside to reaffirming a mortgage loan. The lender cannot force foreclosure or change the terms of the loan simply because you filed for bankruptcy.
If you continue to make your payments on time, reaffirming your mortgage does not matter.
Consult a professional
I can only speak from my experience as a mortgage banker, I am not an attorney or a tax professional. The purpose of this opinion piece is to share what I’ve learned about the bankruptcy process in terms of qualifying for a home loan in the future.
If you have questions about filing for bankruptcy or reaffirming your home loan – consult a professional. A real estate or bankruptcy attorney is a good place to start. Also consult your tax professional to understand your potential tax liability of which option you chose.
Questions and Comments
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