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Question Detail: I had a bankruptcy in 2010 and discharged in 2011. I kept my house and now I cannot afford it. Can I leave the house to the bank still? It was listed in the bankruptcy but I was never late and kept up on the payments. It has drained all my savings and I have nothing left to sell to keep up on the payments. My mortgage statement from them say ‘this is for information only, and we are not trying to collect a debt because this mortgage was assigned in a bankruptcy case.’

Whenever I first meet with a potential client in need of bankruptcy, I attempt to offer as much information of the basics of the process as is possible within an hour or two that I am alotted. Mostly, I cover the concepts in broad strokes touching upon as many of the pitfalls and the benefits as I can. I always discuss the possibility and option of reaffirmation. This is probably a new word in most people’s vocabulary and has a very technical usage in the bankruptcy arena. To reaffirm a debt in bankruptcy means to sign a document that prescribes that regardless of the benefits that a bankruptcy discharge provides, the debtor agrees to allow the debt to survive the bankruptcy and furthermore agrees to continue making payments.

Now, to be very clear, if you have a house with a mortgage encumbering it, or a car with a car loan securing the vehicle, you can choose to not reaffirm the debt and still continue making payments throughout and after the bankruptcy. In this way, you will still be able to keep your home or car. The only recourse the banks have is to repossess the collateral (ie. foreclose on the home, repossess the car) if you stop making payments. However, if you stop making your payments and accept these consequences, there is good news!  Because of your bankruptcy discharge and the fact that you did not sign and file a reaffirmation agreement, while the bank can take the collateral, they cannot garnish your wages or execute upon your bank accounts. They cannot lien your future property. Therefore, you can walk away from the property that you cannot afford due to unforeseen circumstances that occur after your discharge and not suffer any further repercussions.

So why would you reaffirm such a debt, when the questioner clearly benefits from having not reaffirmed?  Well, thats a good question. Most of the time I counsel my clients not to reaffirm. A reaffirmation must be voluntary and should benefit the debtor as well. So what are the potential benefits?

If you do not reaffirm, any late payments you make will not adversely affect your credit report. Conversely, if you DO reaffirm, all your timely payments can potential help your credit score. So to recap :  no reaffirmation = no credit reporting either way;  yes to reaffirmation = means good reporting if you pay timely, bad reporting if you don’t.

Finally a great teacher, Frank Scardilly, once taught me that everything in life is negotiable. It is simply a matter of perspective and positioning.  To derive the greatest potential benefit possible from a reaffirmation agreement, a debtor can negotiate the terms of their loan much like a mortgage modification. This means potentially lowering interest rates and/or placing past due payments/ arrearages at the back end of the loan. I’m not saying this is likely, just possible.  I am still against reaffirmations in almost all circumstances but it is a decision the client must make… with a little education and counseling. For the purposes of the questioner, they should feel very relieved knowing they are not saddled or obligated with the debt because they never reaffirmed.

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