People file bankruptcy in order to discharge their debts and get a fresh start in life. I have often called this "hitting the financial reset button." However, many people here in New Jersey get scared or talked into something that can cause a real problem for them down the road: they reaffirm the mortgage or mortgages on their homes.
What is Reaffirmation?
Simply put, you list your debts in a bankruptcy in order to wipe them out in what is called a discharge. Reaffirming a debt is the action of taking the debt out of the bankruptcy discharge so it can never be wiped out.
Although this is often done with car loans, as it is most often the only way to keep the vehicle once your case is over, it is a very bad idea when it comes to a home mortgage. This is because there is virtually no upside to doing it and many downsides.
What is the Downside to Reaffirming?
Once you reaffirm, you will always owe the debt personally until it is paid. Should you fall behind on payments after the bankruptcy is over (for any reason whatsoever), the mortgage company can make a negative credit report.
Plus, if there’s a foreclosure here in New Jersey, you could potentially be responsible for any unpaid principal, interest, late fees, lawyer’s fees, costs, etc. as if you had never filed for bankruptcy! So you go back to tarnished credit with a creditor pursuing you for payment.
Mortgage companies will tell you that reaffirming will help you rebuild your credit because they can report timely payments on your credit history, which they could not do if you did not reaffirm. Although that may be true, it is not the only way to rebuild your credit, and other options do not bear the risks of reaffirmation.
What is the Upside of Not Reaffirming?
As long as you have the mortgage the lender can’t go after you personally for any shortfall or deficiency if the lien should go into foreclosure. Plus, although timely payments are not reported on your credit, neither is the failure to make payments, should you fall behind. Simply put, if the payments are current, you keep the house; they cannot foreclose.
If you are considering bankruptcy, do not think that you have to reaffirm your mortgage in order to keep your house; you do not. You can do a number of things to rebuild your credit besides that!
So What Do I Do?
If you live in southern New Jersey and are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.
If you have more questions about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.