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Should I Reaffirm My Mortgage Debt?

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Most people assume that when they file for bankruptcy, they will lose everything, including their home. However, there are ways to keep some of your property, such as your house, while addressing some of your debt.

One of these ways is through a reaffirmation agreement. By fully understanding what it is and how it can help you through the complex bankruptcy process, you can come out of the process of retaining some of your possessions.

What Happens When You File for Bankruptcy?

When you file for bankruptcy, you enter a legal process where you admit you cannot repay your debts. This gives you protection from creditors coming and taking all your possessions.

The process most commonly starts with the debtor filing a petition to declare bankruptcy. A bankruptcy court then takes over and freezes, measures, and evaluates your assets so they can be liquidated to repay some of your outstanding debt.

What Types of Bankruptcy Do Homeowners Face?

When it comes to bankruptcy and homeownership, most people face two types of bankruptcy.

Chapter 7

In Chapter 7 bankruptcy, the absolute priority rule separates debt into two categories (secured and unsecured) and lays out the order in which debts are to be paid.

Secured debt is backed or secured by collateral to reduce the risk associated with lending, like a mortgage. Unsecured debts include tax debts, child support, and personal injury claims against the debtor.

Priority unsecured is paid first, then secured, then non-priority unsecured. If there are insufficient funds to pay the non-priority unsecured debt, then the debts are paid on a pro-rata basis.

Chapter 13

In Chapter 13 bankruptcy, a wage earner’s plan is implemented. Debtors must submit and follow through with a plan to repay outstanding creditors within three to five years.

In most cases, the repayment plan must provide a substantial payback to creditors—at least equal to what they would receive under other forms of bankruptcy—and it must, if needed, use 100% of the debtor’s disposable income for repayment.

How Does a Reaffirmation Work?

Reaffirmation is an agreement a debtor makes with a lender to repay some or all a debt despite going through bankruptcy proceedings. A borrower often maintains possession of an asset held as collateral, such as a home, if they can fully repay the debt owed on that loan.

So, if you make payments on your mortgage while the court continues to liquidate your other assets to pay debts, you can keep the house. However, you will lose your home if you fall behind on your payments.

How Do I Apply for a Reaffirmation?

There are some steps that you need to follow to apply for a reaffirmation:

  1. Get caught up on your mortgage payments.
  2. Tell the court that you want to reaffirm a debt on your Statement of Intention form.
  3. Mail a copy of this form to the lender and ask them to draft a reaffirmation agreement and send it to you.
  4. Send the agreement back to the lender within 45 days of meeting with your creditors.

The lender then files the agreement with the bankruptcy court, which the court must approve.

Rely on an Ohio Debt Relief Attorney for your Reaffirmation

A reaffirmation agreement can help you keep your home during a complicated bankruptcy. Our attorneys at Luftman, Heck & Associates have been advising people on bankruptcy matters for years.

Talk to us first if you are thinking about reaffirming a debt during bankruptcy. We can walk you through your case and help you determine if a reaffirmation is the right way to go. For a free consultation, contact us online or at (216) 586-6600.