Should You Reaffirm Your Mortgage to Keep Your Home in a Chapter 7 Bankruptcy?

What Determines Whether You Can Keep Your Home?

Several factors must be satisfied in order for you to keep your home once you file for Chapter 7 bankruptcy.  If you are current on your mortgage payments and qualify to file for bankruptcy under Chapter 7, so long as your equity does not exceed the Ohio exemptions, and you can continue to make the monthly payment, you should be able to keep your home.  Other factors, such as your income and other expenses must be considered, but if those factors are satisfactory, you should be able to keep your home.

In Ohio, if you have owned and lived in your home for the past two and one-half years or more, you qualify for the exemption, which is $ 20,200.  If you are married and the title is in your and your spouse’s names, each of you can claim the exemption, increasing the exemption in equity to $ 40,400.00.  If the title is in only your or your spouse’s name, the one who is not on the deed may still claim an exemption in the present value of what is known as a “dower interest,” which is, under Ohio law, the right to live in the home after the one listed on the title dies. 

The Procedure For Keeping Your Home in Chapter 7 Bankruptcy

Although some states require you to sign what is known as a reaffirmation agreement during a Chapter 7 bankruptcy case, Ohio does not require you to do so.  In Ohio, you can agree to “retain and pay according to the original agreement” and keep your home.  The mortgage company must be notified that you intend to retain and pay the mortgage according to the original agreement by the Statement of Intention that is filed in your Chapter 7 bankruptcy case.  So long as you continue to make your mortgage payments on time, your mortgage company cannot sell your home by filing suit to foreclose on the mortgage. 

By not reaffirming on the mortgage in Chapter 7 bankruptcy, the bankruptcy discharge that you receive eliminates your personal liability on your mortgage, even though your mortgage company continues to have a valid lien against your home.  That is because the mortgage attached to your home when you signed the mortgage and it was recorded, and your Chapter 7 bankruptcy discharge does not do away with this lien that your mortgage company has against your home. 

Beware of Mortgage Companies That Suggest You Must Reaffirm Your Mortgage When You File Chapter 7

Many mortgage companies try to convince homeowners that they must reaffirm the mortgage on their homes if they file a Chapter 7 bankruptcy case.  A reaffirmation agreement is a re-commitment of the loan by the homeowner, in which the homeowner agrees that the mortgage is “reaffirmed,” as if the bankruptcy had not taken place; in short, the homeowner is agreeing by signing the reaffirmation agreement to personal liability despite the bankruptcy filing.  These mortgage companies warn the homeowners that they either cannot or will not report to the credit bureaus that the homeowners are current on the payment of their mortgages once they file bankruptcy petitions under Chapter 7.  Although mortgage companies are not required by present law to report that homeowners that remain current on their mortgage payments after they file Chapter 7 bankruptcy petitions, homeowners have the right to report to the credit bureaus that they are indeed current on their mortgage payments.  Proof of payments on a current basis may need to be provided to the credit bureaus to establish that the mortgage payments are indeed current. 

The attempts by these mortgage companies to get homeowners to reaffirm their mortgages in Chapter 7 should cause homeowners to ask why the mortgage companies are so insistent upon reaffirmation of their mortgages?  What is in it for these mortgage companies?  If the homeowner reaffirms the mortgage in Chapter 7, and later on loses a job, suffers a medical crises, or the homeowners that were married go through a divorce, and no longer can make the mortgage payments, the mortgage company can now foreclosure on the home.  If the homeowner had reaffirmed the mortgage during the Chapter 7, and if the sheriff’s sale resulting from the foreclosure does not bring enough sale proceeds to pay the mortgage, the mortgage company obtains a judgment against the homeowner for the difference, called  the deficiency balance, and can use the court system to collect that deficiency balance from the homeowner (by seizing assets or garnishing wages).  If the homeowner has not reaffirmed the mortgage during the homeowner’s Chapter 7 bankruptcy, the mortgage company cannot try to collect that deficiency balance from the homeowner.  Why is this?  Because the personal liability has been discharged in the Chapter 7 bankruptcy. 

If you file a Chapter 7 bankruptcy petition, you must seriously ask whether it is worth the very minor benefit of having your mortgage company continue to report to the credit bureaus that you are current on your mortgage after your bankruptcy case is completed, whereas your mortgage company stands to gain a huge benefit if you cannot make your mortgage payments after your bankruptcy case is completed.  Consider some hard numbers in the following example that will make this point abundantly clear: 

Assume your home is worth $ 100,000, and your mortgage balance is the same $ 100,000 when you file your Chapter 7 bankruptcy petition.  A year later you lose your job, and can no longer make the mortgage payment.  Your mortgage company then files to foreclosure on your home, and eventually the sheriff’s sale brings a sale price of $ 68,000, leaving a deficiency balance of $ 32,000, for purposes of this example.  If you had signed a reaffirmation agreement during your Chapter 7 bankruptcy case, your mortgage company now can try to collect this $ 32,000 from you.  If you did not sign a reaffirmation agreement, your mortgage company cannot legally try to collect this $ 32,000 from you, and is limited to what they received from the sheriff’s sale.  When you also consider that in most cases your mortgage company is the buyer at the sheriff’s sale, it is easy to understand why your mortgage company would try to convince you that you should or must sign a reaffirmation agreement during your Chapter 7 bankruptcy case. 

Although every rule seems to have an exception, I am hard pressed to come up with an exception to this rule.  During the past few years, the economy has greatly reduced property values, perhaps not as great in the Dayton area as others across the country, but still by significant proportions.  A mortgage company suggesting or insisting upon a reaffirmation agreement for a mortgage during a Chapter 7 bankruptcy case is clearly looking after its own financial interests, not yours.

Jerry A. Meadows, Attorney at Law

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