Where ever they are getting this advice it is wrong. If you can no longer afford to make the payments on your home, filing for bankruptcy will not save your home. The mortgage company as a security interest in your home, if you don’t pay for, they get a foreclosure to get the security interest back and sell it to someone else. A Chapter 7 bankruptcy will discharge any liability you owe to the mortgage company but if you want to keep your home you must continue making the payments and reaffirm the debt.
Recently, the Senate voted on Senate Bill 61, the bill which would allow homeowners, consumers, and everyday Americans, to modify the residential mortgages and bankruptcy. This bill had been debated over an eight month period of time, mostly during the presidential elections. The Senate, in a vote of 45 to 51, rejected the Helping Families Save Their Homes Act of 2009. Other types of origins can be modified in bankruptcy and other types of loans can also be modified. If the debtor is an investor with business properties, the mortgage can be modified. But the everyday homeowner who is now facing adjustable rate mortgage rate hikes in decreasing property values, that everyday homeowner is stuck with paying the mortgage as is, or giving up their residence.
Prior to the new bankruptcy code in 2005, in most restrictions, debtors were not required to reaffirm secured debts. In fact, many debtors’ lawyers specifically did not enter into reaffirmations as a matter of practice because not reaffirming provided extra protection to their clients.
When you reaffirm a debt in Chapter 7, you essentially make that debt permanent, and you eliminate bankruptcy protection. In the case of the mortgage debt, if you reaffirm, you reassume personal liability for your mortgage obligation. By contrast, if you do not reaffirm, you have no personal liability to pay that mortgage, although the lender still has a valid lien against the property. If you do not reaffirm the debt and later decide to walk away from the property, or the property is destroyed by flood or fire, you have no personal liability on the debt.
With the new bankruptcy law, a debtor must make a choice, either to reaffirm or to surrender, and if you do not make a choice, the default is to surrender the property. But in pre-BAPC PA filings, you did not have to make a choice. In many of these cases, lenders were happy to have the payments and debtors regularly retained possession of their homes without reaffirming any personal liability there to. The primary downside to retaining possession without reaffirming when you File Chapter 7 bankruptcy was to a debtor’s credit. Since there was no reaffirmation of the personal liability, your credit would not reflect that you did, in fact, make your regular payments.
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