When filing a Chapter 7 petition for bankruptcy, you can include reaffirmations of secured loans. These would typically involve your home and your motor vehicle. Reaffirmation is a process that advises the court that you are maintaining full responsibility for the loan, and that it isn’t to be included in the bankruptcy process. There are some real dangers in reaffirming these loans, particularly after the bankruptcy process has been completed.
Filing for bankruptcy automatically triggers an event known as a stay. A stay is a legal requirement that prevents all creditors from taking any further action – this includes lenders that own your mortgage. Once your bankruptcy petition has been discharged, that stay is lifted, and a lender is free to continue on with foreclosure action. Under the Bankruptcy Act, lenders cannot sue for the outstanding balance after a home is foreclosed and sold – that difference is automatically discharged.
The one exception to that rule is when a petitioner has reaffirmed a loan. As mentioned, reaffirmation removes that debt from the bankruptcy process, so if the home is foreclosed post-bankruptcy, the lender is free to sue the outstanding balance. In most cases, reaffirmation protects the lender, not the borrower. The only exception to this is if the lender agrees to modify the loan in any way. In that case, the new terms should favor the borrower, however, a borrower should not agree to a modified loan unless they are sure they can maintain the new mortgage schedule.
Before reaffirming a loan, you should first seek the advice of a bankruptcy attorney. They will determine if the reaffirmation is really in your best interests, both short and long term. While the reaffirmation may feel like the right thing to do now, you also need to look at the longer term effect.
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