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If you’re underwater on your home and you’re filing Chapter 7 bankruptcy, the bottom line in 99.9% of cases is that you should NOT reaffirm the debt. Following are three reasons why?
3 Reasons Not to Reaffirm Your Mortgage in a Chapter 7 Bankruptcy
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Expose Yourself to Future Financial Risk: If you reaffirm the debt with your mortgage holder, you run the risk of being able to walk away with a clean slate if your finances should change in the future. For example, while you may be able to afford your mortgage payments now, what happens if you or a spouse lose a job, your health suffers or any number of things that can happen.
The whole point of filing Chapter 7 is to be able to walk away free and clear; start with a clean slate so to speak.
You can stay in your home without reaffirming: While your mortgage holder (your bank) can ostensibly foreclose on you, almost none of them will if you remain current with your payments. And in some states/cases, if you don’t reaffirm and stay current with your mortgage payments – even if a lender wanted to foreclose at a future date — they may legally not be able to.
Laws vary from state to state, so be sure to check with a bankruptcy attorney in your state before making any decisions.
The credit conundrum: Many people worry about their credit being hurt if they don’t reaffirm their mortgage debt. The reason is, when you don’t reaffirm, mortgage companies are not required to report your payment history to the credit bureaus. And, they’re not required to provide you with monthly (or any kind of) statement.
So if you’ve made on-time payments, your credit report will most likely not reflect this. When you weigh what reaffirming offers against what it strips you of though, even this is not enough of a reason to reaffirm.
As Americans, we’ve been so brainwashed to be worried about our credit scores that we do stupid stuff (like opening ourselves to future financial risk by hanging onto a home that may be severely underwater), just to say we have “good credit.” More on this in a bit.
What protections do you get when you reaffirm?
What benefits does reaffirmation of your mortgage in Chapter 7 offer?
Basically, it reinstates the debt, which means that your lender can’t foreclose on you (if you remain current) and all of your payments (on-time or late) will be reported to credit bureaus. If you keep a good track record, of course, your credit score will reflect this.
On the other side though, just as on-time payments are reported, so are late payments . And, if you miss a beat, your lender can still foreclose. So the two “protections that reaffirmation offers can so easily be stripped away if you should find yourself in a financial bind in three years, five years or 10 years.
As far as reporting on-time payments to major credit bureaus, you can do this by adding updates like on-time payments to mortgage companies to your credit report by contacting them yourself.
Now, back to this idea of credit being the end all and be all.
What Exactly Is “Good Credit” Good For? What “Benefits” Does It Offer?
It is simply a means to borrow more money; get in more debt. That’s the only thing it’s good for when you boil it down to the basics.
If you already own a home, there’s likely nothing else that you need that you can’t pay cash for. And yes, this means a car. While you may not be able to drive the car you want without taking out a car loan, you can always find a reliable beater that you can pay cash for.
So get out of the mindset of “I must have good credit.” Get IN the mindset of I don’t ever want to use credit — especially if you already own a home.
Sure, if you lose your home and want to get amortgage in a few years, you’re going to have to rebuild your credit. But this can be easily done by getting a few secured credit cards, using them and paying the balances off in a timely manner. Just by doing this, in 12 to 18 months, you can start to rebuild your credit and within 24-36 months have very good credit again if this is really important to you.
But, don’t fall in the credit trap. This is what’s caused most of us to borrow more than we ever should have, live way beyond our means and get inthis financial mess.
So in short, if your home is underwater and you’re filing Chapter 7 bankruptcy, do not reaffirm. If you want to keep your home, simply stay in it and keep sending your on-time mortgage payments to your lender. It’s highly unlikely that they’ll ever foreclose on you.
Again, nothing said here is to be construed as legal advice. Laws vary from state to state, so consult a qualified bankruptcy attorney in your jurisdiction for legal, binding advice.
Do more detailed reading on if you should reaffirm a mortgage while in Chapter 7 bankruptcy.
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Copyright © 2011 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.