One of the most difficult concepts for debtors to grasp in Chapter 7 bankruptcy is when they need to sign a reaffirmation in bankruptcy, in particular a mortgage reaffirmation.
If I receive a question on this subject it is usually something like can I keep my house if I dont sign a reaffirmation agreement? However, more often than not, its not a question I receive, but rather a definitive statement such as I want to sign a reaffirmation agreement so I can keep my house. I also get an offspring of that comment, which goes something like this: but I wont own the house anymore if I dont reaffirm the mortgage.
Aside from a rare minority ruling on this subject, the debtor can be assured that he/she does not need to reaffirm the mortgage to stay in the home. What the debtor must do to stay in the home is to continue to pay on the mortgage. However, this is true whether or not the debtor filed bankruptcy or not. The bankruptcy debtor should in fact be well acquainted with this concept, as the foreclosure notice the debtor might have received prior to filing bankruptcy would attest to.
In other words, the debtor who does sign a reaffirmation agreement but continues to fall behind in payments is in a much more grave threat of foreclosure after bankruptcy than the debtor would did not reaffirm, but made timely ongoing mortgage payments since the bankruptcy case was filed. With a signed reaffirmation agreement, the creditor can not only take the house back, but also ding the debtors post bankruptcy credit and pursue the debtor for a deficiency balance.
Touching on another misconception noted above, the title to the property does not change whether the debtor reaffirms or not. Reaffirmation is about the debt, not the title. The debtor will remain on title whether or not the debtor reaffirms, subject of course to any subsequent foreclosure, should it happen.
So are there times when a debtor would want to reaffirm a mortgage? Although I would argue the debtor almost never needs to reaffirm the mortgage, there are times when the debtor can somewhat comfortably reaffirm the mortgage. Where the mortgage payment is reasonable and the debtor has some equity in the home, the debtor might certainly want to reaffirm the mortgage, as timely payments can help rebuild the debtors credit.
However, it is very atypical that the debtor has enough equity to justify reaffirm the mortgage but not such an asset that the debtor is not over his/her allowed exemptions for the property. As such, the problems with reaffirming a mortgage often outweigh the benefits.
Now should the debtor reaffirm a car note? This one is a little different for a variety of reasons and why reaffirm a car note should be much more common than reaffirming a mortgage.
Unlike a home, which is considered real property, a car is personal property. The code is much more clear that personal property liens must be reaffirmed for the debtor to retain the property under federal bankruptcy law. That being said, many states have ipso facto clauses that prevent a creditor from repossessing a car that the debtor is current on payments even in the absence of a note. Additionally, even in states where the creditor can pick up a vehicle in which the debtor is timely on payments due to the fact the debtor did not reaffirm, some car lenders will not pick up the vehicle as long as the debtor continues to make timely payments.
It should be noted that the bankruptcy stay expires as to personal property during a Chapter 7 case, while it never expires as to real property during a Chapter 7 case (unless the lender has won a Motion to Lift Stay). Therefore, a debtor can lose a car during a Chapter 7 bankruptcy without an Order of Lift Stay, whereas the same is not true of a home. That is another reason why a debtor might want to reaffirm a car note in a Chapter 7.
Finally, it is important to remember that one of the primary goals of Chapter 7 bankruptcy for a debtor should be to emerge with as few debts after bankruptcy as possible. Therefore, whereas reaffirm a car note is often for many debtors only obligating themselves to $5,000 or so worth of debt, that makes signing that reaffirmation agreement a lot less risky than reaffirming that $250,000 mortgage.