Should you re-affirm a mortgage or simply stay-and-pay?

Many if not most homeowners who have to file for bankruptcy would like to stay in their homes, if possible. Sometimes staying put is even the primary, or only, reason for filing the case in the first place.

If a homeowner is current on their mortgage, keeping the house will not be a problem. One issue that often does arise, however, is whether the homeowner should sign a “reaffirmation agreement” with their lender as part of the process.

Most consumer bankruptcy attorney advise against signing these agreements, because they recreate a personal obligation to pay the debt, which is exactly what the bankruptcy filing just wiped out.

Instead, a better option for most folks is what in legal slang we call a “stay-and-pay” — you stay in the house, you make your payments on time, the lender cashes your checks and doesn’t foreclose. You could think of it like a truce: everyone tacitly agrees to the status quo, and pretends that a bankruptcy just never happened. (Of course, if you start missing payments, the lender has the right to start foreclosure proceedings, just like always, at least after the bankruptcy case is closed.)

Are there any possible downsides to the stay-and-pay arrangement? Well, you probably won’t get much of a boost to your post-bankruptcy credit rating, because the lenders aren’t going to report these payments to credit reporting agencies in either a positive or negative way.

Second, some people just plain prefer the security of having a formal agreement with their mortgage holder, even if it is a disadvantage to them. Since a lender could technically accelerate a loan based on the bankruptcy, some people might not sleep at night worrying about this possibility. It doesn’t happen very often though — as long as you keep making timely payments, most lenders will be quite happy to have your checks coming in, especially in the current economic climate.

In my view, the stay-and-pay advantages (primarily that you are not legally obligated for the entire mortgage balance) vastly outweighs the drawbacks for most homeowners who file a Chapter 7 case.


By Doug Beaton

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