Most Chapter 7 bankruptcy filers who wish to retain their home believe that reaffirming the debt is advantageous. However, the converse is true after communicating with their bankruptcy attorney. Many Chapter 7 petitioners are advised not to reaffirm their mortgage by their attorneys. The recommendation is based on the fact that the reaffirmation will leave you personally liable for the debt after the bankruptcy discharge has been granted.
The property's upside-down value is an additional reason for not reaffirming the debt. Negative equity or being upside down occurs when the value of the property is less than the amount of the mortgage. During the real estate surge, the majority of purchasers who put little or no money down on a home are currently upside down. These are the two most prevalent explanations for not reaffirming a debt.
What will happen to the home if the debt is not reaffirmed is a common concern among those who are contemplating reaffirming the debt. Fear of losing the property and being compelled to live on the street after the discharge of the bankruptcy is a common misconception among those who choose not to reaffirm. This absolutely is not true. The truth is that if the monthly mortgage payment is sent to the bank, the filer can continue to reside in the home. The filer may elect not to reaffirm, obtain a bankruptcy discharge, and continue to have a place to reside.
Therefore, the issue of why anyone would reaffirm the debt remains unanswered. The reaffirmation may aid the applicant in a different method. Suppose the person who filed for bankruptcy wishes to remain in their home. Through the procedure of reaffirmation, the filer can negotiate a lower interest rate or a reduction in principal. Reducing either the interest rate or the principal balance will decrease the monthly payment. The reaffirmation process can be an effective negotiating instrument for a Chapter 7 bankruptcy filer.
A bank or lending institution would rather have a borrower make a smaller monthly payment than maintain an empty property. In the current housing market of 2013, banks do not want to add another upside-down property to their portfolio. Banks must maintain all vacant properties in their portfolios. The monthly maintenance fees and property preservation costs that banks incur for vacant properties are very costly. If the filer decides to reaffirm the property at a lower interest rate, both parties will benefit.
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