I recently encountered two debtors with a similar problem, but with one crucial distinction.
Both people had filed Chapter 7 bankruptcy within the previous three years and received a discharge. They kept their respective homes despite filing bankruptcy, but both experienced financial difficulty a few years after their filing which led to the bank sending them each a foreclosure notice. Neither of them were interested in keeping their house anymore, and they both said they were interested in completing a short sale to “solve the problem.”
This situation is all too familiar to some bankruptcy debtors, as their initial bankruptcy filing did nothing to reduce their monthly mortgage payment even though they kept their home. But even as both ladies were encountering a similar problem with foreclosure, there was one major difference between the two debtors which led to them taking vastly different approaches to their situation.
One debtor had reaffirmed her mortgage in her Chapter 7 bankruptcy, while one debtor did not reaffirm her mortgage. Although truth be told, neither debtor was sure whether they actually did reaffirm their mortgage, and I pulled their respective case dockets online to reveal the answer.
Think the decision to reaffirm is not a big one that should not be taken lightly? Consider that the debtor who did not reaffirm did not “need” to complete a short sale to absolve herself of the bank pursuing a deficiency, since her personal liability was extinguished in her Chapter 7 bankruptcy discharge.
Unfortunately for the other debtor, she continued to place herself on the hook for personal liability related to the mortgage even after her discharge, since by reaffirming the mortgage, she voluntarily allowed that mortgage to not be among her discharged debts. This meant that she now was either going to have a short sale or foreclosure on her record, was going to continue to harm her credit by these post-bankruptcy missed payments, and more importantly, was running the risk of the bank pursuing her after foreclosure for a deficiency.
These examples illustrate the point that reaffirming real estate is always a shaky proposition at best, particularly if there is no equity. Unfortunately most debtors do not realize that it is a myth to think they cannot keep their home if they file bankruptcy or if they do not reaffirm their mortgage in the bankruptcy.
Finally, it is important to note that if you find yourself in a similar situation as either of the above-described debtors that you must check your case docket. You might not remember exactly what happened in your case, and it’s always important to review the official case docket to determine what transpired in your case. As these fact patterns revealed, the proper approach for both debtors could not be known until the case docket was reviewed.