Bankruptcy: Reaffirmation vs loan modification

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By: NathanielCopeland
on 5th Jun,2013

Owning a house usually means that you would have to take up a mortgage which is a debt in itself.
Bankruptcy: Reaffirmation vs loan modification

The sub-prime mortgage crisis of 2008 left thousands homeless as the housing bubble burst, taking the economy down with it. There were multiple reasons as to why the markets crashed and millions lost their jobs but the hard fact of the matter is that Americans all over the country were rendered homeless Over the last few years the economy has been recovering slowly but in the current scenario many homeowners continue to face tough financial situations and at one point they have no other options left but to file bankruptcy.

What is reaffirmation?

For a homeowner, bankruptcy generally means that he or she would have to surrender most of his/her assets so as to get out of debt. Owning a house usually means that you would have to take up a mortgage which is a debt in itself. In order to retain their homes, people filing for bankruptcy resort to reaffirming the debt.


A reaffirmation is nothing more than a contract between the lender and the homeowner filing for bankruptcy wherein the homeowner agrees and is legally bound to repay all or at least a part of the mortgage debt which would have been otherwise discharged via the bankruptcy process. Signing on the reaffirmation contract generally means that you, as a homeowner will have to assume a significant personal liability in case you lose the house to foreclosure.

Why consider loan modification?

Mortgage lenders generally do not allow homeowners who have gone delinquent with their monthly payments to reaffirm their debt in case they are filing for bankruptcy. There are also cases in which lenders have agreed to reaffirm after the delinquent balance has been attached to the whole of the actual loan balance. In case the lender refuses to do so, the only remaining option is to go in for loan modification through which the delinquent balance is attached to the loan balance after the modification has been approved.

Many homeowners file for bankruptcy while they are significantly behind on their mortgage payment. In most cases, borrowers go in for loan modification during or after the bankruptcy process concludes. There are also a few cases in which borrowers are delinquent for a shorter period of time, usually starting before and continuing a little after the bankruptcy process. Going by the laid down rules, most lenders will never allow this but as is the case, it does happen that homeowners continue to stay in the homes all through this time. There are many reasons as to why this happens:

    Lenders base their decision on the level of delinquency. The more payments a homeowner has missed, the  greater the chances of foreclosure are.

    How far the upside down mortgage is as compared to the actual value of the property in question

    The number of foreclosures in the same area

    The lender sees the homeowner making an effort to catch up with the payments and is doing so at a pace.

The moot point is that lenders are more interested in getting repaid than in foreclosing a home whose owner has filed for bankruptcy. One a homeowner files for bankruptcy, a lenders stance on how the mortgage and the property securing it is going to be handled. Some lenders will continue to let homeowners retain the home as long as they are making payments and the delinquency is manageable. Some lenders stop accepting payments the moment bankruptcy is filed and there are no other options but to contact the lender and start working towards modifying the loan.

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