Do You Need to Reaffirm a Mortgage if It Is Exempt in Your Bankruptcy Case?

Bankruptcy doesn't always force people from their homes, because the equity they have built in their houses is often exempt from being used to pay their debts. Even if you get to keep your home, though, you'll be faced with the question of whether to "reaffirm" your mortgage -- that is, continue to take personal responsibility for the debt. You may not have to reaffirm, although there are benefits to doing so, and your lender will certainly want you to.

Homestead Exemptions

Home equity poses a special challenge in bankruptcy cases. Equity is the portion of the home that you "own." If you have a house that's worth, say, $200,000, and you owe $125,000 on the mortgage, then you have equity of $75,000. Under normal circumstances, home equity is a good thing, but bankruptcy is not a normal circumstance. Depending on where you live, the more equity you have in your home, the more likely it is that you will have to sell the home and use the proceeds to pay off your creditors. Bankruptcy filers can "protect" a certain amount of home equity through what's called a homestead exemption, but that amount varies widely by state. In Florida and Kansas, for example, all home equity is exempt. In Indiana and Illinois, by contrast, the homestead exemption is less than $50,000.


If your home equity is exempt, you can stay in your home after bankruptcy -- but your mortgage debt doesn't go away. You have to keep making the payments or the lender will foreclose. The question at this point is whether you must "reaffirm" the debt on your home. Reaffirmation of a mortgage is an agreement between you and your lender, in which you both essentially pretend the bankruptcy didn't happen, and the terms and conditions of the mortgage remain unchanged.

Liens vs. Liability

When you go through bankruptcy, one of the final steps in the process involves the court erasing, or "discharging," your personal liability for your debts. Creditors can't come after you to repay a discharged debt, because you're no longer legally responsible for it. Personal liability for mortgage debt can be discharged in bankruptcy -- but the mortgage lender still holds a lien on your home. In other words, the home is still collateral for the unpaid balance on your mortgage. This distinction matters most when the outstanding debt on the home exceeds the value of the home, something that happens when property values fall or homeowners borrow too much against their homes. Say you owe $200,000 on a house that is worth only $180,000. Your lender could seize the home and sell it for $180,000, but that leaves the lender $20,000 short. If you're personally liable for the debt, the lender can try to get that money from you. If you've had liability discharged in a bankruptcy, though, it can't.

To Reaffirm or Not

Reaffirming a mortgage in bankruptcy re-establishes the borrower's personal liability for the entire loan. Lenders, of course, want people in bankruptcy to reaffirm their mortgages because it increases their chances of recovering all the money they're owed. Theoretically, a bank could seize the home of a borrower who refused to reaffirm. But according to bankruptcy attorney Justin Harelik, who writes the "Bankruptcy Adviser" column for, that just doesn't happen. If you keep making the payments, a lender will more than likely let you keep living in the house. Still, lenders try to "encourage" reaffirmation through several means. One is to stop sending you mortgage statements. Another is refuse to report your future payments to credit bureaus, which can make a big dent in your efforts to rebuild your credit after bankruptcy. The rationale behind such tactics is that if you deny your responsibility for the loan, the lender can deny you the services and benefits that come with timely payment. Ultimately, even if you don't have to reaffirm your mortgage, you may choose to do so. Your best bet is to consult with the attorney handling your bankruptcy case.

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