There is never a good reason to sign a reaffirmation agreement for a debt after filing bankruptcy. This is particularly true when it comes to your mortgage. A reaffirmation agreement is a binding promise to repay a debt after bankruptcy.
You may keep your house, even after filing bankruptcy, as long as you keep your mortgage payments current. But many years later, we hear from too many clients who are falsely told by their mortgage company that they “should have reaffirmed their mortgage.” If your mortgage company will not refinance your home for you, it is because you do not qualify for a loan for some other reason — not because you did not sign a reaffirmation agreement.
A mortgage company may try to induce you to sign a reaffirmation agreement because your payment history will continue to be reported to the credit bureaus after bankruptcy. This is a misleading promise to try and get you to sign a reaffirmation. The truth is that it probably is better for your credit not to sign the reaffirmation agreement, for three reasons:
- By signing the agreement, you substantially increase the debt to income ratio reported to the credit bureaus, which will drag down your credit score.
- Usually, most people will have late payments post-bankruptcy. Those late payments are not reported to the credit bureaus if you did not reaffirm the mortgage.
- By not reaffirming, you are free to make payments whenever you can make them without any negative impact on your credit — so long as you do not miss payments entirely and cause a foreclosure.
In addition, reaffirming a mortgage puts you on the hook for the balance of the mortgage for decades to come, but you do not know what the future holds for you in terms of employment and income. If necessary, you are free to walk away from a mortgage that has not been reaffirmed.
With regard to number 3 above, we do not recommend late payments. Not only does it cost you money, but if you do decide to refinance someday your new lender will probably go back to the old lender and get a copy of your payment history which was not reported on your credit report.
The next time your mortgage company says, “You should have reaffirmed the mortgage,” call their bluff. You know better.