Individuals who file for bankruptcy to seek relief from debt have the option of reaffirming certain debts. In the event that a debtor elects to reaffirm debt, the debtor will continue to be liable for the balance on the respective property. However, the debtor also maintains the right to the property. Debtors generally reaffirm debt in relation to automobiles or real property.
A debtor may file a reaffirmation agreement in the bankruptcy court that allows the debtor to "reaffirm" the debt obligation with a lender. Such an agreement is a legally enforceable contract, and it binds the debtor to the promise to repay all, or part of, the debt. Otherwise, the debt would be subject to a discharge through the bankruptcy proceedings. If a debtor fails to make timely monthly payments toward a mortgage debt, the debtor will once again be subject to foreclosure proceedings. A debtor could continue to make mortgage payments without reaffirming the debt. In this case, the debtor would continue to provide adequate protection for the lender, but there would not be a legally-binding contract between the parties.
The lenders are not under any obligation to compromise with debtors to reaffirm mortgage loans, allowing the debtors to keep their property. This is especially problematic when the lender refuses to send regular statements to debtors after the bankruptcy because the debtor does not know the current state of the mortgage. However, debtors may still be able to keep their property if they continue to make regular monthly payments towards their mortgage throughout bankruptcy. Generally, lenders are more inclined to reaffirm a mortgage and create a binding legal contract because, by doing so, they sustain the right to seek legal relief in the event that debtor fails to make mortgage payments. However, lenders may also be reluctant to reaffirm a mortgage loan with debtors.
For instance, in some jurisdictions, lenders cannot pursue a remaining balance on a property after foreclosure proceedings. Therefore, lenders in those jurisdictions do not want to take the time and resources to complete reaffirmation paperwork because this procedure does not adequately protect the lender's interests. Furthermore, lenders often maintain branches across the nation. In the event that a specific jurisdiction does allow a lender to pursue a balance on a property, it is still overly costly to staff and maintain legal offices across the country to complete reaffirmation paperwork for corresponding lending agreements. However, a debtor may maintain the right to refinance a mortgage in spite of bankruptcy proceedings. In general, lenders are stricter in their refinancing procedures, requiring debtors to show sufficient equity in the property, and a sufficient monthly income to support mortgage payments.
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