Reaffirmation

Reaffirmation is a voluntary agreement by a borrower to continue paying a secured debt after bankruptcy, preserving the lender's right to hold the borrower personally liable for the obligation. Without reaffirmation, a Chapter 7 discharge eliminates the borrower's personal liability on the mortgage while the lien against the property survives. With reaffirmation, both the lien and the personal obligation remain fully intact — the borrower is agreeing to treat the debt as though the bankruptcy never happened.

How Reaffirmation Works

When a borrower files Chapter 7 bankruptcy, they must file a Statement of Intention within 30 days, declaring their plan for each secured debt. The three options are:

A reaffirmation agreement must be filed with the bankruptcy court before the discharge is entered. If the borrower is not represented by an attorney, the court must hold a hearing to determine that the reaffirmation does not impose an undue hardship. Courts scrutinize these agreements because reaffirmation re-exposes the borrower to personal liability that the bankruptcy was designed to eliminate.

Why Reaffirmation Matters for Note Investors

Preserving In Personam Rights

The distinction between in rem rights (rights against the property) and in personam rights (rights against the borrower personally) is fundamental. A mortgage lien is an in rem right — it attaches to the property regardless of what happens in bankruptcy. Personal liability on the promissory note is an in personam right — it can be discharged.

Reaffirmation preserves both. This matters because:

• Deficiency rights survive. If the borrower later defaults and the property sells at foreclosure for less than the debt, the investor can pursue the borrower for the remaining balance.
• Collection options remain open. The investor can report to credit bureaus, negotiate workout terms, and use standard collection strategies — none of which are available when personal liability has been discharged.
• Modification leverage improves. A borrower who has reaffirmed the debt has a stronger incentive to engage in loan modification discussions, since they remain personally on the hook.

The Ride-Through Alternative

In many jurisdictions, borrowers choose to ride through — continuing payments without formally reaffirming. This is increasingly common, particularly in circuits where courts discourage mortgage reaffirmation. The ride-through preserves the lien and the borrower's possession of the property, but the investor loses the ability to pursue a deficiency if the borrower eventually stops paying.

For note investors, a ride-through borrower is still a viable asset. The borrower is making payments and has an incentive to protect their home equity. However, the investor should recognize that these borrowers can walk away at any time with no personal financial consequence — a risk factor that should be reflected in the loan's valuation.

Reaffirmation in Practice

Chapter 7 vs. Chapter 13

Reaffirmation applies primarily to Chapter 7 cases. In Chapter 13, the borrower enters a repayment plan that addresses secured debts over a three-to-five-year period. Chapter 13 does not require reaffirmation because the repayment plan itself governs the debt treatment. Chapter 13 also introduces risks not present in Chapter 7, including lien strips and cramdowns that can reduce or eliminate a junior lien entirely.

Timing and Process

The reaffirmation agreement must be executed and filed with the court before the discharge order is entered — typically 60 to 90 days after the 341 Meeting of Creditors. If the window closes without a reaffirmation being filed, the borrower's personal liability is discharged permanently. The lien survives, but the debt becomes non-recourse as a practical matter.

What to Review in PACER

When you identify a borrower in bankruptcy, pull the case docket from PACER and review:

• Statement of Intention — reveals whether the borrower plans to reaffirm, ride through, or surrender
• Reaffirmation agreement (if filed) — confirms the terms and whether the court approved it
• Discharge order — confirms whether the case has closed and personal liability has been eliminated on non-reaffirmed debts

Common Misconceptions

"If the borrower does not reaffirm, I lose my lien." Incorrect. The mortgage lien is an in rem right that survives bankruptcy regardless of reaffirmation. Reaffirmation only preserves personal liability — the lien exists independently.

"Reaffirmation is required for the borrower to keep the property." Not in most jurisdictions. The ride-through option allows borrowers to retain the property by continuing payments without reaffirming. Some courts even discourage mortgage reaffirmation to protect borrowers from re-assuming potentially unaffordable debt.

"A reaffirmed loan is the same as a performing loan." Not necessarily. Reaffirmation restores the legal relationship, but the borrower's financial situation may still be distressed. Monitor payment performance closely after the bankruptcy closes, and be prepared to pursue workout options if payments do not resume consistently.