Does reaffirming a car loan after bankruptcy help rebuild your credit? Rebuilding credit is the motivation that drives lots of debtors to waive the benefits of their discharge as to a car loan.
A reaffirmation agreement has the debtor agreeing to be personally liable after the bankruptcy discharge for the car loan balance. Miss payments on a reaffirmed loan, and the lender can not only repossess the car, but can sue the borrower for the difference between the auction value of the car and the contractual balance on the loan.
When it comes to reaffirming a car loan, it doesn’t seem to matter how underwater the car is. The desire to build a better credit score overwhelms the economics of the deal.
Reaffirming has no effect on credit score
But, it turns out, reaffirming a car loan after a Chapter 7 bankruptcy has little or no effect on the debtor’s post bankruptcy credit score. That was the conclusion of the judge in Anzaldo ( 612 B.R. 205 (Bankr. S.D. Cal. 2020) after she heard testimony from the lender bank and credit experts.
Ms Anzaldo made a very modest income . She commuted 40 miles to her job as a custodian in an area where there is little public transportation. When she filed the proposed reaffirmation agreement, the court scheduled a hearing to consider the agreement. The judge had of concern that the numbers didn’t show that reaffirmation was in her best interest.
Her attorney told the court that rebuilding her credit was one reason she wanted to reaffirm the car loan.
At the court hearing, the expert that the lender Wells Fargo called to support the reaffirmation of the reaffirmation agreement testified:
The reporting of positive payment history on an account that has a discharged in bankruptcy indicator would not be beneficial for a consumer from a scoring perspective.
He explained this is because:
An account included in bankruptcy is considered a major derogatory by FICO. As such, any positive payment history would not be evaluated by the scoring model.
In fact, the expert continued that the impact of entering into the reaffirmation agreement on a debtor’s credit score is “none if very low.” Binder also noted that entering into a reaffirmation agreement and having payments reported could also backfire because reporting newer negative late payment information would lower the consumer’s credit score.
The judge disapproved the reaffirmation agreement, in part based on Wells Fargo’s representation that it did not repossess cars after bankruptcy so long as the payments remained current. (Other car lenders, notably Ford, treat the bankruptcy filing alone as a default entitling them to repossess.)
Reaffirmation is tricky
To her credit, Judge Mann recognized the complexity of the reaffirmation decision and the difficulty that debtors’ counsel have in predicting the credit score impact of reaffirmation.
She didn’t discuss the cost to the debtor of replacing a car repossessed after bankruptcy and noted that Ms. Anzaldo would be in peril if Wells Fargo changed its policy of not automatically repossessing the cars of bankruptcy debtors.
But the message of this case is clear: reaffirmation does not assure a positive impact on the debtor’s post bankruptcy credit score.