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The Soap Box

Better Credit After Bankruptcy: Does Reaffirming A Car Loan Help?

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rebuilding credit

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.

More

What you need to know about reaffirmation

Redemption: the alternative to reaffirmation

Car loans in Chapter 13

Bankruptcy Drives Credit Score Surprise

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credit score increase

Bankruptcy improved my client’s credit score, almost on the spot.

Before bankruptcy, a miserable credit score was no surprise.  My client reported a 498 credit score before he filed.

What was surprising is that, three month after he filed bankruptcy, his score was 614!

That’s a 116 point increase in his score in three months. 

That’s while his bankruptcy case is still active, and long before he gets a Chapter 13 discharge.

So let’s hear no more about bankruptcy always trashing your credit score.

More importantly, let’s stop focusing on credit scores as a measure of financial well being. After all, a credit score only claims to measure the liklihood of your paying back more debt.

Instead, focus on the health of your balance sheet.  And enjoy the peace that comes with reduced debts.

What credit scores measure

Credit reports and credit scores explained

Credit scores are supposed to measure the likelihood that a borrower will repay future credit. Makes sense that lenders would want to measure that.

But credit scores are based on information found in credit reports.  And credit reports are notoriously inaccurate. Twenty five percent of credit reports contain material errors, according to government studies.

Isn’t it ironic that the oh-so-precise number in your credit score is based on bad information?  As we say in number-obsessed Silicon Valley:  garbage in, garbage out.

Misuse of credit scores

As if inaccuracy isn’t bad enough, credit scores are increasingly used for issues far removed from the extension of credit.  Auto insurance rates, utility service,  employers and even immigration decisions are influenced by credit scores.

So questionable information from credit reports invades your life far beyond issues of consumer credit.

And, even worse, in my view, is the commercial exploitation for profit of consumer’s focus on credit scoring.

Credit anxiety is profitable

The widening use of credit scores outside of finance created a entire industry of supplying credit scores, weekly or monthly, to consumers.

Originally credit scores were used by lenders, internally.  But these days, credit card companies, personal finance sites, and even my credit union, try to sell you access to your credit score.

And by the time they’ve convinced the public that their credit score is as vital a measure as blood pressure or body-mass index, lenders and debt collectors can use that belief to demonize bankruptcy.

But, as my client’s experience shows, it just isn’t so.  (And a national study says credit scores trend immediately upward after bankruptcy.)

More

Credit reports heal

The most compelling reason to file bankruptcy

Life after bankruptcy

The Worst Reason To Choose Debt Settlement Over Bankruptcy

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settle or file bankruptcyThe guy with an old debt asked if bankruptcy or debt settlement would cause greater damage to his “credit”.

The money advice columnist gave the right answer to the wrong question.

She got it backwards.

She advised that bankruptcy was more damaging given that the nagging debts were already three years old and would drop off his credit report in four years, whereas bankruptcy would show for seven to ten years from the bankruptcy filing.

Right, assuming that your credit history is the important issue.

But your credit record is a sideshow in life.

Dealing with old debt

I would first challenge the question.

When you look at the alternatives to debts you can’t pay, I think the first concern should be for your balance sheet.

Which of the alternatives makes you better off NOW, not when you want to incur more debt in the future.

For the man writing in about settling a $13,000 debt for $5,000, I would have a series of questions that didn’t center on his ability to get new credit.

  • How old are you?
  • Do you support others?
  • Do you have any emergency savings?
  • How are you doing on retirement savings?
  • Got health insurance?

If he is young, single, and employed with a bit of money in the bank, perhaps paying $5,000 to make eliminate a $13,000 debt is a good deal.

If he’s middle aged, supporting children or aged parents, and living paycheck to paycheck, I would be inclined to suggest there are better uses for $5000.  At the most basic level, put it in an IRA, and your creditors can’t take it.

If he’s approaching retirement and looking at a future of reduced income and with  little need for future credit, chances are that there are crying needs for that $5000 other than dealing with an old debt.

It’s not about the credit score

As you can see,settlement versus  bankruptcy is not just a matter of which impacts your credit record more negatively.

The decision needs to take weigh spending money on old debts when faced with current and future demands on your assets.

It’s all backwards to think that protecting your credit record is the central issue..

More

Credit heals

Better to keep paying or file bankruptcy

Shore up your defenses against debt collectors

Image courtesy of Flickr and Luke Montague. 

 

 

 

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