You file a bankruptcy case and receive your discharge of debts.
You are keeping your house and cars and continue making the payments on time.
You assume this will help you rebuild your credit.
But none of those payments shows up on your credit report.
Why not?
The most common reason given is that since the debt was discharged in bankruptcy, they cannot report voluntary payments being made on the loan.
Let me explain this issue a bit further before getting to the solution.
Secured Debts Are Discharged In Bankruptcy, But Liens Remain
When a bankruptcy discharge is “granted”, the legal obligation to pay on debts which were discharged is removed.
With me so far?
This includes secured debts such as car loans and mortgage payments.
The lien that these lenders have remain against their collateral, so you must continue making payments if you want to keep the car or real estate.
But the payments are technically voluntary, because you could walk away and not have to pay anything. (But if you did that, the lenders are entitled to repossess or foreclose. See my article on secured debts and liens in bankruptcy)
The only time a discharged debt is not discharged, is if you enter into what is called a “reaffirmation agreement” prior to the entry of discharge in your case.
Reaffirming a debt means you have to pay it, despite getting a discharge, and you are obligated for the total balance owed as if you never filed bankruptcy.
There Is No Reason To Reaffirm A Mortgage Debt In California
Reaffirming a secured debt usually only makes sense if the creditor can legally repossess or foreclose on your property in the absence of a reaffirmation agreement after a bankruptcy.
For real estate in California, mortgage creditors do not have the right to foreclose unless payments are missed pursuant to the Promissory Note and Deed of Trust.
So, as long as one is current with payments, there is no need to reaffirm the debt.
In fact, reaffirming the debt on some junior or refinanced mortgages could result in you owing the full amount later on in the event you miss payments and the property is later foreclosed on.
So it’s not a good idea to reaffirm.
But this is where the problem arises.
Mortgage companies and other creditors often refuse to report the on-time payments after a bankruptcy case, unless the debtor enters into a reaffirmation agreement.
To make matters possibly worse, this usually isn’t discovered until after the bankruptcy case is over, when it is too late to reaffirm anyway.
Some Vehicle Debts Need to Be Reaffirmed
Vehicle debts are a little different than mortgage debts in bankruptcy.
Technically if you do not reaffirm a debt secured by your vehicle the lender may be able to repossess your vehicle even if you remain current on your payments.
Fortunately, most do not do this.
Follow your attorney’s advice in your specific case on whether you should reaffirm (typically those requiring reaffirmations are credit unions, Ford Motor Credit, and Chrysler).
But if you do not reaffirm, and choose to maintain your payments with them, you need to ensure you are getting property credit for doing so on time.
How do you do this?[pullquote]See when to get a new credit card after bankruptcy[/pullquote]
Self-Reporting Options
The solution to the refusal of creditors to report your payments to credit agencies is not to reaffirm the debt in bankruptcy (at least not for mortgage debts), but rather to report the payments yourself!
Fortunately, this is fairly easy and there are services that will do it for you automatically, such as Experian or Ultra Fico.
You can Google “self report credit” and find others.
Doing this basically eliminates any downside to not reaffirming a mortgage debt in bankruptcy, as well as for vehicle debts you choose not to reaffirm.
Ideally you should discuss all this with your bankruptcy attorney before filing your case.
But in case you didn’t, hopefully this gives you a solution.
Image Courtesy of Trinity Credit Services
