Reaffirmation & Credit Scores
There’s a common question amongst my clients. Should I reaffirm my car loan and does it help rebuild my credit after bankruptcy?
Rebuilding credit is very important to all of my clients. We live in a world fueled by debt. It’s the nature of capitalism.
Does that mean I should sign away the benefits of my discharge just to keep a car loan and try to rebuild my credit?
The reaffirmation agreement, or reaff for short, is where you agree to be personally liable after your bankruptcy for the balance of the car loan. If you miss a payment on a reaffirmed loan the lender can repossess the car and then sue you for the difference between what they get at auction and what you actually still owed.
Unfortunately the desire to rebuild credit often overwhelms my clients who are often severely underwater on the car. While this desire certainly exists, the reality of the situation is…
The Reaff has no effect on credit scores
Believe it or not, this has actually been litigated. A woman who had a very modest income had a 40 mile commute to an area with very little in the way of public transit. She wanted to reaffirm her car loan but upon further review of the facts, the judge wanted to look over it themselves. The judge was worried that the reaff was not in the best interest of the debtor.
The woman’s attorney told the judge that the client’s primary concern was rebuilding credit after the bankruptcy and that’s why she wanted to reaffirm.
At the hearing, the judge called in a witness from Wells Fargo who testified that:
“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.”
The expert testified further that the reaffirmation agreement’s impact on the debtor’s credit score would be “none if very low” and could in fact actually lower the consumer’s credit score.
Because of this, the judge disapproved the reaffirmation agreement in this case.
Reaffirmation is risky business
For some people, it makes sense. If you can afford the car, you’re not underwater and the car is in good shape you may want to consider the reaff. The message, however, is quite clear. Reaffirmation isn’t a guaranteed positive on your credit report in your post bankruptcy life.
If you’re looking for information about bankruptcy, call us to schedule a free, no obligation consultation.