Credit Reports

Everyone should be in the habit of checking their credit reports once per year.  Remember that you are entitled to a free credit report (charges apply for credit scores) once every 12 months from all 3 major credit bureaus by way of annualcreditreport.com.
If you need to dispute errors that you find on your credit report, visit the FTC website here.
If you need information pertaining to your bankruptcy case, including replacement copies of your discharge order or bankruptcy schedules, go here for additional information.

Reaffirmation Agreements That Never Were

Scenario:  John Doe filed Chapter 7 Bankruptcy in 2013, discharging about $60k in unsecured debt while reaffirming on his mortgage and car loan.  He has never missed a payment since his bankruptcy case was filed.  Now, 2 years later, he has pulled his credit report and is dismayed to find out that while his auto loan payments have been reported, his mortgage payments have not.  As a result, his credit score hasn’t improved as much as he would have hoped by now.  He calls his bankruptcy attorney and finds out that while he entered into a reaffirmation agreement on the auto loan, he did not enter into such an agreement on the mortgage.  Instead, he was doing what is referred to as a “ride through” – making payments sans a reaffirmation agreement.
Why is this happening?
To be honest, we’re not really sure.  Last October, after the conclusion of the Annual Bankruptcy Update in Milwaukee, I had a discussion with 7 other attorneys concerning a lender’s requirement to report payments with or without a reaffirmation agreement.
On the one hand, the Fair Credit Reporting Act (FCRA) only requires creditors to make accurate reports to the credit bureaus.  It does not, however, confer an affirmative duty to report at all.  In other words, any creditor can choose to report or not report, but if they do report, those reports must be accurate.
There was nothing in either the FCRA nor the bankruptcy code that any of us were aware of that indicated that lack of a reaffirmation agreement meant that a lender could not report payments, nor that filing a reaffirmation agreement forced a lender to report payments.  (In fact, it is entirely possible that payments might not be reported, even if a reaffirmation agreement is filed.)
It just seems to be “the way it is” – a matter of convention and policy rather than law.  At least one attorney reported being told by a creditor that the creditor’s policy was to not report without a reaffirmation agreement because to do so would be a violation of the discharge injunction.  Not only do we feel that argument is specious, but the inducement that creditors are making (no reaffirmation, no reporting) might itself be the bigger violation of the discharge injunction.
To the best of my knowledge, this has not yet been litigated in this district.
Can a reaffirmation agreement be filed now so that my payments get reported?
No.  At least, not in the Eastern District of Wisconsin.  The judges here (and I imagine in most districts) have a very strict policy that reaffirmation agreements will not be approved if they are entered after the discharge order is issued, and that cases cannot be reopened for this purpose.
Whose fault is this?
Usually, it’s nobody’s fault.  Reaffirmation agreements are voluntary agreements between a debtor and creditor.  A creditor cannot force an unwilling debtor to enter into an agreement, nor can a debtor force an unwilling creditor to enter into an agreement.
Unless someone deliberately obstructed transmission of the agreement, or if the debtor failed to notify the creditor of their intent, or if the creditor simply neglected to draft the agreement – there is no blame.
Why didn’t my bankruptcy attorney draft the reaffirmation agreement?
I have yet to meet a single debtor attorney who drafts reaffirmation agreements.  And I think we all refuse to draft them for the same reasons.  Reaffirmations are agreements between the creditor and debtor.  I’m happy to review the agreement, advise in favor of or against signing the agreement, and signing off on the agreement when appropriate.  But the agreement should still be drafted by one of the parties to the agreement.  And the creditor has access to contractual information (interest rates, maturity dates, current payoff balances, etc.) necessary to properly complete the agreement that the debtors’ attorney may not have access to (at least, not all of the information).
This is the worst thing ever!
Not necessarily.  Reaffirmation agreements turn otherwise dischargeable debts into non-dischargeable debts.  Yes, secured debts like mortgages and auto loans are dischargeable and presumed to be discharged in the absence of a reaffirmation agreement.  One of the nice things about a ride-through is that it allows you to retain your property without assuming the risk of having to pay a deficiency if you ever default and have your property repossessed.
In other words, let’s say a year after you file for bankruptcy, you default on your mortgage payment.  Without the reaffirmation agreement, the lender is only empowered to foreclose the property.  They cannot collect a balance from you.  With the reaffirmation agreement, they can foreclose AND collect a deficiency balance from you.
In fact, the only good reason to sign a reaffirmation agreement is for the credit reporting to help rehabilitate your score.  But there are other ways to rebuild credit.
I still want my payments reported, gosh darn it.
You have a couple of options, but none guaranteed to work.
  1. Talk to the lender.  Ask them to report your payments.  (This works better with smaller local banks and credit unions than it does with the big banks.)  If the creditor failed to provide you with an agreement – tell them that you would have signed the agreement if they had drafted one.  Since they chose not to, it’s hardly fair to punish you for their inaction.
  2. Refinance.  This is going to be difficult without the payment history to help rebuild your credit.  If you’re refinancing with the same lender – many of them refuse to refinance because of the lack of the reaffirmation agreement (which is really stupid, because with the refinance, they have a legal claim to the money; without it, they do not).
  3. Dispute the lack of reporting with the credit bureaus.  This has been suggested by a few attorneys.  Gather evidence of all of your post-petition payments and send them in to TransUnion, Experian, and Equifax.  Explain that your payments haven’t been reported because a reaffirmation agreement was not filed.  The problem with this approach is that – if you’re disputing a credit reporting error – there’s no error to correct.  Again, FCRA only requires that creditors report accurately, it does not require them to report at all.  Even if the credit bureaus do amend your report to show the payments, it still doesn’t mean that your lender will report payments going forward, which means that you will have to continually update the bureaus yourself.

A side-by-side comparison of Chapter 7 and Chapter 13 Bankruptcy.


Chapter 7
Chapter 13
Generally
Liquidation of non-exempt assets, discharge of general unsecured debts.
Reorganization and repayment plan.  Debts split into categories. Some paid in full, others paid a percentage based on income and other factors.
Duration
Time between filing and discharge is approximately 4 months.
Time between filing and discharge is approximately 3-5 years.
Cost
Cheaper
More Expensive
Income
Must be below median or be able to “beat” the Means Test.
Surplus disposable income on either the Means Test or the budget.
Prior Bankruptcy
Ineligible to file if filed a prior Chapter 7 in the last 8 years or a prior Chapter 13 in the last 6 years.
Eligible to file even if not eligible for a discharge. Eligible for discharge 4 years after prior Chapter 7 or 2 years after prior Chapter 13.
Assets
If equity exceeds allowable exemptions, trustee can sell for benefit of unsecured creditors.
Assets are not liquidated, but repayment plan may require a minimum threshold paid to unsecured creditors to make them as whole as they would have been under Chapter 7.
Stay Protections
Both chapters stop collection efforts, lawsuits, wage garnishments, and utility disconnection.
Repossession & Foreclosure
Automatic stay suspends pending actions temporarily, but no adequate protection for arrears.
Arrears are cured. Foreclosure and repossession fully stayed pending successful completion of repayment plan.
Codebtor Stay
No
Yes
Other Issues
Preference payments, insider payments, transfers of assets, excessive gambling losses, and fraudulently incurred debt all pose the risk of adversary proceedings or denials of discharge.
Chapter 13 is sort of a fix-all remedy to anything that might be a problem in Chapter 7. Many issues become non-issues, or are mitigated with a floor amount paid to unsecured creditors spread out over the life of the repayment plan.
Discharge
Non-dischargeable debts simply survive the bankruptcy.
Certain non-dischargeable debts (priority debts, such as taxes and child support) are paid in full.  Other non-dischargeable debts (such as student loans) can be paid down concurrently with unsecured creditors.
Credit
Most people have improved credit scores about 12 months after bankruptcy is filed, assuming they have made payments on surviving debts (e.g. mortgages, car loans, or student loans).
Credit rebuilds a little faster in Chapter 13 than in Chapter 7.

  

Why reaffirm?

I have blogged in the past about why it is critical to disclose all of your debts on your bankruptcy schedules, even ones you don’t want to include or “file against”.  The two main things to take away from that article are:

  • Listing a debt is NOT the same thing as “filing against” or discharging a debt.
  • You have an obligation to disclose all creditors – dischargeable or non-dischargeable, secured or unsecured – as a matter of due process.

So, with that in mind, let’s move on to the topic of reaffirmation agreements.  Again, there are two main points to make in order to understand why a reaffirmation agreement may be necessary.

  • Bankruptcy wipes out debts, but it does not remove liens (with some exceptions).
  • Secured debts are generally dischargeable debts.

All right, so let’s put ourselves in an alternate reality where there is no such thing as a reaffirmation agreement, but all other bankruptcy laws are the same.  You file for bankruptcy and receive a discharge.  The discharge is good against the world.  Therefore, your mortgage and car loan are discharged.  This means that you have no obligation to pay the mortgage company and vehicle lender, and they have no legal right to pursue you for payment.
However, bankruptcy did not wipe out the security interest that existed.  In the absence of payment, the vehicle lender repossesses your car and your mortgage company forecloses on your home.
Enter the reaffirmation agreement.  A reaffirmation is a post-petition affirmation of a debt.  In a way, it converts an existing, pre-petition debt into a post-petition debt, and makes it non-dischargeable under the old bankruptcy.  (It can be discharged in a future bankruptcy, provided that enough years lapse such that you are eligible for a discharge.)
Reaffirmation agreements are voluntary and must be entered into by both parties – the creditor and the debtor.  A debtor who wishes to reaffirm cannot force an unwilling creditor to enter into a reaffirmation agreement.  A creditor who wishes to reaffirm cannot force an unwilling debtor to enter into a reaffirmation agreement.
So, what are some of the advantages and disadvantages to reaffirming?
First, reaffirming a secured debt allows you to keep the collateral so long as you continue to make payments on the loan.  A failure to reaffirm does not necessarily mean that you lose the collateral (you can make payments without a reaffirmation, which we refer to as a “ride through”), but there are some creditors who consider a failure to reaffirm as a default, and sufficient cause to foreclose or repossess.
Second, reaffirming a secured debt is an excellent way to rebuild credit after bankruptcy, because you don’t have to apply for a new loan – it already exists, and the payments you make on it after your case is filed will help boost your credit score.  In the absence of a reaffirmation agreement, however, creditors are not obligated to report your payments to the credit bureaus.
Third, if you file a reaffirmation agreement, but then default on the loan later, the creditor is not only able to repossess or foreclose, but the creditor can also sue you for full payment of the deficiency balance afterward.  Your bankruptcy discharge won’t protect you.  Whereas, if you do not file a reaffirmation agreement, but later default on the loan, you still face the foreclosure or repossession, but won’t be liable for the deficiency.
Here are a few other things to consider when making an informed decision to reaffirm a debt or not…
Creditors are generally under no obligation to repossess or foreclose a property if they do not want to.  Although this is uncommon with real estate and vehicles, if this does happen, you could remain liable for things like property taxes, liability insurance, winterization and heating costs, parking violations, and so forth.  If you cannot get a creditor to physically take the keys to real estate or a vehicle, you probably should not abandon the collateral until they actually come for it.  And don’t just sell the collateral, either.  The lender could come back later for the collateral, and if it isn’t available for collection, you could be assessed criminal penalties.  Property that has a lien on it should never be sold without the lender’s express consent and – ideally – a lien release.
For smaller secured loans (like furniture loans, appliance loans, and jewelry loans), although the creditors have the right to repossess if you default or do not sign the reaffirmation agreement, it is highly unlikely that they actually will.  The costs of repossession almost always outweigh the price the lender will realize at auction.
Creditors who claim to have security in stuff you buy might not necessarily have a valid purchase money security interest (PMSI).  Best Buy is notorious for having very vague security agreements which list as security “all of the debtor’s assets” or “all the debtor’s personal property” or “all items purchased”.  Under Wisconsin law, 409.108(3) of Wisconsin statutes indicates that generic descriptions are okay for finance agreements, but not sufficient for security agreements.  There needs to be some reasonable detail of the collateral.
If you do want to reaffirm, the agreement must be filed with the Bankruptcy Court within 60 days of the date of your 341 hearing (which is when you are scheduled to receive your discharge).  Your case cannot be reopened to get a late-filed reaffirmation approved.  (You can file a motion to delay discharge to allow more time to complete a reaffirmation agreement.  You can also reopen a case to file a reaffirmation agreement after discharge, but the court will not approve it, and at the expense of a $260 filing fee.)
Notwithstanding considerations of positive credit reporting and eliminating the risk of foreclosure and repossession, there are other things you should consider before filing a reaffirmation agreement.  Most notably – can you afford it?  Often overlooked is the budget, but what good is a fresh start in bankruptcy if you’re just going to dig yourself into a new hole with something you cannot afford.  Consider the following factors:
  • What is the monthly payment?  Can I afford to pay it?
  • What is the interest rate?  Could I get a new loan for this sort of collateral at a better rate?  How much of my payment is actually going to the principal balance?
  • What is the term of the loan?  Do I have to make this payment for 6 months or 30 years?
  • How much is the collateral worth?  Does it make sense to pay $20,000 for a car that is worth $6,000?  Might it be cheaper to finance a new car?
  • Is the collateral necessary?  Sure, I love my 72″ plasma television, but is paying $200 a month for it really worth it when I have a wife and two kids to feed?

Reader-Submitted Question

Someone posted a question in the comments section of an old post I wrote in 2009.  It’s an excellent question (and I welcome readers to post questions), and since it’s buried, I decided to re-post it here.
QUESTION:
I had a Chapter 7 discharged in 2009 (in Wisconsin). I recently became aware that my first and second mortgages were on my credit report as “part of the bankruptcy”, though I have always paid on time, before and after the bankruptcy. I was unaware that I needed to sign formal agreements to do so and my attorney did not advise me in this area. I certainly was never presented with the forms, and in fact, the mortgagor says they did not receive any paperwork. It is now too late to do so and, as a result, I am not getting credit for my payments through the credit bureau. When I asked Bank of America why they did not originate a request to reaffirm (which I assume they would rush to do) I was told it would now be easier for them to foreclose on me, should I ever stop making payments. Should I be concerned? What, if anything can i do at this point? Thanks!
ANSWER:
Bankruptcy is good against the world. All of your debts, whether they are listed or unlisted, presumptively dischargeable or non-dischargeable – they are all affected by a bankruptcy filing. In the case of secured loans, bankruptcy eliminates debts, but it does not eliminate liens. Therefore, in having a secured debt discharged in bankruptcy, a secured creditor can still realize their security interests via repossession or foreclosure. This is why – in extremely rare cases – certain vindictive creditors will repossess or foreclose in the absence of a reaffirmation agreement.
Secured debts like mortgages and car loans are actually dischargeable. The reaffirmation agreement is a tool that excepts those debts from discharge and prevents the lender from repossessing or foreclosing unless there is some future default in plan payments. Without the reaffirmation agreement, the debt is technically discharged. With the reaffirmation agreement, the debt survives, and the creditor can collect deficiencies against the debtor in the event of foreclosure or repossession. (Which is why it makes no sense for Bank of America to say it is easier to foreclose – the reaffirmation agreement actually gives them more protection.)
The vast majority of secured creditors will not foreclose or repossess, even if the debtor does not sign a reaffirmation agreement, so long as the debtor continues to make monthly payments. This is called a “ride through”, and it’s a pretty good deal for the debtor, because if they do default in the future, their bankruptcy still protects them from collections.
The downside to the ride through is that the lenders are not required to report payments to the credit bureaus (though some do as a courtesy). And that’s the issue you’re faced with now. Once the case is discharged or closed, the court here in the Eastern District of Wisconsin (other districts may have different policies) will not allow you to reopen the case to file a reaffirmation agreement.I would venture to say that your only two options are to contact Bank of America to see if there is someone you can talk to about having your payments reported or to file a dispute with the credit bureaus (see http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.pdf).
The only other option I can think of is for you to refinance. Get a new company to assume the debt, pay off Bank of America, and then – having a valid new debt with the second creditor – your payments would be reported correctly. Unfortunately, this would be a tough feat to accomplish in this economic environment.
Most of the bankruptcy attorneys I know (myself included) will not initiate drafting of reaffirmation agreements, because the lender is generally in the best position to have the details of the original loan agreement necessary to complete the forms. Also (and I’m just speaking for myself), there is no practical way of tracking whether certain creditors have submitted reaffirmation agreements for our clients (especially since it is not always in our clients’ best interest to file a reaffirmation agreement). However, because of the very issue you’re facing, I’ve made a point of informing my clients about reaffirmation agreements, their consequences (both in signing and not signing one) and what they need to do if the lender does not initiate a reaffirmation agreement. Most secured creditors will submit reaffirmation documents without being prompted.
Unfortunately, I don’t have a good answer for your situation, but I hope – at least – you find the information useful.  Although the lack of credit reporting is unfortunate, I wouldn’t be too concerned about foreclosure.  Just keep making your mortgage payments.  And in the event you do default on your mortgage in the future and the home does foreclose, you can at least rest easy knowing that they can’t come after you for more money.

Bankruptcy MythBusting #10

Myth:  I will never have another credit card again!  I don’t want or need to rebuild my credit.
Fact:  Your credit does more for you than allow you to incur debt.  Although rebuilding credit for that purpose is enough of a reason if you ever hope to buy a home or new car.  But let’s pretend for a moment that you are willing to live in an apartment for the rest of your life and buy beaters with cash, just to avoid going into debt again.  Your credit score is used by more than just lenders, such as prospective employers, insurance underwriters, and prospective landlords.
In a nutshell, you need to be concerned with your credit score (and more importantly, rebuilding your credit score), because it will impact many areas of your life.Credit cards might not be the best way to rebuild credit, but it is faulty logic to believe that credit cards are – in and of themselves – bad.  They are not.  Credit cards can be very useful tools, if used properly.The problem is that too many people use credit cards and loans as a means of supplementing their income.  For example, Bob earns $2k per month, spends $3k/mo, and supplements his income by taking out $1k loans each month.  Bob is living beyond his means.  The proper way for Bob to handle his finances is to either scale back his expenses, find ways to increase his income, or a combination of both.Credit cards are best used as a means of a temporary advance.  Bob spends $2k/mo, and Bob earns $2k/mo, but Bob doesn’t have $2k right this second.  He needs to make a purchase, and will have the money to cover the purchase on a later date.  He puts the purchase on a credit card, and promptly squares his bill when the statement comes in.Of course, budgeting (leaning how to scale back expenses as necessary) and determining what expenses are necessities and what expenses are optional is a whole other topic.  As an experienced bankruptcy attorney, I can help make suggestions for improvements to your budget so that you only have to go through bankruptcy once, and can avoid having to do it again in the future.
If you’d like to schedule a free consultation to determine what we can do for you, give my office a call at (920) 490-6160.

Bankruptcy Mythbusting #3

Myth:  I don’t want to file for bankruptcy because it will damage my credit and I have great credit now.
Fact:  This myth is composed of about one teaspoon of fact and two cups of fiction.  The teaspoon of fact is that yes, your credit will take a hit after you file for bankruptcy.
The first cup of fiction is believing that you have great credit right now.  If a person’s finances have become so distraught that the person has made an appointment with me to discuss bankruptcy, their credit is usually worse than they think it is.  Most people think that their credit rating is based solely on their payment history, and because they are current on all of their bills, they must have excellent credit.
In fact, credit scores are based on several items – only one of which is payment history.  The algorithms for determining credit score are a tightly guarded trade secret held by the credit bureaus, so there are only a few people in the world who know with certainty what affects credit and by how much.  What we know, however, is that your credit score is impacted by:

  • payment history
  • debt to income ratio
  • types of debts
  • number of open accounts open
  • available / unused credit
  • residential and employment stability
  • and much more…

No matter what sort of bankruptcy you’re filing under, bankruptcy is generally a debt to income ratio problem.  Even millionaires can file for bankruptcy.  The issue isn’t how much money you make, but whether that income is sufficient to pay back your debt as it becomes contractually due.
The second cup of fiction is that your credit is ruined forever.  While it is true that the bankruptcy remains on your credit for up to ten years, your credit score can be rehabilitated.  Think of bankruptcy as resetting you to when you turned 18 and had no credit.  You start over from scratch.
If you’re lucky, you will have debts that survive bankruptcy, like a mortgage, car loan, or student loans.  These debts already exist, so you don’t have to reapply for them.  You can continue making payments on these debts and use them to re-establish your credit worthiness.  Filing Chapter 13 can also help rebuild credit a little faster than it would in Chapter 7, because you’re paying back some of your debt, plus the regular plan payments and payments from the trustee help.  If you file under Chapter 7 and don’t have any surviving debts, small secured loans (furniture and appliance loans) are a great way to get back on your feet.
When done correctly, most people have substantially better credit scores about 12 months after filing bankruptcy than they did going in.
Also bear in mind that your bankruptcy will – in some respects – make you less of a credit risk.  People filing for Chapter 7 Bankruptcy can’t get another Chapter 7 discharge for 8 years.  New creditors know that one way or another, they’re going to get paid for the foreseeable future.  Also, with all of your unsecured debt now eliminated, you now have a better debt to income ratio, and presumably, an increased ability to pay back new debt.
An experienced bankruptcy attorney can look over your financial circumstances and give you advice on the best ways to rebuild your credit after bankruptcy before you make any commitments.  Want to find out what bankruptcy could mean for you?  Call (920) 490-6160 now to schedule a free consultation.

How can I repair my credit after bankruptcy?

When it comes to credit after bankruptcy, my clients seem to fall into two categories. The first is the “I’ll never own another credit card so long as I live” person. It’s a poignant cliché, to be sure, but this is the wrong attitude to have. It presumes that the credit card itself is the problem. The problem is that most people do not realize that there is a right way and a wrong way to use credit. Credit can be a useful tool for a variety of reasons (and bear in mind that in today’s world, you need good credit to do much more than just incur debt). Therefore, rebuilding your credit is important. The key to using credit is to use it wisely and responsibly.
If you use a credit card as a temporary substitute for cash, and you have the ability and intent to repay that debt soon after you incur it, then it’s okay to use the credit card. But if you cannot make ends meet from paycheck to paycheck, and you’re relying on payday loans on a weekly basis to put food on the table, then you’re in some real trouble! Do not buy now and worry about paying for it later. Worry about paying for it now. If you do not have a solid game plan before you purchase, you are setting yourself up for failure.
The second category of clients is concerned that their bankruptcy will prevent them from ever getting a new loan. They fear their hopes and dreams of buying a new home are squashed. For these people, arming yourself with knowledge is important. Yes, your credit score will tank immediately after your bankruptcy case is filed. But it will eventually rebound if you go about it the right way.
A common misconception is that your credit score is affected solely based on your repayment history. This isn’t even close to being true. Lenders reviewing your credit application concern themselves with a variety of other criteria, namely your income, your current indebtedness, and the ratio between those two numbers.
In many respects, a bankruptcy can improve your credit-worthiness. You’ve just had thousands of dollars of unsecured debt discharged. With that monkey off your back, you are presumed to have an easier time repaying new debt. If you filed under Chapter 7, you cannot receive a second Chapter 7 discharge for another eight years, giving your creditors plenty of time to collect on your new debts, one way or another.
Be aware of the markets. We are in the midst of a major recession and miserable housing market. People cannot sell their homes for a nickel, it seems. Equally, buyers looking to take advantage of low prices are frustrated because mortgage lenders, experiencing the backlash of the sub-prime market, are extremely reluctant to finance people with even the best credit scores. Your inability to get new credit may have more to do with the markets than it does your bankruptcy.
Many of you will have debts that survive your bankruptcy. You might have student loans, or perhaps you reaffirmed on your mortgage or car loan. These are fantastic because you don’t need approval for the loan – it already exists! These surviving loans will help rebuild your credit rapidly. Utility bills and maintaining a savings account can help too, but they work much slower.The longer you wait after you file bankruptcy before you attempt to get new credit, the easier it will be to find a friendly lender and lower interest rates. It will be tough, though not impossible, when you first emerge out of bankruptcy.
If you don’t have any debts that survive your bankruptcy, I personally recommend small furniture and appliance loans. Most lenders have deals where you pay 0% interest for the first “x” number of months. These deals give you an opportunity to establish a positive credit history without paying for it in interest (presuming you pay the debt off before the 0% interest ends). From there, you can work your way up to bigger and better things.
Building your credit is a process that started when you first became an adult. Filing for bankruptcy was like pressing a giant reset button on your financial life. Don’t expect things to just be handed to you. Rebuilding your credit will require hard work on your part. Have some patience and perseverance, and you will eventually find yourself in a better financial situation.