Archive for the ‘Reaffirmation Agreements’ Category

How Do You Rebuild Credit After Bankruptcy?

This is probably one of the most common questions I get in my practice. People want to know whether or not a bankruptcy will permanently destroy your credit score and whether or not you’ll ever be able to get a credit card, a mortgage or a car loan after filing bankruptcy. The answer to that question is that you will be able to do all of these things as long as you take care to properly rebuild your credit.

Your Credit Score After Bankruptcy

For a large percentage of my clients (probably around 80%), their credit scores usually increase after they have received their bankruptcy discharge. To understand why, You first need to understand how credit scores work. A FICO Credit score is essentially an algorithm that takes into account multiple factors which determine your credit worthiness, and your ability to repay. Some of the factors that are taken into account are: payment history, lawsuits, accounts in collections, average payment amount, length of credit history, and other factors. Now, a large percentage of individuals who end up filing bankruptcy will usually already have late payments reporting on their credit as well as accounts in collections. This usually hurts your score. Now the reason that I say a large percentage of credit scores increase after bankruptcy discharge is because the discharge removes all of these items from your report. Your late payments are no longer reporting as late, and the collection accounts are removed. A bankruptcy will typically lower your credit score 100 points for a period of around 10 years, but that’s from the maximum score of 850. Once the late accounts are taken off after you have completed your bankruptcy this increases your score exponentially. I have had clients who had pre-negotiated the purchase of a car and were merely waiting on their discharge order to go and pick up the car. Lenders see you as less of a payment risk if you’ve discharged your credit card debt, they are happy to lend to someone with a stable income, and no debt.

Repairing Credit After Bankruptcy

The first thing I usually suggest is to get a credit card, and usually a secured credit card. You want something that will report on time payments to the credit bureaus. A secured credit card is basically a card where you put down a deposit to the card, and your credit limit is usually equivalent to the deposit. That way, if you miss a payment it is taken out of the deposit, its less of a risk for a lender. I have also read that if you are added as an authorized user on someone else’s credit card, then that can also report on time payments. Make sure that it will actually be reported, otherwise it won’t help. Another way to rebuild credit is to get a secured loan, usually a vehicle loan. As discussed above it is fairly easy to get a car loan these days, just make sure the interest rate is fair. And finally, a reaffirmed debt within your bankruptcy will also report on your credit, when on time payments are made. As I have said in other posts, reaffirmation is not usually a good idea, too much can go wrong, but this is the ONLY instance where it may make sense.

If you have questions about the bankruptcy process please contact Steven J. Grace at 312-493-6912 for a free phone consultation.

Should I Sign A Reaffirmation Agreement in a Chapter 7?

The answer to this question is generally no. In order to understand why, you need to understand the underlying reasons. A Chapter 7 bankruptcy is called a “Fresh Start” bankruptcy because 120 days after filing a debtor will get their discharge if all goes as planned. This means creditors can no longer garnish wages, or freeze bank accounts. Thus, the personal liability you had to your creditors has been discharged. This doesn’t mean that a creditor can’t take collection activities against collateral, such as vehicles and real estate.

What is a Reaffirmation Agreement?

A reaffirmation agreement is simply a replacement contract that is executed during a bankruptcy. As mentioned above, a Chapter 7 will basically void all of the contracts you have in place with creditors. This could mean credit card agreements, mortgage notes, car notes, etc. Thus, you no longer have to personally pay on these debts, but as I mentioned above the creditor can still repossess the security or collateral. What a reaffirmation agreement does, is it replaces the contract that was voided by the Chapter 7 discharge and puts you back on the hook personally for all the debts you owed prior to the bankruptcy. This means that a creditor can now take money from you personally, either from a wage garnishment or a bank account levy, instead of just repossessing certain collateral.

So Does it Ever Make Sense to Sign a Reaffirmation Agreement?

I have seen only a few instances where it made sense to sign a reaffirmation agreement. In one instance a Mortgage Company, Wells Fargo actually, offered to bring my client current on his mortgage in a Reaffirmation Agreement. My Client was already behind on his mortgage by a few years and within the bankruptcy we were able to bring him current. This bypassed the loan modification process and we were able to essentially modify the loan simply and inexpensively. Another instance is where the lender lowers the interest rate in the Reaffirmation Agreement. If a lender is giving you a better rate in the agreement, and you intend to keep the asset (home or car) then this might make sense because it will save you money. But I’d also make sure that there are no expensive repairs that are foreseeable, because if you reaffirm, the minute you do you’re back on the hook even if the car breaks down or the house sinks into the ground. So as a rule of thumb, reaffirmation agreements are a bad deal for debtors, UNLESS you are getting something back in return. Never reaffirm at the exact same terms you had prior to bankruptcy, it makes no sense. I had one instance where a Client wished to take her vehicle to Puerto Rico from the US and the lender refused to let her because she didn’t reaffirm. Thats the one instance where I’ve seen it come back to bite someone, once! Even if you wish to keep property, don’t reaffirm and just keep paying the bills as agreed, you will still get title upon completion, and won’t incur any additional personal risk. Be smart!

If you or someone you know is considering a Chapter 7 Bankruptcy in Chicago or even Illinois, call 312-493-6912 for a free confidential phone consultation with experienced bankruptcy attorney Steven J. Grace.

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At The Law Offices of Steven J. Grace, based in Chicago, Illinois, we represent clients throughout Chicagoland, including the cities of Deerfield, Jefferson Park, Lisle, Northbrook, Oak Brook, Park Ridge, Schaumburg, St. Charles and Warrenville; and other communities in Cook County, Dupage County, Will County, Grundy County, Kendall County, Kane County, LaSalle County and Lake County.