“I filed bankruptcy a few years ago, but I kept my house and have made my mortgage payments. Why isn’t my good payment history being reported on my credit reports?”
A lot of consumers in Alabama have been noticing an unexpected problem with their credit reports after bankruptcy: their mortgage payments disappear! This is particularly distressing to some people because having gone through bankruptcy, they’re trying to work their way back towards financial stability, and making those mortgage payments on time every month isn’t always easy.
Most of us know that a bankruptcy filing will remain on your credit reports for 10 years from the day you file the petition with the bankruptcy court. That’s damage enough, right? So at the very least, it only seems fair that if you continue paying some of your debts after bankruptcy, you should get credit for that good behavior.
That’s true. But the law is a bit more complicated than that. Whether or not your mortgage payments should be on your credit report depends on several aspects of your bankruptcy proceeding, like what chapter you filed and whether a reaffirmation agreement was signed and approved by the Bankruptcy Court.
A common scenario looks like this: you file Chapter 7 bankruptcy. Your lawyer prepares the petition and does the paperwork, and you go to court for your 341 Meeting. You answer the Trustee’s questions and you are told that you’re free to go. You get your discharge a few months later. As for the mortgage, your lawyer only says: “Just keep making your payments and they can’t take your home.” But you don’t sign anything in writing stating that you’re going to keep paying the mortgage. You just do what your lawyer says and make your payments.
Then, a few months after you’ve gotten your discharge, you notice that all those good, current payments of hard-earned money aren’t even being reported on your credit. And worse, the mortgage that you’re paying every month is reported as having been discharged in bankruptcy! How is that possible? You’re living in the house and paying every month!
Well, it is possible. Because in order for a dischargeable debt to survive a Chapter 7 bankruptcy, you must sign a reaffirmation agreement and file it with the Bankruptcy Court. And the Court must approve the reaffirmation agreement. If you didn’t sign a reaffirmation agreement (or a “Re-Aff,” as we lawyers call it), then the debt is legally considered discharged. Which is both good and bad. It is good because that mortgage company cannot go after you for the money you owe if they end up foreclosing. Normally, if you owe $150,000 on a home mortgage and the home sells at foreclosure for $100,00, then the bank can sue you for that $50,000 deficiency balance. But if you didn’t sign a Re-Aff, you’re off the hook.
The downside is that the bank has a duty to report the real legal situation: that debt was discharged. Furthermore, the Fair Credit Reporting Act does not require any creditor to report positive information. It only prohibits creditors from reporting false negative information.
If that’s the case, then why doesn’t the bank foreclose immediately? Two reasons: First, their mortgage lien cannot be foreclosed unless you default on the contract, and if you never default, then they cannot take your vested interest in your own property. Second, mortgage companies lose money in foreclosures. If you’re paying, they have no reason to foreclose unless you have a LOT of equity in your home. And if you just filed bankruptcy, you probably don’t have much equity in your home.
Why didn’t your lawyer tell you this? I can’t say. Good lawyers explain these sorts of things to their clients. But a lot of bankruptcy lawyers just process their clients through the system as quickly and inexpensively as possible, because they run a volume practice.
If you’re thinking about filing Chapter 7 bankruptcy, then you need to consider the advantages and disadvantages of reaffirmation agreements. If you are fairly certain that you can afford to pay the mortgage and you know for sure that you want to keep that home, then a reaffirmation is probably a good idea, because the positive payment history will help you rebuild your credit faster. But if you’re not sure about keeping the home or your ability to maintain the payments in the future, then you should avoid a reaffirmation.