One reason to file bankruptcy is to get back to good credit. Once your credit has gone bad, bankruptcy, for most people, is the fastest way to fix it. I encourage all my clients to rebuild your credit after bankruptcy.
So you may be disappointed, and even angry, about how the credit bureaus handle your mortgage payments. Making your after-bankruptcy mortgage payments on time doesn’t help your credit score one bit. Those payments don’t show at all.
Instead your mortgage will just show “included in bankruptcy.”
“Hold on” people say, “I didn’t include my mortgage.”
Actually you did. When you file bankruptcy, you “include” everything. That’s the law. You pick and chose what debts you want to keep paying–keep paying the house if you want to live there; keep paying the car if you need it to get to work. But you don’t pick and chose what debts are covered.
(The bankruptcy covers–discharges–your credit cards, medical bills, debt collectors, bank loans, car payments, mortgages. It doesn’t discharge student loans, most taxes, child support or alimony.)
Even if you are keeping the house, the discharge is an important benefit to you. If real estate values don’t recover–or drop again–and you can’t sell the house when you are ready to move, you are still protected. You can move out and not owe them anything. (Remember though to pay your home owners association!) Also, after bankruptcy late payments don’t count against your after bankruptcy credit.
If you complain to the mortgage company about your credit report, they will tell you that “you should have reaffirmed your mortgage.” Reaffirming takes the house out of the bankruptcy.
Is reaffirming a benefit to you? Maybe you get back to good credit a month or two sooner than you would just be getting and paying new credit cards. The disadvantage? If you can’t pay or can’t sell the house, you get garnished for up to eight years.
That disadvantage is lots bigger than the benefit.
If the credit bureaus worked for you and me, rather than the creditors, we’d set it up something like this. The credit bureaus would report your house payments as long as you are current, but they come off if you get behind. Sorry, but we don’t have that choice.
After bankruptcy mortgage payments–current or late–don’t show on your credit. That’s just the way it is.
(The same rule applies on car payments.)