Restoring credit after bankruptcy

Dear Bankruptcy Adviser,
I have recently filed bankruptcy, but I want to keep 1 of my lines of credit open. I have a balance due, but the account is in good standing. My question is, if I do not reaffirm the debt but continue to make payments, will this help to re-establish my credit?
— Lee

Dear Lee,
It is possible to reaffirm debt that has been discharged in bankruptcy. This would be through a specific, court-approved agreement. A reaffirmation agreement is an agreement by which a bankruptcy debtor becomes legally obligated to pay all or part of an otherwise dischargeable debt.

Reaffirmation agreements are common with auto loans or other secured loans. It is also possible, but not that common, with credit card debts held by credit unions. Credit unions have contacted me asking whether my clients would like to reaffirm the debt in order to maintain their relationship. I provide my clients with the option and let them decide whether the relationship is important enough to voluntarily agree to pay the balance on a debt that has been eliminated in bankruptcy.

In your case, you did not reaffirm the debt and wish to continue paying. Typically, the lender will take your money, but will not report the future payment history to the credit reporting agencies. You will make all the payments, and get no benefit of that payment history.

You also should be leery of paying a creditor after your bankruptcy. I recently saw a case in which a debtor filed bankruptcy, had the debt eliminated and then tried to keep a relationship with one of his pre-bankruptcy creditors. Unlike in your case, this usually occurs when a friend or family member is the lender. The debtor paid on the debt or loan after the bankruptcy was over and missed 1 payment. Thinking that the debt had been eliminated and the obligation to pay was a moral one only, he did not think he had to pay the debt.

However, the debtor got sued, claimed that he did not reaffirm the debt therefore it was eliminated in his bankruptcy. In California, our understanding is that the debt was terminated — even if the debtor did not list it in the schedule of debts. The judge did not agree and gave the creditor a post-bankruptcy judgment on pre-bankruptcy debt. The debtor appealed and lost. It appears he will have to pay this debt back.

The moral of the story is that you should be very careful about reaffirming, or paying debt after your bankruptcy is over. You got your discharge; begin trying to rebuild your credit and stop fretting about past, discharged debts.

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