Credit scores after bankruptcy with a mortgage “included in bankruptcy” and with a balance

I just saw a very interesting post by bankruptcy attorney L. Jed Berliner, Springfield, MA.  Apparently his client continued to pay the mortgage after a Ch. 7, but 4 years later she was declined by her credit union for a loan to pay for a new roof because she had not re-established credit.

From attorney Berliner’s Credit Report After Bankruptcy

…. She and I had agreed that it did not make sense to incur unnecessary debt after her bankruptcy and then pay it off solely for credit reporting reasons.  I always give that advice because the largest factor in credit scoring is the passage of time after the last negative entry, the bankruptcy.  She did not want to risk incurring debt she might not be able to repay due to unforeseen future circumstances.

Re-establishing credit does NOT mean incurring new debt!   I ALWAYS recommend to first of all try to NOT discharge old accounts with SMALL balances as they can easily be worth 50+ FICO points.

If that’s not an option, you MUST MUST MUST!!!! open a new credit card ASAP.    Don’t get one of those crappy cards with monthly fees and atrocious terms and you do NOT need a secured account.  Most after bk applicants can get $500 limits for decent cards with cash back and a $39 annual fee.

Opening a credit cards account is NOT incurring new debt — unlike getting a $20k car loan.

You use the card to pay for food or fuel or whatever expenses you have and then you pay it off in full every month.  You can easily get enough cash back to cover the annual fee, so there is absolutely NO expense associated with it.

HISTORY is MOST important for credit scores as well as manual underwriting!

The sooner you re-establish revolving credit, the higher your score will be essentially forever.  As your old accounts get removed from your credit because they were closed or discharged, the accounts you open after the discharge will be your ONLY credit history unless you have mortgages, student loans, etc.

And that is where it gets complicated.  From attorney Berliner’s post:

I advised her to get a payment history from her mortgage lender to show the credit union that she was responsibly paying despite the bankruptcy.  Oddly, the credit union did not ask for that.

This goes to show that many credit unions operate like commercial  banks and are unwilling to treat their members with the respect they deserve.  I wish he’d identified this credit union so that others can avoid it.

I then advised her on how to dispute the absence of her payment history on her credit reports.  Remember, those reports must be accurate.  They contain payment history information as well as balance owed information.

The dispute should lead to an accurate report of her payment history, either the easy way by the creditor not responding to the dispute or by a, ah, confrontation with the misreporting creditor.

All in all, a good day’s work and a happy client.

I don’t see any reason for happiness yet.

ALWAYS await the results of your disputes before you celebrate.

The dispute results could be:

  • The account is DELETED. Ouch.
  • The mortgage is updated with the current balance and payment history and it still contains the “included in bankruptcy” or similar reference to the bankruptcy.  Double OUCH!

    FICO scores will be LOWERED as now the MOST RECENT derogatory (the bankruptcy) occurred this month or last month.   Unfortunately, none of the credit bureaus associate DATES with the reporting of derogatory remarks or comments.  This is also a potential problem with reaffirmations because the reporting of “reaffirmed” is rated for FICO scores as DEROGATORY and the scores will likely drop to the 500s.

  • The lender verifies with NO changes.
  • The mortgage is reported with the current payment history and WITHOUT any reference to the bankruptcy.  Now it’s time to open the champagne!   But keep in mind that they could change the reporting ANY time for no reason.

Of course the lender could also change, add or delete other data. In my experience, chances of reporting of the after bk payment history without reference to the bk are small. 

It rarely happens.

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