Does Paying Off Reaffirmed Debt Help Rebuild the Debtor’s Credit Score?
Updated: Mar 19
A debtor may have several reasons for signing a reaffirmation agreement. Two of the most common are: (1) the debtor believes she can rebuild post-bankruptcy credit by paying off the reaffirmed debt in full; and (2) the creditor requested the debtor sign one and the debtor feels it has no other choice but to do so because the car is necessary to get to/from work.
For years, debtors and their counsel have largely operated on the assumption that debt service payments on reaffirmed debt can be a great way to boost a creditor’s FICO score. Judge Mann tested this theory in In re Anzaldo, 612 B.R. 205 (Bankr. S.D. Cal. 2020). A copy of that decision can be read here).
In Anzaldo, the bankruptcy court issued an Order to Show Cause (OSC) for Wells Fargo to appear before the Court to provide evidence on the issue (it also appeared Wells Fargo may have been pressuring the debtor into signing a reaffirmation agreement). The debtor had been a janitor at UCSD struggling to pay her necessary daily expenses and relying on her car to commute 40 miles to work each day. The debtor was underwater on her car loan to Wells Fargo. The debtor stated she wanted to reaffirm the debt because Wells Fargo wanted her to, she needed to use her car for work, and she wished to rebuild her credit.
First, WF responded to the OSC averring it does not repossess a debtor's car if the payments are current, regardless of whether the debt is reaffirmed. Id. 612 B.R. at 211-12.
At the OSC, the court heard from Wells Fargo personnel and their credit reporting expert, Dean Binder, who has been employed by both Equifax Credit Information Services and by the Fair Isaac Corporation, who compiles and provides "FICO" credit scores, widely used in the consumer credit and lending environment.
According to Binder:
“The reporting of positive payment history on an account that has a discharged in bankruptcy indicator would not be beneficial for a consumer from a scoring perspective…. An account included in bankruptcy is considered a major derogatory by FICO. As such, any positive payment history would not be evaluated by the scoring model.” Anzaldo, 612 B.R. at 212.
Judge Mann likely also issued the OSC as a benefit to the consumer bankruptcy bar to properly advise consumer debtors as it relates to reaffirmation agreements. The evidence presented was telling, and is instructive for all jurisdictions. Not only do we now know reaffirmation payments have little effect on credit scores, but WF has showed its cards when it comes to demanding reaffirmation agreements. Often, if not invariably, creditors seeking a reaffirmation agreement couple their request with a threat to repossess the vehicle (even if the debtor remains current) if no such agreement is signed. Given what's at stake debtors have no choice assume these threats will be carried out.