HORRIBLE post by bankruptcy attorney Andy Miofsky about after bankruptcy mortgage credit reporting

Often the posts at the Bankruptcy Law Network (a promotional blog for bankruptcy attorneys nationwide) are quite informative — or so I thought.  After reading “Top 3 Reasons Not To Reaffirm a Mortgage in Bankruptcy” I’m wondering about the quality of the other information at this blog.

As so often, bankruptcy lawyers spew loads of FALSE information about credit reporting and credit scores and this article by Andy Miofsky, Illinois Bankruptcy Attorney, is especially offensive.

Contrary to attorney Miofsky’s claim, reaffirmation will NOT necessarily result in the reporting of the account as positive.

I documented in 2002 that FICO scores rate the reporting of the reaffirmation as a HIGHLY DEROGATORY remark.   

It is possible that myFICO’s formula changed, but I have seen no evidence of any change.

From attorney Andy Miofsky’s post at the Bankruptcy Law Network:

In practice, mortgage companies dangle the prospect of reporting future good payment history to credit bureaus as a way for bankruptcy debtors to improve the credit score.

It may be true that bankers claim that the future positive reporting will improve the credit scores, but when was the last time a banker spoke the truth?

FACT:

A discharged AND paid as agreed mortgage can be reported in various ways:

  • with a $0 balance and “included in bankruptcy.”
  • with the current balance and the factual payment record.

Problem:  The Ch. 7 or “included in bankruptcy” AND the current positive payment record would seriously lower the scores because the FICO formulas rate the negative Ch. 7 or “included in bankruptcy” notation as a CURRENT derogatory remark, just like the “reaffirmed” notation.

In this case, the account should be disputed.   I would request that the account be reported without the Ch. 7 remark and as paid as agreed to get maximum FICO points for the open and positive mortgage account.  If the lender refuses to do so and CONTINUES to report the balance, it’s time for a lawsuit.   After all, they can’t report the balance if it was discharged!

I have not had any clients that reaffirmed a mortgage in quite a few years.  There is really no reason to and reaffirmation can PERMANENTLY (as long as you owe on the mortgage) DESTROY your FICO scores.

Attorney Miofsky:

The more accurate part of the reporting argument is that the borrower should not want mortgage payments reported to the lender, because:

1.  The debt to income ratio is minimized by not reaffirming the mortgage;

FACT:  There is no “debt to income ratio” related to credit reporting.

A correctly reported paid as agreed mortgage without derogatory notations will almost always improve FICO scores.  A mortgage several years older than the bk and reported as paid as agreed might give you 30 – 50 FICO score points — depending on what other open old positive accounts you have.

Open account HISTORY is an important FICO score factor.

So if you want to reaffirm your 15 year old always paid as agreed mortgage to ensure that you keep the good payment history (and possibly 50 or more extra FICO score points), you MUST get in writing that the lender will NOT report the reaffirmation or any other derogatory remark to the credit bureaus.

The same applies to car loans.  I recently read that a court decided that lenders CAN repossess vehicles even while the payments are CURRENT!  So if you reaffirm the car loan, be sure to get in writing that the lender will NOT report the reaffirmation.

2.  The likelihood a borrower actually makes mortgage payments on time is small;

Not in MY experience.  Of course my clients who are concerned with their credit and able to pay me must be able to pay their mortgages.  I see NO reason whatsoever why people shouldn’t be able to make a “reasonable” mortgage payment on time after they discharge their unsecured debt.   After all, interest rates are incredibly low and MANY people get loan modifications resulting in payments lower than comparable rents.

INSTEAD of reaffirming, many home owners should seek MODIFICATIONS!

A “good” bk attorney would assist the borrowers with the modification PRIOR to filing if the debts to be discharged are necessary to qualify for maximum benefits of the modification.  It really depends on the individuals’ income and debts — sometimes they don’t qualify until AFTER the discharge because they have to be able to make the payments.  A competent bankruptcy attorney should analyze the financials, make the appropriate recommendations and time the bankruptcy filing and possibly reaffirmations to MAXIMIZE BENEFITS to the home owner.

The question is often whether they should keep the house and get a modification — NOT whether they should reaffirm.  If the house is overmortgaged and they can’t get a principal reduction, they should “probably” walk away after living rent free in the house for a year or more, as so many people do.  Many lenders will also offer incentives such as $6,000 or more for home owners to sign a deed in lieu.

3.  The borrower can make the payment late, miss a payment here or there, catch up payment, pay whatever late fees accrue, all without risking a negative tradeline on the credit report.

If people can’t make the payments on time AFTER the discharge and mortgage modification, they need to look into more affordable housing. 

More important, they are probably not able to re-establish credit, their credit sucks and credit scores are entirely irrelevant.

A credit score is based on secret data manipulation. While the exact formula is not publicly known, a major factor involves the total amount of unpaid debt in relation to a person’s income.  Low debt and high income is better than not.  After bankruptcy the mortgage debt is discharged unless the debt is reaffirmed.  By not reaffirming, a person effectively lowers the total amount of outstanding debt, thus lowering the ratio of debt to income.

It is public knowledge that INCOME is NOT part of any credit score.

All you have to do is look at ANY credit report and you’ll notice that income is NOT reported anywhere.  DUH!

It’s bad enough that most consumer lawyers don’t have a clue about credit, but it is unconscionable to write articles about credit reporting and credit scores when you have absolutely NO knowledge about these subjects.

Many of my clients know more about FICO scores BEFORE we get started than this guy.



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