I want to file for bankruptcy because my debt is crushing me. I owe almost $35,000 on credit cards and another $20,000 in medical debt. But I also want to minimize the damage to my credit score as much as possible.
I’ve kept my mortgage current even while I’ve been struggling – and I want to keep my house. I read that during bankruptcy, I can agree to something called “keep and pay.” Is that a good idea? Will it help me continue to build credit even during my filing?
Colby in Michigan
Steve Rhode, the Get Out of Debt Guy, responds…
This question has both a technical and practical answer – and they’re at odds with each other. Welcome to reality.
Technically, what you’re talking about is called a “reaffirmation agreement.” But “keep and pay” or “stay and pay” is the casual term. It’s an accurate description of what this legally binding contract means. To define it, let’s first start by talking about what bankruptcy really is.
When you file for bankruptcy, you’re seeking legal protection from your creditors – and to be relieved of the debt because it’s no longer sustainable. You just don’t have the means of paying back. This is why bankruptcy is referred to as a fresh start.
This is where the reaffirmation agreement comes in. Basically, you’re promising to stay responsible for a debt so that you can keep your property. If you have financial problems later, that debt would not be able to be included in a future bankruptcy so it can be a risky strategy.
The argument against reaffirmation
There is no way I’d recommend such an agreement if your goal is primarily to prop up your credit score. That score is going to take a hit regardless, and you need to consider two things:
- the speed at which you can rebuild your credit
- the burden the current mortgage places on you
Additionally, there’s no guarantee the mortgage company will report your payments to the major credit bureaus after you file bankruptcy.
Believe it or not, credit is stupidly easy to rebuild after bankruptcy. If you jump on rebuilding your credit starting the day after your bankruptcy is discharged, your credit score can start shooting up within a year. You’d be eligible to purchase a new car and get credit cards. In another year, you’d be able to get a market rate mortgage.
If you’re filing for bankruptcy, it’s for only reason: Your financial situation isn’t sustainable, and you need the protection that bankruptcy offers. Therefore, it seems illogical to throw away a limited opportunity of getting a fresh start over concerns about your credit report.
It doesn’t sound like there’s a lot of equity to protect here, which might be a reason to consider the onerous reaffirmation agreement the mortgage company may offer up. And before that offer could be accepted, the bankruptcy attorney and the court would have to agree to it.
The argument for reaffirmation
Just to show you how complicated these situations are, I spoke with a bankruptcy attorney myself and shared your question. Chad Van Horn of the Van Horn Law Group was much more enthusiastic about pursuing a reaffirmation agreement:
“With mortgages for homestead properties that my clients would like to keep, I recommend reaffirming the mortgage. That way, the lender will continue to report the positive credit history and your future payments. Having positive reporting will help your credit rebuild much faster than those that do not have any positive secured accounts. So, in short, I’d recommend filing bankruptcy and reaffirming the debt with your mortgage holder.”
The final word
Here’s another consideration. Let’s say your current mortgage is less than rent in your area. You could take the risk that if you agree to stay and pay, you wouldn’t be able to discharge the mortgage in a potential future bankruptcy. That might be something you consider doing.
In other words, your mortgage company agrees to let you stay in the home and doesn’t call the loan with the bankruptcy filing. If your current housing situation is the same or lower cost than letting the home go and moving, that could be a reason to stay.
Whatever you decide to do, as you can see, you’ll need a sit-down with a bankruptcy attorney to really do the math and figure out what’s best for you. I hope this was a good start, but it’s certainly not the last word.
