Refinance to Build Credit After Bankruptcy, Is That a Good Idea?

English: Refinance auto loan when needed

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A debtor recently told their personal bankruptcy story on a bankruptcy forum website. They had filed a Chapter 7 bankruptcy and they wanted to reaffirm the loan on their new car, their lawyer inadvertently forgot to file the reaffirmation papers on the loan.

A Reaffirmation on a Loan

A reaffirmation is a new agreement between the debtor and creditor of a secured loan that reaffirms the old agreement to the exclusion of a bankruptcy discharge. That means the debtor is agreeing to the terms of the old agreement and gives up any discharge rights of the bankruptcy. A bankruptcy judge, the lawyer, and the debtor all have to sign off on the new agreement before it can become a document with legal binding authority.

Is it a Good Idea to Refinance?

The debtor providing the personal bankruptcy story said he has continued to make payments on time to his car loan institution, even though they no longer send him any records to that fact. Afraid there will be problems and desiring better credit to buy a newer car in a couple of years, the man asks the forum if anyone thinks it is a good idea to refinance a loan in order to build credit even though he may be paying a higher interest rate.

After you have filed a bankruptcy, is it a good idea to refinance a loan in order to build credit?

In the opinion of this writer, it is probably not a good idea to refinance a loan in order to build credit if you can avoid it at all. Similar occurrences happen all the time after a Chapter 7 bankruptcy has been discharged.

To refinance the loan will only provide a new credit risk for you, something you have just remedied in filing the Chapter 7. Why risk a new loan so quick after bankruptcy and with a higher interest rate to boot?

It is never a good idea to buy credit. You build credit free by being a good credit risk and paying your bills on time. This takes time and requires discipline, something the debtor in the story was obviously missing from the first. Does the debtor really think by jumping into a high leveraged note the action will automatically create a new disciplined approach at handling a budget? It seems to me that is what got him in this condition in the first place.

Reaffirmation May Not be a Good Alternative Either

Frankly, it is probably not even a good idea to reaffirm a loan after you have filed for bankruptcy protection. You are giving up part of your protection when you do. The principal on the loan has already been discharged, and you are not obligated to pay the loan. Most loan companies are not interested in repossessing an asset unless the debtor has completely defaulted on the loan.

The End Result

Although the debtor has made timely payments from the beginning and is not legally bound to honor the debt, to avoid repossession of the asset, he must come to a new understanding with the loan company. Since there was no reaffirmation agreement, the debtor is in the better position to renegotiate and command for accountability.

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