How Is My Credit Affected By Bankruptcy?

Bankruptcy Credit RepairCredit rating is very important in our society. It determines how much money you can borrow to buy a car, a home or how much you can charge on credit cards. A strong credit rating gets you the best credit with the lowest interest rates because creditors see you as a good risk. Many people avoid filing bankruptcy because they fear the effects it will have on their credit rating.

Kelly Law Office does not do credit repair work.  From our perspective, those who claim to be able to repair credit appear to be making very questionable claims.  In the course of doing bankruptcy work, however, we get a lot of feedback from clients as to how the bankruptcy has affected their credit and their lives in general.  The overwhelming majority of the feedback is positive.

Just how a bankruptcy will impact your credit rating if you file a Chapter 7 bankruptcy or a Chapter 13 debt reorganization plan depends primarily on what your credit rating looks like when you make the filing. If your credit is very good, a bankruptcy of any kind will have a serious negative impact on your credit rating.  As a practical matter you will not have credit for several years.  What we hear is that the credit bureaus keep the bankruptcy filing on the credit report for ten years.  However, usually after three or four years, based on what we have been hearing from our clients, credit will start to improve.  Typically in any given year, Dave Kelly will regularly get phone calls from clients who filed three or four years earlier asking for copies of documents from their bankruptcy files.  Why are they asking for the info?  Because they want to use it as part of a credit application.  They have a banker or a lender who is about to give them a car loan or extend some other sort of credit.  Caution is recommended once credit is available again.  We would rather not see folks again for another bankruptcy years later.

If, however, your financial difficulties have been mounting for some time and your credit rating is already significantly damaged or will be in the near future, filing for bankruptcy might be the best move you can make.  It may, in fact, help you improve your credit.

Once you have completed the bankruptcy process, you are essentially debt free. While you have a bad credit score, you now have the ability to repay any new creditors. This makes you a better risk than when you were carrying all the debt. You may be penalized for bankruptcy and poor credit with higher interest rates but it is an opportunity to start rebuilding your credit. Under Chapter 7 protection, you can only file once every eight years. This gives you plenty of time to rebuild your credit once you are debt free.

If it has been less than eight years since you filed a Chapter 7 bankruptcy, you can still file a Chapter 13 bankruptcy, providing you are meeting the pre-established percentages for the debt you must repay.  There are time limits on getting at a discharge under Chapter 13 as well, but usually by the time the payment plan is completed in the Chapter 13, the time limit would have expired and the debtor would be eligible for the discharge.

Will Bankruptcy Stop the Creditor Harassment?

Debt CollectorFacing financial difficulty is stressful enough. Dealing with credit collections can be miserable. Many collections agents are reasonable and will work with you. It always pays to be honest. Explain your situation and some may offer to renegotiate your terms, reduce your payments or offer some other type of assistance. You won’t know unless you talk to them.

Other collections agents are not so agreeable. While there are laws that govern the allowable behavior a collector can reasonably use, many will still attempt to coerce payment from you with threats and intimidation tactics. If you have tried to explain your situation to them and work something out but the harassment continues, your life can become increasingly stressful and depressing, affecting both your personal and professional life.

In this situation, you may need to talk to a bankruptcy attorney. Filing a Chapter 7 bankruptcy forces strict collection and contact laws to go into effect. It effectively prevents the creditors from contacting you. Their dealings must all be with your attorney or the court. If they continue to contact you or in any way attempt to collect on the debt you owe once the Chapter 7 bankruptcy has been filed, they can be sanctioned. If their violations are serious enough, usually involving multiple debtors, they can even lose their business license.

When a bankruptcy case is filed, a court order called the automatic stay goes into effect.  This order requires all the creditors to leave the debtor alone.  This stay remains in effect until the debts are discharged, at which point the creditors are required to not try to collect because the debtor no longer owes the debt.  After the automatic stay expires, however, a creditor with security can foreclose or repossess the security if the payments on the debt are not up to date.  So debtors who wish to keep a home, for example, would ordinarily have to keep making the payments on the mortgage.

Harassment is against the law and your bankruptcy attorney can help you put an end to the misery that accompanies financial hardship and collections actions. If you are being hounded at home and at work and are unable to find a reasonable solution on your own, a bankruptcy attorney may be the answer you are looking for. Don’t let the creditors to rob you of the chance to live in peace when help may be just a phone call away.

Chapter 7 and Credit Card Debt

Credit Card DebtOne of the main reasons consumers seek bankruptcy relief is overwhelming credit card debt. If you qualify for a Chapter 7 bankruptcy, you could discharge most if not all of your unsecured credit card debt but there are circumstances where your credit card debt may not be dischargeable.

A bankruptcy places your creditors in order of priority. If your bankrupt estate has assets that are not exempt, the trustee could seize those assets and sell them off to repay your creditors in order of priority. Creditors who are unsecured or lack collateral for their loans are lowest in priority.

In most Chapter 7 bankruptcies, however, there are few if any unprotected assets available for distribution. In a no-assets case, unsecured creditors like credit card issuers are unable to collect anything for the unpaid balances on their cards and the debt is discharged.

Challenging the Discharge

There are situations, however, where the card issuer or company may successfully challenge the discharge. These include the following:

  • You obtained the credit card by falsifying information on the application
  • You never intended to repay the credit card company
  • The creditor has a purchase money security interest in the item

If you bought an expensive item with credit, you may have signed a purchase money security agreement even though you may have paid for the item with your credit card like a Sears card. In a bankruptcy, the creditor can claim that you either must return the item, pay its market value, or continue making installment payments for this item.

The more common issue that arises in a bankruptcy is your lack of intent to repay the creditor. Your payment history is vital in this instance as is your conduct in using the card.  A sudden change in the card’s use before filing is suspect. Here are some common mistakes that debtors make with their credit cards before filing for bankruptcy:

  • You made a number of large or expensive purchases with your card in the months leading to the bankruptcy filing.
  • You took out one or more cash advances.
  • You took an expensive vacation or traveled shortly before filing.
  • You maxed out the card.
  • You recently were issued the card and made a number of expensive purchases.
  • You made no payments on the new card.
  • You made no payments or only a few minimum payments after making large purchases or using it extensively just before filing.
  • You were unemployed while making these purchases.

Avoiding or Resolving Challenges to Discharge

If you are likely to have a challenge or objection to your bankruptcy discharge, you might want to consider one of the following strategies for either avoiding or resolving the potential challenge:

  • Wait at least 4-6 months before filing and make more than the minimum payments for each month. The longer you wait and make payments, the less likely the creditor can show that you lacked the intent to repay it.
  • Be prepared to settle with the creditor if or when the creditor makes an objection to dischargeability.
  • Consult with your bankruptcy attorney to see if a trial on this issue is advisable. If you win, you might be able collect attorney’s fees if the court finds that the claim was not “substantially justified.”
  • Consult with an attorney to see if a debt management program is more amenable.

Being prepared and having the advice of a knowledgeable bankruptcy attorney before you file will help you to avoid embarrassing, costly and potentially criminal acts.

The type of objection involved in most of the above situations is made when the creditor files what is called an adversarial proceeding in the bankruptcy court.  This proceeding is considered to be an action separate from the bankruptcy itself and has it’s own court file and it’s own set of documents.  Typically when you hire a lawyer to do a bankruptcy, the attorney fee will not include representation in adversarial proceedings.  The retainer agreement with your lawyer will probably actually EXCLUDE adversarial proceedings.  Defending  those is a practice area all by itself that many ordinary bankruptcy lawyers stay away from.

A good bankruptcy lawyer will screen your case in an effort to be sure that adversarial proceedings are unlikely.  If there is such a proceeding on the horizon, the creditor will tend to threaten an objection before actually filing one with the court.  Your regular bankruptcy lawyer may either try to talk the creditor out of it or try to settle the claim before the creditor files; but if the creditor actually gets to the point of filing the objection, you can expect an additional attorney fee and perhaps a referral to another attorney.

This article is for general information purposes only and is not intended to be legal advice.  Kelly Law Office is a Debt Relief Agency helping people file for relief under the federal bankruptcy code.

Rebuilding Credit After Bankruptcy

Rebuilding Credit After BankruptcyPeople ask me a lot of questions.  A  very common question is “how can I rebuild my credit after bankruptcy?”  Another variation of the question is “how long will it take to rebuild my credit after bankruptcy?”  For most of the people who are calling me, I think that is the wrong question.  Hidden beneath the “how can I rebuild my credit” question is another question which I am afraid is the real question:  “How soon can I get back in debt?”

Once the bankruptcy is completed, most of my clients are really out of debt – or at least nearly out of debt.  That can feel pretty strange for somebody who is not used to it.  It can feel uncomfortable, just not normal, not OK.  There can be a tendency to want to get back into debt as soon as possible, because being debt free is just too strange. Let me suggest this is not the time to be thinking about more credit.  This is the time to focus on staying debt free and actually enjoying being debt free. Being debt free will start to feel really good if you allow yourself some time to let it start feeling normal.

The better question would be “where can I learn some money management methods and principles?” I make no claim of being a money management expert.  If you want such an expert, I have been recommending Lutheran Social Services and/or Family Means for years.  Having said that, however, let me share a few money management ideas that I believe actually work:

  • Never let somebody else handle your check book or checking account.  Always take care of it yourself.  Otherwise you’ll never know what’s going on.
  • Minimize automatic withdrawals – they make it harder for a person to be aware of where the money is going.
  • Sit down and spend some time with your bills.  Touch them, smell them – I’m serious.  Accept that they are real and they are yours.
  • Pay each bill manually or as manually as technology these days permits.  Avoid everything and anything that helps you forget that the bill is there.
  • Avoid credit cards whenever possible.  In the situations where you must have one, use a debit card or a prepaid card.
  • Do whatever it takes to completely rid yourself of the idea that somebody or something is going to come along and bail you out.  No matter what the politicians, your friends, your relatives (especially parents) say, there are no free gifts.  No free bailouts.  No free money of any kind.  It all has a price of some kind that you will have to pay sooner or later.

Everything I’ve ever read about money management says you should do a written budget.  Personally, I’m not sure that’s such a great idea.  Diets don’t work for people who need to lose weight, and I think a budget is a lot like a diet.  Best to take it day by day, being mindful every day of where your money is coming from and where it is going to.  I don’t think it is at all a matter of needing to put yourself on something like a diet.  I think it’s mostly a matter of needing to really just start paying attention.

This article is for general information purposes only and is not intended to be legal advice. Kelly Law Office is a debt relief agency helping people file for relief under the federal bankruptcy code. 

 

close
Facebook IconYouTube IconTwitter Icon