Bankruptcy and Rebuilding Your Credit Score

Rebuilding your credit after bankruptcy can be done!

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While it may seem devastating, bankruptcy can allow for you to have a fresh start at your financial freedom. Recovering from bankruptcy does take time, diligence and patience – you don’t accrue debt overnight, so you cannot expect to fix it over night. Have hope though, many individuals who have declared bankruptcy have gone on to fix their credit scores and become financially successful. You too can overcome bankruptcy.

One of the main areas to focus on while recovering from bankruptcy is learning to manage your monthly bills. If you are not used to working on a budget, this can prove to be quite challenging, especially with the burden and stress of bankruptcy. Creating a budget is imperative to your future financial success and bankruptcy recovery. A budget can be time-consuming to initially set-up, but once you do the initial work ,the rest is easy. Some important categories that need to be included in your budget are:

  • Annual Expenses: car registration, taxes, HOA fees, and other yearly fees.
  • Monthly Expenses: mortgage/rent, insurance, gas, food, utilities, and other once a month expenses. Also include any payments that you must pay from your bankruptcy in this category.
  • Emergency Money: it is important to save some money in case of an emergency.
  • Retirement: don’t stop investing in your future. Allocate monthly earnings to your retirement account.
  • Savings: if you can, automatically put a portion of your monthly earnings into a saving account.

There are also many online tools, and mobile apps, that can help you create and manage a budget, getting you on track to recover from bankruptcy. Apps such as Mint, Manilla, and You Need A Budget are excellent, free resources to help you stay on track. Be diligent in paying your bills on time – a late payment could be reported on your credit score deterring all the effort you are putting into rebuilding it after bankruptcy. All of these apps allow you to set up reminders when bills are due so you can stay on top of your finances, which is part of the bankruptcy recovery process.

The next step you need to make post-bankruptcy is re-establishing your credit score. Ironic as it may seem, opening up a credit card is one of the best ways to help raise your credit score after taking a hit like bankruptcy. While this is one of the quickest ways to build up your credit, it can also be one of the most detrimental if not used properly. After bankruptcy, you may have to start with a secured credit card. A secured credit card is a credit card that allows you to put a cash payment down to “secure” your line of credit. The amount you put down is how much your line of credit will be. A word of caution must be given about opening up a credit card. You must be very careful about how you use this card. The point is to use it to build your credit, but do not use it beyond your means. Make a few purchases with it each month and then aim to pay it off in full each month. If you are careful and use your credit card properly, you will soon be eligible for non-secured cards. These cards typically have high interest rates, so being mindful of that is also suggested.

In addition to the budget and credit card, make sure you are keeping an eye on your credit score regularly. Check for inaccurate information. If you come across inaccurate information, write a letter of dispute to the agency asking for it to be removed. Here is more information on how to request the removal of inaccurate information from your credit report.

Bankruptcy can be a very stressful situation. You may need to seek out additional help in order for you to recover from bankruptcy and raise your credit score. The important thing to remember is that you CAN and WILL recover from bankruptcy. Your budget may be tight for a while and you may have to sacrifice some of the “wants” in your life, but in the end your goal is overall financial health and it will be worth every struggle you go through after bankruptcy.

Bankruptcy Myths

…and the Honest Truth

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Photo Credit: David Castillo Dominici

A friend of a friend told your Aunt Edna’s first child who told your mom who told you that if you file for bankruptcy you will grow a beard, lose your job and have to donate your kidney. As silly and unbelievable as it may sound, there is a lot of misinformation regarding personal bankruptcy.

Let’s take a look at 9 common bankruptcy myths and the truth behind those myths.

1. Bankruptcy clears you of all debts

False. Some debt cannot be cleared up in bankruptcy. Debt such as school loans, child support and alimony, and certain taxes are deemed as non-dischargeable in a bankruptcy case. Bankruptcy CAN help you clear up medical bills, credit cards, and personal loans.

2. People who file bankruptcy are irresponsible with their money.

False. Most bankruptcy cases can be traced back to job loss, divorce, or illness/injury. Filing for bankruptcy does not determine whether or not the person filing is irresponsible. In fact, a study done by Harvard University found that the biggest cause of bankruptcy was due to serious illness. Sixty-two percent of personal bankruptcy cases fall into this category. Bankruptcy can be a means to protect your family and begin a fresh financial future.

3. Bankruptcy ruins your credit permanently.

False. Bankruptcy is a negative mark on your credit score and will most certainly bring your score down. However, with time and diligence you can recover from bankruptcy and bring your credit score back up. Make a budget, pay all your bills on time, and keep an eye on your credit score. Interestingly enough, and very ironic, one of the best ways to re-establish credit is to open a line of credit. You can start with a secure credit card with a low monthly limit and get in the habit of using it and paying it off in full each month. Exercise caution with this as it can lead to issues if it is abused or neglected. Understanding your limits is imperative if you choose to open a line of credit.

4.  If your spouse files for bankruptcy, it will not affect your credit score.

False. If there is one or more joint accounts, it will affect your spouse’s credit score. However, the Bankruptcy Code allows a spouse to file individually without the other spouse. The non-filing spouse’s credit should go unaffected. The main point here is it must be individual debt. It cannot be debt accrued as a joint effort.

5. If you file bankruptcy you will never be able to purchase a house

False. Filing for bankruptcy does not dictate future ownership of a house or car. If the time and diligence is taken to repair your credit score, you could be a homeowner one day. The key is to build up your credit score again.

6. There is a minimum amount of debt needed in order to file for bankruptcy.

False. There is no magic minimum debt number that qualifies you for bankruptcy. If neglected, even a small amount of debt can cause financial strain and could be cause for filing bankruptcy. The key point here is not to ignore your debt. Be proactive and seek help immediately if you are struggling.

7. You will never get credit again if you file for bankruptcy.

False. The truth is filing for bankruptcy could actually improve your credit score by improving your debt to income ratio and opening up new lines of credit. As mentioned before, the debtor could use this new credit wisely and turn their credit around much sooner than it takes for the bankruptcy to get off your record.

8. You will lose everything you own if you file for bankruptcy.

False. Not necessarily true. Depending on the type of bankruptcy filed, you could still keep your house, car and other items. Many associated bankruptcy myths include: you can only keep one car if you file, you have to give up all of your vehicles if you file, and you can only have one TV in your house if you file. These are simply not true.

9. There is hope after filing bankruptcy.

Truth. You can move past bankruptcy and into a healthy financial future. It takes time, but starting with small steps you can improve your credit score, own a home, and live the life that you want with financial freedom you deserve. While bankruptcy can be a scary and stressful time, it is very important that you seek out help from an individual experienced in bankruptcy.

Chapter 7 Bankruptcy

Filing for Chapter 7 Bankruptcy

Many people contemplating filing bankruptcy need to know whether Chapter 7 bankruptcy is the best option for them. So in order to make that call, they need to be clear on what Chapter 7 bankruptcy is and what filing for it involves. It is the single most common bankruptcy chapter filed in the United States. Chapter 7, commonly referred to as liquidation bankruptcy, refers to the chapter of the Bankruptcy Code which can be found in Title 11 of the United States Code. It involves the sale of a debtor’s non-exempt assets by a trustee. Any proceeds obtained by the bankruptcy trustee are then turned over to creditors.

Here are some common questions asked when you are contemplating filing for Chapter 7.

1. Who can file a Chapter 7 case?

Anyone who qualifies and resides in, does business in, or has property in the United States is able to file a Chapter 7 bankruptcy case. (That does not mean you will necessarily get approved, but you a can file for it.) You may also file if you have intentionally dismissed a prior bankruptcy case within the last 180 days.

2. Who is not eligible for a Chapter 7 discharge?

  • Someone who has been granted a discharge in a Chapter 7 within the last 8 years.
  • Someone who has been granted a discharge in a Chapter 13 case within the last 6 years, unless 70 percent or more of the debtor’s unsecured debts were paid in the Chapter 13.
  • A person who acts with the intent to defraud his or her creditors or the trustee in the Chapter 7 case.
  • A person who fails to explain any loss or deficiency of his or her assets.
  • A person who refuses to answer questions or obey orders from the bankruptcy court.
  • A person who, after filing the case, fails to complete an instructional course on personal financial management.

3. How do I prepare a petition?

Prior to filing a Chapter 7 bankruptcy, you should gather together all of your financial records in order to fill out the bankruptcy petition, schedules, statement of financial affairs and other documents. Financial records include but are not limited to, bank statements, credit card statements, loan documents, and pay stubs. These records are critical because they act as proof that the financial information you list on your petition is accurate. They also allow you to easily comply with any requests by the trustee to verify your information.

4. What documents will I need to complete before filing?

Documents you will need to fill out prior to filing for a Chapter 7 bankruptcy include a voluntary petition for relief, schedules of assets and liabilities, declarations regarding your education, and a statement of financial affairs. These documents give the bankruptcy courts full access to your financial history including a listing of all your property, debts, creditors, income, expenses, and property transfers. Once you have filled out these documents in their entirety, you must file them with the bankruptcy court and pay a filing fee.

5. What is a Means Test?

Before you can file a petition for Chapter 7 bankruptcy, you must also pass a means test. This test calculates whether you are able to afford, or have the “means” to pay your debts. The means test annualizes your income for the past six months and compares it with the median income for your place of residence. The means test also includes your secured debt in determining whether you can afford to pay for your debts. You must pass the means test in order to be eligible to file Chapter 7 bankruptcy, unless you fall under very specialized circumstances.

6. What happens during the Meeting of Creditors?

After you have filed for Chapter 7, the court will issue a document giving notice of your Meeting of Creditors. This notice is also sent to all of the creditors that are listed in your bankruptcy documents.  Any creditor may appear at this meeting and ask questions about your bankruptcy and finances. During the Meeting of Creditors, the bankruptcy trustee will ask you various questions. The main thing they want to know is that all of the information contained within the bankruptcy documents is true and correct. You may also be asked other questions about your financial affairs. If the trustee feels your case requires further investigation, he or she may continue your Meeting of Creditors to a future date. If he or she feels they have obtained all the information they need, the trustee may conclude on the first meeting.

7. What happens to my assets?

If you have any non-exempt property, the bankruptcy trustee has the ability to seize and sell the property. Exemptions would be federal or state statutes which allow you to keep certain types of property from seizure in bankruptcy or can satisfy a judgment. Common exemptions include retirement accounts, such as a 401(k) plan. Exemptions must be set forth in Schedule C, a bankruptcy document completed upon filing your petition for Chapter 7. Any assets that the trustee seizes are distributed to creditors.

8. How long will it take for my petition to discharge?

The last day to file a complaint objecting to your petition is 60 days after the first session of the Meeting of Creditors. If no complaint is filed, the discharge is usually entered several days later. If neither the trustee, nor any creditor objects to your discharge, the bankruptcy court will automatically give your petition a discharge at some point after the last day to object.

9. What does a discharge do?

The discharge prevents creditors from attempting to collect any debt against you, personally, that arose prior to you filing Chapter 7. Essentially, the discharge effectively wipes out your previous debts. However, there are certain debts that are not dischargeable, including, but not limited to, certain taxes and child or spousal support obligations. It is important to remember that your bankruptcy discharge is personal which means that a creditor can still collect on a discharged debt from any co-debtor you may have had that did not file for bankruptcy.

10. What debts are not dischargeable in Chapter 7?

  • Tax debts and debts that have been assessed within 3 years of filing.
  • Debts obtained by fraud for money, property, services, or credit.
  • Debts not listed on the debtor’s Chapter 7 forms.
  • Debts for domestic support, which include alimony, maintenance, or support, and certain other divorce-related debts, including property settlement debts.
  • Debts for intentional injury to the person or property of another.
  • Debts for some fines or penalties.
  • Debts for student loans, unless a court finds that not discharging the debt would impose an undue hardship on the debtor.
  • Debts for personal injury or death caused by the debtor’s operation of a motor vehicle while intoxicated.
  • Debts that were, or could have been, listed in a previous bankruptcy case of the debtor, in which the debtor did not receive a discharge.

Chapter 13 Bankruptcy

When to File for Chapter 13 Bankruptcy

Before you can assess whether or not to file for a Chapter 13 bankruptcy, it’s imperative to know exactly what that means. Chapter 13 allows you to repay creditors in a 3-5 year plan at 0% interest. Usually, if you have filed for Chapter 13, you will only have to pay your creditors a percentage of what you actually owe. Most importantly, you get to keep all of your assets. You will get put on either a weekly or monthly payment plan that is designed around your personal budget and income. So when should you file for Chapter 13 bankruptcy? Here is a list of circumstances in which filing for Chapter 13 bankruptcy might be a good option.

1. You have filed a Chapter 7 bankruptcy within the last 8 years and you cannot file a Chapter 7 again, filing for a Chapter 13 might be a good option for you.

2. You are facing a short-term financial setback like job loss, illness, or a large unexpected expense.  If you have fallen into financial distress that has caused you to fall behind on your bills, but you still have regular income, filing a Chapter 13 could help. It allows you some breathing room to get back on you feet and back on track with your payments without losing your home or property.

3. Your creditors are threatening to repossess your car, garnish your wages, and are pressuring you with constant phone calls. Filing for a Chapter 13 will stop all this immediately because you become under what is known as automatic stay. Basically, this means your creditors are barred from making any more attempts to collect on the debts you owe. So, if you are looking to repay your debts, but according to your affordability rather than at the demands of your creditors, filing a Chapter 13 might be your answer.

4. You are facing possible foreclosure or repossession. Filing a Chapter 13 can help you avoid foreclosure or repossession because it allows you to catch up past due payments over that 3 -5 year period, while keeping current payments up to date.

5. You are making too much to file a Chapter 7 bankruptcy. When filing for a Chapter 7 bankruptcy, you must pass a “means test” that proves your income is lower than the average household income in your state. If you have assessed your situation and found that your income is too high and you do not have enough dependents to file a Chapter 7, you might have better luck filing a Chapter 13.

6. You have a lot of assets. Your house, you car, your equity…these are all assets that you will lose if you file a Chapter 7. A Chapter 13 can let you keep all of your assets. It allows you the same protections as a Chapter 7, but you don’t have to turn your assets over to your creditors. If your house is still under mortgage or your car is being leased and you are unable to keep up the monthly payments for them, you should consider filing for Chapter 13, to avoid losing them.

7. You have a lot of taxes, student loans, or other debts that are non-dischargeable in a Chapter 7. If you need protection from the IRS or student loan collectors attacking your pay and bank accounts, you might be better off filing a Chapter 13.

8. You have enough disposable income to pay toward your debts after paying your essential living expenses. If you are able to make periodic payments, you are eligible for Chapter 13.