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Credit after Bankruptcy – Yes you can !

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paul allen

After a debtor receives a discharge in bankruptcy, creditors whose debts are discharged are required to report that the account has a zero balance. The fact of the filing itself can remain on the credit report for 10 years from the date it was filed. A debtor interested in re-establishing credit after bankruptcy should obtain credit reports from the 3 largest credit reporting agencies, (Experian, Equifax, and Trans Union) and ensure that the account balances have all been zeroed out. If not, the debtor should contact the credit reporting agencies and ask that the record be corrected

Methods of Re-Establishing Credit

A debtor seeking to re-establish credit should consider applying for a secured card, usually a Visa or Master Card. This is a credit card issued by a bank to a customer who is required to establish a savings account at the bank, which is used as security or collateral for the card. Typically, the limit on the card is based on the amount of collateral put up in the form of the savings account. Often, the bank will have an annual fee. The benefit of the secured card is that banks will issue them to persons with poor credit reports in the past, but who have the ability to pay the deposit to secure the account.

Major store cards are also a good addition to building credit. Once you have a major credit card, even a secured card, it’s usually all that’s required to open an account at a major store, such as JCP, Kohls, etc.

Other methods include buying a car from a local car dealer who advertises that it specializes in making car loans to persons with bad credit or recent bankruptcies. Also, a debtor with a personal relationship with someone at a local bank should not hesitate to seek assistance from that source.

There are also financial institutions that target recent bankruptcy people seeking credit. This also includes mortgage companies. Several major companies will consider a mortgae within 1 to 2 years from the bankruptcy discharge.

The reason these companies are interested in bankruptcy discharge consumers, is because they cannot file a bankruptcy again for 8 years, do not owe money, have a good debt to income ratio (Income from employment, all debts discharged in bankruptcy), and finally, they get to charge more than regular financial institutions. Bottom line – it’s a business, and a good business at that.

Caution in Rebuilding Credit

Ultimately, however, debtors emerging from bankruptcy should use their experience to avoid getting into the same financial traps, which snared them before. All too often, this was the easy availability of unsecured credit in the form of unsolicited, pre-approved, credit cards. Debtors should take steps to budget properly, not spend beyond their means, and resist the temptation to incur debt beyond their reasonable ability to repay just for the purpose of re-establishing credit. Debtors should avoid being enticed by so-called “credit repair” agencies. These are often simply unregulated rip-offs, who prey on the financially-distressed, and who do nothing more than what debtors themselves can do by exercising their legal right to have their reports properly list their outstanding obligations.

Income Taxes in Bankruptcy

As a general proposition, older income taxes (more than 3 years old) can be wiped out in bankruptcy; newer income taxes (less than 3 years old) cannot. A debtor/employer can wipe out the employer’s portion of older, but not newer, payroll taxes. The discharge ability of state and local, such as sales and use taxes, will depend upon their true nature, i.e., whether they are excise or withholding taxes. The trust fund portion of payroll taxes is generally not dischargeable. Prior to filing bankruptcy, the debtor should have his own particular tax situation assessed.

Test for Wiping Out Income Taxes

 

The Test for wiping out income taxes in bankruptcy include:

The tax return was due more than 3 years prior to the filing

The tax return was filed at least 2 years prior to the filing

The tax has been assessed for at least 240 days prior to the filing

The tax is not based on a fraudulent return

There was no willful tax evasion by the debtor.

In Chapter 13, income taxes can be wiped out if the return was due more than 3 years prior to the filing, and was assessed at least 240 days prior to the filing. In some cases, the tax may be dischargeable even if not assessed prior to the filing.

Income Tax Liability

Under the Internal Revenue Code, as a general rule, forgiveness of indebtedness constitutes income to the debtor. However, there is an exception where the debtor receives a discharge in bankruptcy.

Can Utility Debts Be Discharged in bankruptcy?

Public utilities, such as the gas and electric company, are not permitted to discontinue service because of a bankruptcy filing. However, if the utility bill is included in the bankruptcy and not paid, then the utility has the right to demand that the debtor pay a deposit within 20 days to ensure the continuation of service. Sometimes, the requested deposit is several times the amount of the bill, so it often makes sense for a cash-strapped debtor to simply pay the bill. Utility bills for service arising after the bankruptcy filing is not included in the bankruptcy, and must be paid.

Does the Bankruptcy Code prohibit discrimination based on a bankruptcy filing?

The Bankruptcy Code contains an “anti-discrimination” provision, stating that government units and private employers may not discriminate against a person solely because that person has filed bankruptcy or was insolvent. Also, if a debtor has lost his driver’s license solely because of his inability to pay damages resulting from an accident, then a bankruptcy discharge will allow the debtor to get his license back.

Too many debts? Cannot sleep at night? We can help. Call today, and schedule a free consultation with the premier “No Hassle” Bankruptcy Law Firm of Paul M. Allen. Two offices to serve you. Glendale: 818-334-5445, or Cerritos: 562-356-9931.

(This article is for information purposes only, and does not necessary reflect the company’s opinions and views on general issues. We make no warranty, prediction nor representation, nor do we assume any legal liability for the completeness of any information and its effect on any case. Each case is different and results depend on the facts of each case. Consult with and retain counsel of your own choice if you need legal advice.)

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