Many people considering bankruptcy ask the very predictable question “Will this effect my credit, and if so, for how long”. In certain situations, the question is a little late, since they have already blown their credit to bits, with late payments and charge-offs. In some instances, a bankruptcy can be quite beneficial to a credit rating, since one key criteria for credit, is debt to income ratio.
With a bankruptcy, all debt is gone, only income remains, providing an excellent debt to income ratio. In fact, there are a whole host of companies that line up to woo prospective customers with a bankruptcy discharge on their credit reports. They specifically purchase these lists from the credit reporting agencies, to market their special programs for this segment of the market.
Why do they accommodate these people, because it makes good business sense. Here’s why:
- They don’t owe any money – they can afford to service the new debt.
- They cannot declare bankruptcy again for eight years.
- Lenders usually charge a little more to bankruptcy applicants, which mean they make more money.
- In the case of cars and mortgages, the debt is secured by collateral – if you don’t pay, they foreclose or repossess.
Bankruptcy does not interfere with mortgage loan modification programs. Most of our bankruptcy clients who are also home owners with adjustable rate mortgages will qualify for a loan modification which typically reduces the monthly mortgage by 20% or more. In many cases, clients with second mortgages are either stripping these in a bankruptcy process, or applying for debt forgiveness, now available under new Government induced incentive programs to the banks. (Bankruptcy will also discharge a second trust deed, if it is unsecured by the properties current fair market value).
So having a bankruptcy doesn’t stop you from reestablishing credit, although some lenders may charge you more when they see a bankruptcy on the credit report. Most lenders have different policies for opening credit accounts for customers with bankruptcy discharges, but today, more and more banks and stores are offering great programs to help you get started again. Several banks offer starter programs, with either secured or unsecured credit cards. We maintain a list of Banks, credit card companies and stores, that have post bankruptcy programs. Give us a call, and we will send you the list.
Q: I have financial problems, should I file a bankruptcy?
A: Maybe, that depends on your personal net worth, and how your assets are distributed. Chapter 7, which is a liquidation of debts and non-exemptions assets, is all about debts versus assets, whilst chapter 13, a debt repayment plan is confined to debts versus income. Usually, people who file bankruptcy, do so because they cannot pay their debts, and expect that the bankruptcy court will discharge all of their obligations – and that’s usually what happens. However, there are some exceptions to the rule – and prospective bankruptcy petitioners should be aware of these.
First of all, bankruptcy does not discharge secured debt. Secured debts are debts, whereby the lender retains a security interest in the sold merchandise. This category refers to Mortgages in real estate, auto loans, major appliances, furniture etc. With the exception of real estate, bankruptcy petitioners have two options on secured debts. They can either return the merchandise, as full and final settlement. (The balance is unsecured and discharged as such), or retain the merchandise, and pay fair market value. Frequently, fair market value may be less than the balance of the debt. In cases like this, the balance is adjusted accordingly, and the account is “Reaffirmed”.
Bankruptcy does not discharge government debt. Items like Federal or State income taxes are usually non-dischargeable (There are some exceptions). This category also includes debts to other government agencies, and federally insured loans such as Student loans, Title One Home Improvement Loans, etc. Exceptions to the above include federal taxes, if they are more than 3 years from assessment or filed tax returns, and for student loans, proof of severe hardship. (No easy task. You need an attorney).
Q: Is CCC a real option?
A: Los AngelesConsumer Credit Counseling – a non profit organization that helps people who cannot meet all of their obligations at once. CCC as it is frequently referred too, usually works out what you can afford, takes one check a month, and distributes it to your creditors. CCC is paid by those same creditors. They get a percentage of what they collect. In fact, one could say, that they have a similarity to collection agencies, in that they make money if they collect money. Clearly, this position is at odds with their name, since one is led to believe that they represent the consumer when in fact they represent the creditor.
The main problem with dealing with CCC is that it doesn’t improve your credit rating, in some cases; it makes it worse, since some creditors will report to TRW that you are in credit counseling. So paying your bills through them, doesn’t rehabilitate you.
Q: I’m filing a bankruptcy. My Mother cosigned one of my credit cards, will she be affected?
A: She will not be affected by the bankruptcy, but will end up as the sole party responsible for the debt. Your bankruptcy filing will discharge your obligation for the debt, but not your Mother’s.
Q: I’ve thought about filing bankruptcy, but I’m afraid of losing my credit? I have a house, and lots of credit card debts, and I’ve got to the point where I take a cash advance from one card, to pay the other. What should I do?
A: Credit is important, but so is survival! Clearly you are in a position where you cannot please everyone, so some tough choices have to be made. Do you pay the credit cards, or your mortgage? Even though you may be current on all of your payments now, can you keep it up? If you cannot pay everyone on time, your credit will start to disintegrate, and prevents you using more credit anyway. You need a survival plan that establishes your priorities, and addresses the real issues. Bankruptcy may be the best option available to you. It also gives you access to the “Fresh Start Program” I mentioned above, that many banks and credit card companies offer.
For immediate help and a free consultation, call the Law Offices of Paul M. Allen. Two convenient locations to serve you.Glendale818-334-5445,Cerritos562-9931.
(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.)