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Atty. Paul M. Allen, Bankruptcy Lawyer

Many people who may be considering bankruptcy ask the predictable question: “Will this affect 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 and pieces” with late payments and charge-offs. In some instances, a bankruptcy can be quite beneficial to a credit rating, since one key criterion for rating credit is the debt-to-income ratio.

With a bankruptcy, all debt is gone and only income remains – providing an excellent debt-to-income ratio.  In fact, there is a whole host of companies that line up to woo recent bankruptcy filers with higher interest credit cards, auto loans and mortgages. Although there is a cost (i.e., higher interest) to re-establishing credit, normal terms are usually available after a year or two.

So why do some credit card companies and banks accommodate people with recent bankruptcy on the record? – Because it makes good business sense.

Here’s why:

  1. Recent bankruptcy filers have no debt. They can afford to service new debt.
  2. They cannot declare bankruptcy to discharge debt for another eight years.
  3. Lenders usually charge more interest to bankruptcy applicants, and ask for higher down payments, when applicable – which means they make more money.
  4. In the case of cars and mortgages, the debt is secured by collateral which is foreclosed or repossessed if you don’t pay, so there is little or no risk.

With regards to home loans, Bankruptcy does not interfere with mortgage loan modification programs. Most of our bankruptcy clients who are also home owners still qualify for loan modifications which can significantly reduce the monthly mortgage payment.  Bankruptcy will also discharge a second trust deed, if it is unsecured by the property’s current fair market value.

So having a bankruptcy doesn’t stop you from re-establishing credit, although some lenders may charge you more.

Most lenders have different policies for opening credit accounts for bankruptcy recipients, but today, more and more banks and stores are offering great programs to help you get started again. Several banks offer secured cards, where they give a $500.00 line of credit with only $100.00 in deposit.

Q:  I have financial problems, should I file a bankruptcy?

A:  Maybe, that depends on your personal situation. If you have credit card debt at 20% in interest, and are making minimum payments, the debt may double every 3.6 years.

If your debt ratio is above a certain limit, it will reduce your FICO score. If you are showing late payments, it will stay on your credit report for 7 years.

Generally, if your unsecured debts (e.g., credit cards, etc.) add up to more than 30% of your annual income, then wiping out your debts through bankruptcy should be seriously considered.

Bankruptcy does not discharge government debt. Items like Federal or State income taxes are not dischargeable. This category also includes debts to other government agencies, and federally insured loans such as student loans, Title One Home Improvement Loans, etc.

Q: I’m filing a bankruptcy. My mother co-signed 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 thought about filing bankruptcy, but I’m afraid of losing my good credit? I have a house and a lot of credit card debt, and I’ve gotten to the point where I take a cash advance from one card to pay the other. What should I do?

A: Good 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, how much longer can you keep it up?  If you cannot pay everyone on time, your credit may start to disintegrate and as that debt accumulates, your debt-to-income ratio may get worse and prevent you from further credit anyway. You need a survival plan that establishes your priorities and addresses the real issues.  Bankruptcy may be a very viable option, but solving your problems and maintaining good credit at the same time is highly unrealistic.

There are different ways of resolving your financial problems and we want to help you learn about some options that may work for you.   Call the law offices of Paul M. Allen at (818) 552-4500 or (562) 865-4480. Offices in Glendale and Cerritos ready to serve you.  Evening and Saturday appointments available.

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