Credit and Bankruptcy
Many folks believe that once you file bankruptcy, you’ll never obtain credit, or have to wait 10 years before you can borrow money again. This article will give you an overview of why these notions aren’t true.
Can you get credit after your bankruptcy discharge?
Yes, in fact many clients report getting credit card offers in the mail shortly after they file. However, the interest rates won’t be as favorable and the credit limits should be lower than what many borrows experienced in the last decade.
However, ask yourself why you need credit to begin with. You should focus on how to accumulate any leftover income in the form of savings or investments. I advise my clients to start saving enough money in the bank to cover their basic needs for three or four months before even considering borrowing any money, for any reason.
Will I be able to purchase a house after a bankruptcy discharge?
Yes. Most lending programs and data we’ve seen suggest that you can qualify for a home mortgage within 18 to 24 months after a bankruptcy discharge. However, your chances are improved if you have a stable income, a down payment, and little or no other debts. Again, bankruptcy helps by eliminating the very debt that may have jeopardized your chances for getting a home mortgage, had you applied before filing bankruptcy.
Is my credit record ruined by filing bankruptcy?
Your ability to borrow money, bankruptcy or no, has less to do with a credit score than your overall solvency. The more important question most lenders ask in our new economy is: does the borrower have more assets and income than debt?
Your debt-to-income ratio actually improves in most cases after filing bankruptcy which assists your overall credit profile. The bankruptcy event will remain on your credit for up to 10 years, but it isn’t the only factor that establishes your credit worthiness.
However, some lenders who are unfamiliar with bankruptcy may make a negative judgment about your application for credit.
What should I look out for on my credit report after my bankruptcy discharge?
The debts you listed in your bankruptcy will still remain on your credit report. Your bankruptcy should be listed, too, which will alert potential lenders that all discharged debt listed on your credit report is no longer legally enforceable. In plain language: your credit report should prove that your bankruptcy wiped out the legal claims of your old creditors, and that you have less debt than before you filed bankruptcy.
Our office recommends that you don’t use your annual free credit report to assist with the filing of bankruptcy, but to save the free annual credit report to clean up any errors on your credit report that may arise after you receive your bankruptcy discharge. I would allow at least a couple of months to pass before expecting the credit reports to catch up with the bankruptcy discharge.
Feel free to review a Summary of the Fair Credit Reporting Act to understand your rights when it comes to credit reporting.
New Wisconsin Bankruptcy Exemptions
There is good news for those contemplating bankruptcy in Wisconsin. The exemptions for bankruptcy filers in Wisconsin have changed favorably, especially for those who seek to retain more value in their primary residence.
The biggest surprise is clearly the increase of the homestead exemption, especially for married couples, who were limited under the old law to preserve $40,000 in their homestead. A married couple can now exempt up to $150,000 in their residence, provided the household qualifies for the exemption.
2009 Senate Bill 259 is set to publish on December 15, 2009, which will become effective on December 16, 2009. The exemptions are set to change as follows:
Consumer Goods
Increased from $5,000 to $12,000
Motor Vehicles
Increased from $1,200 to $4,000
Personal Injury Awards
Increased from $25,000 to $50,000.
Depository Accounts
Increased from $1,000 to $5,000
Qualified Homestead
Increased from $40,000 per household to $75,000 per spouse.
For business debtors and consumer debtors who have businesses:
Equipment, Inventory, Farm Products, Professional Business Books
Increased from $7,500 to $15,000
*What is an exemption, anyway?”
An exemption describes what a bankruptcy filer can keep when filing a liquidation case, such as a Chapter 7 bankruptcy. For example, if a Wisconsin bankruptcy filer owns an automobile worth less than $4,000, the new exemption law allows you to keep the vehicle. Under the old law, you could only keep vehicles that did not exceed a value of of $1,200.
Extended Families and the Means Test
The trend for families to combine incomes and live under a single roof is rising in certain areas of the country and the financial realities for some people require that they move ‘back home.’ The latest change in the bankruptcy law requires a ‘means test’ to be performed for all consumer debtors seeking relief under the bankruptcy code. The general purpose of the means test is to limit the number of debtors who can file a Chapter 7 bankruptcy, which requires that your income be lower than a certain value determined by the household median income of the county where you reside.
The question we receive is: how do I calculate the means test if I live at home with my parents?
The answer: your parents income will be considered in the “means test” to the extent that they contribute to your living expenses.
The official language is that your current monthly income “includes any amount paid by any entity other than a debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents.” 11 U.S.C. 101 Section 101(10A)(B).
Your current monthly income “includes any amount paid by any entity other than a debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents.”
What the trustee really wants to know is if you have any disposable income. If you are living at home, expense free, and pull a paycheck for $1,000.00 month, the argument will be that you have $1,000.00 per month that can be paid towards creditors. The expenses regularly paid by your parents would be added to your current monthly income for the purpose of the means test.
The answer applies to all living arrangements outside of marriage, as defined by the U.S. Bankruptcy laws.
Can I keep my credit card if I file bankruptcy?
Stock answer: no, and I do not advise that you reaffirm a credit card after filing bankruptcy. You’ll get an offer for new credit cards anyway.
What people are usually wondering when asking this question: should I keep a credit card for emergencies and to pay certain bills after a bankruptcy so that I can “keep good credit” with that particular credit card?
You must list all credit cards that you carry a balance with. Failure to do so can be constituted as perjury, which in turn may lead to a denial of your bankruptcy discharge, or federal criminal charges.
You are not required to report ‘zero balance’ creditors on your bankruptcy. However, if you’ve recently made payments to get it down to zero, you can you expect a challenge from the trustee and potentially land in some hot soup. Many credit cards may find out about your bankruptcy and cancel the card anyway, even if your balance is zero.
Most credit card companies will allow you to keep your credit card after bankruptcy if you agree to enter into a new agreement, signed after the bankruptcy filing (called a “reaffirmation agreement.”)
Rebuild your credit without credit cards
It’s actually tougher to rebuild your credit using credit cards, especially ones you reaffirm after filing bankruptcy.
Let’s say that after you file bankruptcy, the credit card approaches you to reaffirm the debt, which is $3,000.00, on the promise that you’ll ‘rebuild’ your credit more quickly. Let’s also say that you will be offered a card with a low-level balance within months of your bankruptcy discharge (very likely.) Why would you pay $3,000.00 for the benefit of having revolving credit when you’ll be offered the same opportunity to ‘rebuild credit’ anyway? In other words, that $3,000.00 is essentially an annual fee for keeping the card.
Keeping your credit card debt actually hurts your credit because it reduces the positive effects that a bankruptcy has on your debt to income ratio: the more debt you keep, the worse your ‘fresh start’ looks via the credit score.
I do not advise using credit cards past bankruptcy. You can rebuild your FICO score using a good financial plan, and by carrying short term loans through a bank that you know you can quickly repay.
Credit Cards No-no’s Prior to Filing Bankruptcy
Never run up lots of credit card debt in the month or two prior to filing for bankruptcy.
Never open up a new credit card.
Never try to pay your ‘favorite’ card off in hopes to keep it.
Never use money from friends or family to pay off your ‘favorite’ card to keep it.
Never sign a reaffirmation agreement for your credit cards.
Think twice before believing that you can ‘save your credit’ after a bankruptcy through reaffirmation.
Too many bills? Follow These 3 Rules Until You Call Us
How many of you are living the formula: ostrich + sand, when facing your personal debt?
How many of you check the caller ID every time the phone rings, and let in continue to ring if it is a 1-800 number, or “unavailable”?
How many of you dread opening up your mailbox?
If these rituals sound familiar to you, we’re here to help. Doing nothing about overwhelming debt is not advised and only makes your financial problems worse. Follow these three rules if you find yourself struggling with debt until you gain the advice of a bankruptcy professional:
Rule 1- Don’t throw away your mail: Approaching the mailbox with dread, only to see a stack of mail from creditors, is not a wonderful thing. Your greatest ally in your personal war against debt, is time. The only way you can buy more time is to prioritize which bills need be addressed before you find yourself answering the door to a process server. Notice that I used the word “address” instead of “pay.”
Rule 2- Don’t pay bills according to who calls you the most: As a general rule, bills should be paid in the following order: 1) Food, 2) shelter, 3) utilities, 4) loans secured by vehicles, 5) child support/taxes, 6) loans secured by other property, 7) unsecured debt, including credit card debt and medical bills. There are times when child support and taxes take on a greater priority. The people who call you most are probably #7 on that list. They are calling you for a very good reason – to move themselves further up that list in your mind! The timing of paying student loans varies from case to case.
Rule 3 – Answer all lawsuits, and show up in court: Failing to answer lawsuits, or showing up in court, only shortens the amount of time you have in addressing the debt. You may have valid defenses which could eliminate the debt entirely. There are scores of companies that attempt to collect ‘zombie’ debt, that is, debt that has expired according to the statute of limitations. Don’t give them a free pass, especially if they intend to garnish your wages.
You need to know your options before you open your checkbook to pay the bills. Contact my Wausau bankruptcy office to set up a free consultation concerning your debts. We’ve helped many “ostriches” pull their head out of the sand, and breathe easier.
Bankruptcy is not for everyone, but it could work for you. The federal bankruptcy code is designed to afford honest debtors a chance at a fresh start in their finances.
Personal bankruptcy is the opposite of “doing nothing” about your bills. The faster you can regain financial balance, the better!
Bankruptcy: The Reset Button for the American Dream
The Fourth of July weekend was slow enough to allow my reflection on how to tie in our nation’s anniversary with this bankruptcy blog.
The first thing I wondered: if the US walked into my Wausau office (figuratively, of course) seeking bankruptcy advice, what would its debt history look like? I found a website called Treasury Direct that tracks such data and a quick review of the figures confirm the whisperings I heard that our nation has always carried debt.
The healthiest our nation’s outstanding debt was during the Andrew Jackson presidency, when he made true on his threat: “The Bank is trying to kill me but I will kill it.” President Jackson even explained why he killed it, convinced that he had done his duty to the American people in protecting the bank from foreign investors by closing it down.
According to Treasury Direct, our lowest outstanding budget was in 1835, when it fell to a whopping $33,733.05 as a consequence of President Jackson’s bankicide. A recession soon followed, complicating his already controversial legacy, and our nation’s outstanding debt has ballooned many times over since.
I’ll skip a discourse on how the budget grew and the history behind the existing Bankruptcy Code and instead retell how the Supreme Court defines the role of bankruptcy:
“It gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” — Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
Bankruptcy offers a way to rebound from past mistakes, and provides a limited safety net for those who seek to the growing risk of private enterprise.
Bankruptcy is about forgiveness. This last Fourth of July incorporates an element of forgiveness for some of us. I choose to love our country despite all its past mistakes and current earmarks of corruption.
Bankruptcy can be a reset the button that restarts our American Dream, whatever that may entail.
One irony in my contemplation was that our nation doesn’t have the same power that individuals do under the Bankruptcy Code to get a fresh start, short of inviting another Andrew Jackson into the government to shut the whole thing down.
The second irony is the contingent in Washington that looks down upon the Bankruptcy Code and implies that debtors who seek its relief are somehow dishonest or immoral for seeking a fresh start. “Shame on you for discharging debt,” say the people creating it for our country at breakneck speeds.
God bless America – and the hypocrites who run it.