Bankruptcy and Credit Repair

No discussion of credit repair would be complete without considering the legal option of bankruptcy (BK) and how it affects your credit score.

Depending on your assets, income and amount of debt, this available option is, in some cases, the best solution to financial turmoil.

There is life (and credit) after filing and discharge and in many cases this is the best option.

The United States' Congress and President George Bush signed the 2005 Bankruptcy Reform Act on April 20th, 2005 and it went into full effect for cases filed on or after October 17, 2005.

It is in need of some type of additional reform because it unfairly punishes those who need the safety net of this protection.

Henry Ford filed seven times before his tremendous success and large corporations routinely seek protection from their creditors.

As it is now, the deck is stacked unfairly in favor of the banks and often prevents consumers and small businesses from utilizing bankruptcy when necessary in today's economy.

The most important thing to know is that bankruptcy is still available to protect people in financial need, even though it has gone through a major change.

For eight years, the credit card and banking industry pushed for new laws, and thanks to their intense lobbying efforts and high political contributions, they have finally succeeded. The changes are expected to make it much harder for consumers to file and will eliminate many of the benefits under the current laws.

This Bill is called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 -- who wouldn't support that? We all want to stop abuse and protect consumers, don't we?

So do the Senators and Representatives who have taken the word of the credit card companies who are pushed this law and whose high paid lobbyists worked so hard to pass it. Just reading the title makes it sound like something we should all support.

The problem with this new law is that it won't stop fraud and it doesn't protect consumers. Some think it should be called the Bankruptcy Prevention and Fraud on Consumers Bill because makes it harder for lower and middle class workers who are already being beaten down by high interest rates, high housing costs, job losses, divorce and/or medical bills.

This is a tool of lenders trying to squeeze more money out of already strapped families and individuals.

The Bankruptcy Reform Act of 2005 include provisions which will make it more expensive and harder for everyone to file bankruptcy. It will involve more paperwork for everyone.

Attorneys are required to provide additional disclosures, including disclosures that must be given to you at the start of any assistance to you.

You may find that attorneys won't talk to you on the phone anymore, even to answer simple questions because of the required disclosures, and may ask you to come in to answer any of your questions. A consultation should provide you with the answers you need about YOUR situation, and to see if this legal option will help you.

Our senators and congress members didn't listen to the people who know the system best - judges, law professors, and lawyers who represent both sides (debtors and creditors).

Many people opposed the new law as being harsh, unbalanced and overreaching. It will punish the majority of people who are honest and in financial trouble, for alleged abuse by a small minority.

The law is hard on consumers and provide additional hurdles to jump. Attorneys are learning to apply the law and make sure that clients are getting the best treatment possible under the new laws.

Even though the law was passed in order to have more people to file Chapter 13 cases to repay some of their debts, it makes Chapter 13 harder. Provisions in the current Chapter 13 laws have been changes so it is not as beneficial as before.

Most lawyers are honest and care about their clients, and help them file correct and accurate documents. Most only recommend BK if it is a good option. This makes the whole system work better as well as protecting good honest people.

New Burdens

The new law imposes heavy burdens on debtors by requiring documentation which is not now required, including providing tax return(s) to the Court.

People who make more than the median income of their geographic area will have to apply a formula to see if they can file Chapter 7. People below the median income won't use that formula, but have other requirements to consider.

Under the old law, the court reviewed debtors' expenses and required that people who could afford to make payments file a Chapter 13, but the new law makes people use a formula that may not be realistic.

It imposes an income and expense test (the "Means" test) based upon IRS standards which may not leave families with enough to realistically live on, and may force people to give up their homes, cars or other all in an effort to pay credit cards back a few more dollars.

For people whose income exceeds the median income for their living area, the "means test" will calculate income and expenses, and must be applied before a BK case is accepted. The problem is that the test uses artificial numbers in the calculations, and is complicated to apply. The test may not reflect reality and may show leftover income where there really is none.

As the Courts interpret these laws, we will find out how this Means Test will affect people.

Credit Counseling Requirement

People will have to complete a Bankruptcy Court Approved Credit Counseling Course (not just any credit counselor) before being allowed to file (except in emergency situations). You must go through an approved program, not just any credit counseling company. Companies are already advertising hoping to pick up some the fees from potential bankruptcy debtors, but the course must be performed by a BK Court Approved program.

You do have to complete the course and receive a certificate of completion before you can file a BK case, but you do not have to do it before you speak to an attorney to see if BK is right for you.

Your attorney will make sure that you complete any required counseling through an approved course, and you may be able to even complete the program from your attorney's office or your home, over the internet.

Also know that BK may actually IMPROVE your credit situation. Depending on you circumstances, it may be something to consider.

Many consumers who were living with mountains of debt and constant threat of lawsuits and wage garnishment, etc. find themselves with higher credit scores and cleaner credit reports within a short time after filing BK.

Unfortunately, scam artists try to convince people who have filed BK they need an illegal scheme called "file segregation" to obtain new credit. This is NOT true and should be avoided.

Bankruptcy does not always cause the negative consequence the credit and banking industry wants you to believe. Many people purchase homes and cars and obtain new credit cards with months of a bankruptcy discharge. The key is to change your credit behavior once you are on the other side of BK and learn from mistakes of the past.

Bankruptcy can be reported on your credit report for 10 years from the filing date of the case. If you file a BK and voluntarily dismiss it before the discharge, the credit reporting agency must report the dismissal as well as the BK filing.

Assuming you have income, you should be more credit worthy after a BK than you were before, since your old debts no longer have a claim on your future income. The important thing to consider is that after a BK discharge, it is vitally important to keep your credit as perfect as possible.

Keep in mind that future creditors will be scrutinizing post-bankrupt applicants much more carefully than those who haven't filed bankruptcy. You need to prove that you've changed your credit behavior and learned from the mistakes that led to the bankruptcy filing.

One interesting thing to keep in mind about your credit score after bankruptcy is that your credit score will probably increase as long as the bankruptcy is on your credit reports. Your credit score is based on the fact that you are in a "pool" of everyone who has ever filed bankruptcy.

Once the bankruptcy falls off your credit reports (after 7-10 years), your credit score will most likely fall dramatically due to the fact that you are now in the "pool" of everyone. For this reason, it is best to obtain mortgage rates and interest rates prior to the bankruptcy falling off your credit reports. Once the bankruptcy is off your record and your credit score is at a lower level, you will not qualify for the better interest rates.

After the discharge, you are entitled under federal law to have the balance of each discharged debt reported as "zero" and a notation of "IIB" (included in bankruptcy).

The history of delinquencies can be reported, but the balance must be zero. If it is not so reported, dispute the tradeline as it is not reporting correctly.

Bankruptcy is the hardest financial decision you�ll ever face. It can be a fresh start, or it can be the start of the biggest financial nightmare ever, whether or not you ever want credit again.

To make sure you truly get a fresh start after bankruptcy, follow these �Do�s and Don�ts�:

DO:

* Get copies of your credit reports from all three major credit bureaus and make sure the accounts that you included in your bankruptcy are listed as discharged.

* Get a secured credit card � but make sure the card issuer reports your payments, offers a grace period, and doesn�t report your card as secured.

* Set up a strategy for your undischarged debts � and pay them off as quickly as possible.

* Wait two years before applying for a mortgage or car loan to get the going interest rate.

* Call a credit counselor and cut up any new credit cards if you find yourself carrying balances again.

* Take steps to heal your relationship with money so you break the cycle that got you into debt.

DON�T:

* Jump at every credit offer that�s mailed to you. You�re better off seeking out a good secured credit card on your own.

* Reaffirm debts that aren�t essentials � only reaffirm debts on your car, mortgage and major appliances.

* Let future creditors shame you into paying a higher interest rate because of your bankruptcy. Once you�ve paid regularly on a secured card for two years, you�re eligible for the going interest rates for car loans and mortgages.

* Take out a car loan for longer than two years � there�s too great a risk of becoming �upside-down� on your loan, owing more than the car is worth. Only buy as much car as you can afford.

* Go to �bad credit � no problem� lenders or take out �payroll advance� loans. These creditors will take advantage of you with outrageous interest rates.

* Allow the mistakes of the past to determine your financial future.

If your reports are clean at the time of filing, you won't have as difficult a time rebuilding after discharge.

Bankruptcy itself is a huge negative, so don't underestimate the effect it will have on your credit score.

The thing is, if your credit reports are clean before filing and remain so after discharge- creditors tend to assume that you had an unfortunate event happen leading to the BK and that delinquencies aren't a pattern of behavior. Others don't care and won't work with you at all for years due to the BK.

FICO still considers the pre-BK negative marks, therefore, if you don't have alot of those piled on top of the bankruptcy, your scores won't suffer as much.

The day you file, no further negative reporting should happen for those accounts. They should report as IIB (Included In Bankruptcy) with the balances zeroed out. No lates, collections, or other negatives should report on your credit reports after filing. You are not increasingly "late" once you file and creditors cannot legally expect payments after that.

Negative history on your credit report is just that: history. It does not doom you to perpetual credit rejection. It does challenge you to strengthen your financial present by managing your money more wisely and using credit carefully.

What to Consider Before Filing Bankruptcy

Some people think of BK as an easy way to offload a crushing debt burden, and it's sometimes the first method they reach for. Well, it may well relieve the burden, but it's far from easy and should be the very last thing you use to do so.

While the law has made it relatively easy to actually file papers, the process - like any legal proceeding - is far from painless. You will have to justify your filing, exposing all your financial history to a judge and opening it to objections by creditors. If you genuinely owe the money, they're unlikely to settle happily for 10 cents (or less) on the dollar.

Even if you're successful, there are multiple long-term impacts that you'll want to consider carefully before taking such a drastic step.

You will lose any credit cards that have outstanding balances, and others may choose to close your accounts. You'll also find it near impossible to get a home loan or other large credit line (except possibly at the kind of ruinous interest rates that probably led, in part, to your current situation).

Also, not all debts are covered even by a bankruptcy filing. Student loans, back taxes within the past three years and select other debts are generally exempt from BK protection.

That situation will persist for 10 years, during which time you will need to maintain a near perfect credit record in order to work your way back to a useful level of trust. Potential creditors will regard any bankruptcy as the most negative criterion on any credit report - even beyond a low FICO score.

Beyond the credit impact, you may actually be required to forfeit real assets - a boat, expensive jewelry and other items - depending on when they were acquired. Most states make an exception for the primary residence and your auto. If you have secondary property, that may not be protected, however.

Finally, of course, the procedure itself is not free. Courts always have required fees and if you use an attorney that too will cost you. That can add the final straw to an already very bad financial situation.

On the upside, you will obtain relief from debt collection efforts (provided they receive notification). Your wages can not be garnished and any foreclosure action will be stopped. By taking action sooner rather than later, you will start to build a new credit history that can be better than the past one.

Since you won't have access to new prime credit cards for at least two years after a discharge, this can actually be an advantage. There are some people who simply should not have access to easy credit, until and unless they can find a way to change their habits. There are many available prepaid debit cards that can be used instead of credit cards.

It can serve as a huge wakeup call to change any bad money management habits. For some, it's necessary to hit rock bottom before they find the inner strength to make large, positive, long-term changes.

But, hitting rocks is painful. Consider carefully before you take the plunge.