Archive for the ‘Post Discharge’ Category

The FICO credit-scoring system groups together people with similar histories and rates them.  These groups are called Score Cards.

If you have filed for bankruptcy, your case filing will appear on your credit report. However, you will be grouped on a Score Card with other individuals who have filed for bankruptcy.  As such, your credit history will be compared with others in your Score Card, and could be viewed favorably by lenders.  However, if and when you are placed into a different Score Card with individuals who have not filed bankruptcy, and who have strong credit histories, your credit rating could be viewed unfavorably by lenders.  In other words, your credit score will be lower, and your credit score can drop when you “jump” from one Score Card to the next.

The best way to avoid a significant drop off in a credit score and recover your credit rating when switching score cards is to repay all debts on-time; pay down all outstanding debts; refrain from opening new credit accounts; and keeping low balances when you do incur debt.  Adhering to this formula will invariably raise your credit score, which will allow you to borrow money to purchase a car or a home at a more favorable interest rate.  Rebuilding your credit score after filing for Chapter 7 or Chapter 13 bankruptcy is possible, however, it takes discipline and time to achieve a higher credit score rating.

Your lenders will generally “write off” a delinquent account as a bad debt after 180 days, or six months. Most lenders attempt to collect their debts for a period of 180 days, and then, after that period,  issue a “charge off.”  This action is reported to the consumer reporting agencies (such as Experian) and will appear as a “charge off” or as “collection” on your credit report.

A “charge off” means that your delinquent debt was sold and/or transferred for collection purposes to a third party.   In all likelihood, after your debts are charged off, you will remain legally responsible for repaying the debt.  In other words, your debt is a contract to repay money, and those rights may be sold, assigned, and transferred to a third party. Some of the large credit card companies use collection agencies to collect their debts.  Here, credit issuers prefer to outsource their collections to aggressive third party agencies who take the risk and rewards in collecting delinquent debts.  In the alternative, many companies and debt collectors are active in the delinquent consumer debt market, and purchase delinquent debt from credit card companies. In these cases, your debt is sold to these companies for a fraction of its full value.

In either instance you have a right to request that the original creditor or new account owner provide documentation that verifies the debt.  You have a right to request a record of assignment and transfer if your debt was sold to a third party.  You also have the right to request an account statement that provides a breakdown of the principal and interest owed, as well as a statement of all credits made to your account. For more information, see the Fair Debt Collection Practices Act, 15 USC s. 1692(g) for the Federal statutes concerning the validation of debts.

If you are considering paying debts that are now owned by a third party, keep in mind that paying off those debts may not improve your FICO credit score. The most important factor that weighs upon your credit score is what the original creditor reports to the consumer reporting agency. This report is weighed upon much more heavily than what is reported by a debt collector or third party assignee of a debt.  In other words, paying off collections accounts does not improve your FICO credit score.

Filing for bankruptcy is a serious blow to anyone’s credit; however, it is possible to rebuild your credit standing within a reasonable amount of time. The amount of time it takes to rebuild your credit varies from person to person; but, for for most who file, bankruptcy is actually the first step on the road to rebuilding your credit standing rather than the last.

When deciding to file bankruptcy, it is important to understand that Bankruptcy can remain on your credit report for up to 10 years.  However, when you consider that a collection lawsuit, repossession, or foreclosure will also remain on your credit report for the same period of time; bankruptcy may be the best option since the bankruptcy eliminates your obligation to the underlying debt.  This is an important consideration when you consider that in a repossession, you will be responsible for the remaining outstanding balance.  Moreover, although a bankruptcy may stay on your credit report for 10 years, it will only take a few years after a bankruptcy discharge to rebuild your credit.

Step 1: Filing Bankruptcy

Believe it or not, the bankruptcy discharge itself, which liquidates all, or most of your actual debt, improves your income-to-debt ratio instantly.  This, by itself, will help to increase your credit score.

Step 2: Obtain Credit and Use It

After your discharge, you will receive credit card and other solicitations fairly shortly. Most of these will be high-interest, low limit credit cards.  Normally, I would recommend that you avoid these offers like the plague; however, it is a simple truth that you have to be in debt to establish credit.  Therefore, I recommend that you obtain one of these cards and actually use it, sparingly.

Bankruptcy eliminates your past credit history.  Therefore, you must establish a new credit history to rebuild your credit score.  By using the card and making payments, you will establish a new credit history.  Your use of credit is reported to the credit bureaus and will help accomplish this goal.

Step 3: Stay Current and Lean From Your Bankruptcy Experience

I hope that Bankruptcy was a learning experience.  Follow these rules when using your credit card.

1. Do not use your credit card if you do not have the money to repay it.  A credit card is a tool; not a crutch.
2. Use your credit card only for emergencies or large necessities and don’t use it again until the balance is paid.
3. Never carry a balance on your card more than two months of disposable income.
4. Pay more than your minimum balance.  If you cannot afford to pay more than your minimum balance, then you can’t afford a credit card and should wait to try to rebuild your credit.
5. Never transfer a balance unless you actually intend to close your account with the card you are transferring.  Most people get in trouble by transferring balances and then running up a new balance on their old card.  GET RID OF IT!
6. Do not get a “store card.” The cards you get from Home Depot, Macy’s, and Target have interest rates that usually exceed 30% and cannot be used anywhere else.  Stay away from them!
7. YOU DON’T NEED MORE THAN ONE CREDIT CARD; EVER!

As time goes by, you will begin to rebuild your credit score.  You can eventually replace the high interest credit card with one that has better terms.  However, don’t start overextending yourself. Learn from your bankruptcy experience!

Step 4: Avoid Credit Traps

Credit card companies are sneaky.  They will offer all sorts of “offers” such as “90 days same as cash” or “no interest for six months.”  However, don’t fall for these traps.  Ninety percent of consumers do not repay the principal balance within the “interest free” period and if you have even $1 left owed on the principal, you will be charged interest on the entire balance.  For example, if you purchase a dishwasher for $500 with no interest for six months.  At the end of six months you still owe $5.00; the credit card company will then charge you the full six months interest on the entire $500 purchase.

Step 4: Monitor Your Credit Report

As a Massachusetts resident, you are entitled to 2 free copies of your credit report from each of the credit reporting agencies per year.  Therefore, you should monitor your credit report every six months.  If you find an error on your credit report, or find that a creditor that was discharged in bankruptcy is still reporting, you should report the error with the credit reporting company.  If you still have problems fixing the error, you should contact your bankruptcy lawyer who will probably be able to help you.

This is by no means an exhaustive list; but just a guide.  Credit is a two edged sword and should be used wisely.  If you obtain new credit and do not control your spending, then you will likely be back in the same boat that you were in when you filed bankruptcy in the first place; only you will not have the option of filing again for 8 years.  If you live in Massachusetts and you are considering bankruptcy, please feel free to contact us.  Your consultation is free.