Credit Scores (Part 2)

In part two of our blog on credit scores, we will discuss how to rebuild your credit score after completing a bankruptcy.

 
While the filing of bankruptcy places a negative report on your credit, rebuilding your credit rating after completing a bankruptcy is a manageable task.  Once completing a bankruptcy, the debtor’s credit report will not reflect a positive credit history, which makes up the largest influence on the overall credit score.  Also included in credit history, is the public record of filing bankruptcy.
One method of keeping at least some positive credit history after completing a bankruptcy is reaffirming debts during a Chapter 7.  In the typical case, debtors have the option of reaffirming their secured debts, including mortgages, car notes, and debts secured by other property such as furniture or electronics.  After reaffirming those debts, the terms essentially stay in place as if they were not including in the bankruptcy.  The payment history for reaffirmed debts should continue to reflect the payments made prior to, and after, the bankruptcy has been completed.
 
Even if there are reaffirmed debts after a bankruptcy, debtors will need to establish a positive credit history to help rebuild their credit after the completion of their case.  One method of establishing a positive credit history is to open, and use, a credit card after discharge.  While many debtors believe they will be unable to qualify for a credit card after bankruptcy, they will likely get inundated with credit card offers soon after their discharge.  Although there is generally a negative perception to one’s ability to maintain credit with a bankruptcy on their record, many lenders will offer credit to recent bankruptcy filers because their debt has likely been eliminated and they are ineligible for another discharge for eight years.  
 
It is important to note that any credit cards obtained after a recent discharge will likely come with unfavorable terms and high interest rates.  Accordingly, it is generally considered the better practice to open one or two secured credit credits after bankruptcy.  Secured credit cards work like regular credit cards but require a security deposit to open which generally range between $500-$1,500.  The deposit typically becomes the credit limit for the card.  As with unsecured credit cards, each offer varying terms and differing interest rates.  When using the card to establish and build credit, it is important to use the card each month and pay off the entire balance.  Prior to signing up for a secured credit card, you will want to ensure the issuer reports to all three major credit bureaus.  After a period of making regular payments on time, you will eventually qualify for an unsecured credit card at near market terms.
 
After building a positive credit history through the use of credit cards, you can eventually look to purchase a car or even a house.  Federal Housing Administration (“FHA”) loans are available to former debtors after 2 years from a Chapter 7 discharge.  In addition, FHA loans may be obtained during a Chapter 13 after one year of timely plan payments.  These timelines may be adjusted if the borrower provides an explanation of extenuating circumstances which led to the bankruptcy filing along with their application for the FHA loan.
 
When working to reestablish your credit and build a favorable credit score, it is important to continue to monitor your credit report for errors and inconsistencies.  While there are Credit Repair companies willing to assist, these companies are generally perceived as a scam.  Disputes to information on the credit report can be done effectively on a “Do-it-Yourself” basis.  Most disputes can be completed online at through the websites for the three major credit reporting companies.
 
GUIDELINE FOR IMPROVING CREDIT
 
Below is a suggestion for steps to take following bankruptcy to rebuild credit:
 
1) Get a Credit Report and Check Your Score
 
Credit reports can be obtained for free from each agency once per year.  After completing a bankruptcy, it is important to review the credit report to check for any errors.  Make sure debts which were discharged are reflected correctly.  Also ensure that any debts which were reaffirmed continue to show the credit history.  Dispute any inconsistencies with the credit agencies.  
 
2) Open a Bank Account
 
If you do not already have a checking or savings account, open a new account.  Get an account that allows automatic bill pay and set it up to prevent missed or late payments.
 
3) Apply for a Secured Credit Card
 
Although you will receive offers for unsecured credit cards shortly after completing bankruptcy, secured credit cards will likely provide better terms and lower limits which should help prevent falling back into debt.  The credit limit on secured credit cards is generally the deposit required to open the account.
 
4) Pay Off the Balance Every Month
 
Make sure to use the card to make small purchases every month.  Having an open credit card without any usage does not help build credit.  It is also important to pay the balance in full on time each month.  The amount of debt owed makes up a large portion of the credit score.  Because the credit limit is likely to be small when opening secured credit cards, it is best to not leave running balances on the cards from month to month.  Paying off the balance in full also prevents accruing interest.
 
5) Continue to Monitor Your Credit
 
Continue to pull a credit report and monitor for inconsistencies.  Make sure any new accounts are showing their timely payments and continue to dispute any incorrect information.  As previously mentioned, you are entitled to one free credit report per agency per year.  It is best to spread these free reports over the year and obtain a report every 3-4 months from one agency at a time.

If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

Credit Scores (Part 1)

In this series on Credit Scores, I will discuss the various types of credit reports and the factors which influence your credit score.  Credit reports consist of detailed information regarding an individual’s current and past financial obligations.  Credit scores are essentially a numerical grade of the information contained within the credit report.  These scores are used by credit card issuers, auto lenders, mortgage companies, and other lenders to judge the applicants financial responsibility prior to issuing credit. Remember you can obtain your free credit report from each agency one time per year at www.annualcreditreport.com.  Contact the attorneys at Fears Nachawati with any questions. 

 
TYPES OF CREDIT SCORES
  1. FICO Scores - FICO (otherwise known as the Fair Isaac Corporation), created the first credit scores in the 1950s. Since their creation, FICO scores remain the most widely used scoring model by lenders with over an estimated 90 percent of the market share in 2010 of scores sold to firm for use in credit related decisions.  Although there are different FICO scoring models, the scores generally range from 300 to 850.
  1. Credit Reporting Agency Scores - Credit Reporting Agencies (Equifax, Experian and TransUnion) each utilize their own scoring model, which causes scores to vary among the three main agencies.  These scores were originally created to predict performance on credit obligations.  However, today these scores are primarily used as educational scores for consumers.  Each agency uses differing ranges of scores.  For example:
    • Equifax’s Credit Score ranges from 280 to 850.

    • Experian Plus Score ranges from 330-830.

    • TransUnion TransRisk New Account Score ranges from 300-850.

  1. VantageScore - VantageScore is produced by VantageScore LLC, which is a joint venture of the three credit reporting agencies.  It was developed as a competitor to FICO. VantageScore results range on a scale from 501-990.
CALCULATING THE CREDIT SCORE
 
While there are multiple credit scores, as noted above, the credit score of primary concern is the FICO score.  The FICO score is generally based on five categories, each of which are weighted to have a varying impact on the overall score.  These categories, sorted by overall importance, are:
  • -Payment History (35%)
Credit payment history is one of the most important factors in a FICO score.  Lenders, who want to know whether you’ve paid past credit accounts on time, place a heavy reliance on payment history.  While a few late payments may not have a major impact on the credit score, numerous late payments, or a history of routinely late payments, will significantly drop the credit score.  FICO specifically looks at how late the payments were made, how much was owed, how recently the late payments occurred, and how many late payments are on the account.  Typically, late payments are reported as either 30 days late, 60 days late, 90 days late, 120 days late, 150 days late, or a charge off.  It is important to note that when a debt is “charged off,” it does not mean that debt is no longer owed.
 
Account types considered for payment history include credit cards, retail accounts (i.e. department store credit cards), installment loans, finance company accounts, and mortgage loans.  Public records and collection items also fall under the payment history category, which include the filing of bankruptcy.  Paying accounts on time, or a good track record on most of your accounts, will have a positive influence and increase your credit score.
 
  • Amounts Owed (30%)
The second leading influence on credit scores is the amount of debt owed on specific accounts.  Credit scores are affected by the number of accounts you have with balances.  In addition, the proportion of credit limits utilized will affect the credit score as well.  For example, when someone is approaching their credit limit on a card, this may indicated that they are overextended and more likely to make late or missed payments.
  • Length of Credit History (15%)
As the category suggests, the length of time your credit account has been open influences your credit score.  Having numerous recently opened accounts will negatively impact your score.  In addition, the length of time from your last activity on an account may also lower your score.
 
  • Types of Credit in Use (10%)
Credit scores are effected by total number of open accounts you have and the overall makeup of that mix of credit.  It is not necessary to have each type of credit account considered to establish good credit.  However, it is also important not to open a lot of accounts you do not intend to use.  
  • New Credit (10%)
The number of recently opened accounts will effect the credit score.  Opening multiple credit cards in a short period of time may negatively effect your score.  In addition, running up high balances on recently opened cards will also have a negative impact.  
 
Credit inquires also fall into the New Credit category when determining the credit score.  Checking your credit report will not effect your credit score as long as the report is obtained directly from the credit reporting agency.  Reports from all three may be obtained for free from www.annualcreditreport.com.  Multiple credit inquires from creditors may negatively impact your score.  However, numerous inquires in a short period of time, such as when shopping for a car, are typically treated as a single inquiry and will have little impact on the overall credit score.
 

The Typical Chapter 7 Timeline

 A lot of my clients have not previously filed for bankruptcy.  One of the most common questions is gaining an understanding of the general timeline and process of your typical Chapter 7 Bankruptcy.  In general, Chapter 7 is the quickest bankruptcy to complete.  The typical Chapter 7 case is completed within three to six months of the filing date.  Keep in mind, before you can file a Chapter 7 bankruptcy, you need to complete your pre-filing Credit Counseling Course from a certified credit counseling agency.  You must also qualify for Chapter 7 by passing the Means Test, which will be completed by your attorney and filed as part of your petition and schedules.

 
After your case is filed, the Court will assign a Trustee to your case and schedule the Section 341 Meeting, otherwise known as the Meeting of Creditors.  This meeting generally takes place around 30 days after the case was filed.  It will be held by the Trustee assigned to your case.  All of your creditors are invited to attend the meeting, however, creditors rarely attend.  At the meeting, you will discuss the schedules filed in your case and provide a brief explanation on what caused you to file for bankruptcy.  These meetings typically last 10 minutes.
 
Creditors have 60 days from the completion of the Meeting of Creditors to file an objection to discharge.  Assuming there are no objections, you should receive your Discharge Order roughly 60 days after your Meeting of Creditors.  Once the Discharge is entered by the Court, your case will be closed and your Bankruptcy will be completed.  Please see our series on rebuilding credit after your bankruptcy for further discussion of how bankruptcy affects your credit. If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.
 

Will I Lose My Property if I File Bankruptcy?

Many clients I meet with are concerned that they will have to surrender their house and car if they file bankruptcy.  As long as you can afford to maintain the payments on the mortgage and car note, you will not lose either in a bankruptcy filing.  Most states provide exemptions for your house and car which allow additional protection for these assets.

In addition, for those who have fallen behind on mortgage or car payments, Bankruptcy may actually provide a favorable option to keep these assets and catch up on payments over time.  A Chapter 13 Bankruptcy, which typically takes 36-60 months to complete, places debtors on a payment plan which commits their disposable income to their creditors.  This is beneficial for debtors who experienced a temporary setback, just as a loss of job, and needs additional time to catch up on car payments or mortgage arrears.  In the Chapter 13, the arrears are spread out over the length of the bankruptcy plan, providing a manageable payment arrangement as opposed to trying to catch up in one lump sum.  Keep in mind that you are still responsible to maintaining regular monthly payment to the mortgage or car creditor during the bankruptcy in the event these are listed as a pay direct obligation and the monthly payments are not part of your bankruptcy plan, which varies from district to district. If you have questions regarding your assets, exemptions, or Chapter 13 payment plans, contact an attorney today at 866-705-7584 or send an email to fears@fnlawfirm.com.

 

Do I Have to Include My Spouse in My Bankruptcy?

In the event you brought significant debt into your marriage which you incurred before you were married, certain states will consider that your separate debt, including Texas.  If your spouse is not liable for your debt, such as it was incurred before the wedding, or they did not co-sign for the debt, an individual bankruptcy may be an option.  Married debtors are able to file both Chapter 7 and Chapter 13 Bankruptcy individually.  However, your spouse’s income may still influence which Chapter of Bankruptcy you ultimately file.  Keep in mind that all household income, which includes your spouse, is used to determine your eligibility for bankruptcy.  In the event you do file bankruptcy individually, your filing will not affect your spouse’s individual credit rating.  This is a common concern for debtors seeking to file individually.  However, joint debts will still include a bankruptcy indication on your spouse’s credit report.

 
If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation. 
 

What If I Don't Qualify for Chapter 7 Bankruptcy

In order to file Chapter 7 Bankruptcy, you will need to complete and pass a Means Test, which is filed as part of your bankruptcy paperwork with the Court.  In general, the Means Test takes a six month look at your income and compares that with the median income for a similar family in your state.  If you earn more than the median income, minus allowable expenses, and show enough disposable income to pay back your creditors while maintaining a minimal standard of living, you may not qualify for a Chapter 7 bankruptcy.  However, this does not mean you cannot utilize the protection of the bankruptcy court to help you resolve your financial difficulty.

In the event you do not qualify for a Chapter 7 Bankruptcy, you may still qualify for a Chapter 13 Bankruptcy.  Under Chapter 13, your attorney will calculate a payment plan, which generally ranges from 36-60 months, to provide payments to your creditors in line with your budget.  At the completion of your bankruptcy plan, you are entitled to a discharge of the remaining debt, subject to certain restrictions.  Your bankruptcy plan may only provide for a return of a certain percentage of your unsecured debt, such as medical bills and credit cards.  In the event there is a portion of this debt remaining, it is subject to discharge at the end of the case.  While Chapter 13 takes longer to complete than a Chapter 7, you are still protected from collection efforts, foreclosure, repossession, and lawsuits while you are in an active bankruptcy.  Although you will be placed on a budget, you will have peace of mind by being protected from your creditors while maintaining a manageable payment plan to help get you on the right financial path.

If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

 

Divorce and Bankruptcy

According to the American Psychological Association, about 40 to 50 percent of married couples in the United States get divorced.    While getting divorced may not be the easiest process, if you happen to be involved in an active Bankruptcy case, it can add additional step to complete your divorce proceeding.  The good news for those going through a divorce is that you can still complete the process if you or your spouse are involved in a bankruptcy.
 
As part of your divorce proceeding, the Judge will divide the family assets between the spouses.  If you are in a Bankruptcy, this division of assets is prohibited unless approved by the Bankruptcy Court.  After the Bankruptcy is filed, all of your assets become property of the Bankruptcy estate.  The automatic stay, which provides protection from your creditors, prevents distribution or liquidation of the bankruptcy estate without permission from the Court.  In order to proceed with the divorce in State Court, your Bankruptcy Attorney will need to petition the Bankruptcy Court for permission to proceed with the State Court Divorce proceeding.  This is generally accomplished by filing a Motion for Relief From Automatic Stay in the Bankruptcy Court.  Once the Automatic Stay is lifted for the purpose of filing divorce, you will be able to proceed in the State Court.
 
If you are involved in an active Bankruptcy case, you should discuss your situation with your Bankruptcy Attorney to make sure you are properly following the rules of the Bankruptcy Court. If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

Getting Married During My Bankruptcy

For those involved in a Bankruptcy, rest assured that your Bankruptcy case will not prevent you from getting married.  For those involved in a Chapter 13 Bankruptcy however, your upcoming marriage may have an effect on your case.
 
In a Chapter 13 Bankruptcy, you are required to pay your disposable income into your bankruptcy plan in order to pay back your creditors.  The calculation to determine your disposable income includes all household income.  Even if you file an individual case, as opposed to a joint case with your spouse, your spouse’s income is still included as the household income.  For those who get married after their case is filed, their household income may increase if their new spouse is employed.  The Bankruptcy Trustee will want to review their income to see if you can afford a higher return to your creditors.  While your new spouse’s credit will not be affected by your bankruptcy, their income may still come into play.   However, your spouse will have their separate expenses which they were responsible for before the marriage.  
 
If you decide to get married during your bankruptcy, congratulations!  Also, discuss your situation with your bankruptcy attorney who can assist you making any necessary changes to your bankruptcy plan and make sure any changes fit inside your budget. If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

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Chapter 13 Discharge

Chapter 13 Discharge

The discharge is the overall of any consumer bankruptcy case.  This is occurs at the conclusion of the case and it is a permanent injunction that eliminates the dischargeable debts.  A chapter 13 debtor is entitled their discharge after they complete of their chapter 13 plan payments and so long as the debtor has:

1.      1. certified that they have made all domestic support obligations (child support and/or alimony) that came due during the case  (if applicable);

2.       2. has not received a discharge in a prior case filed within a certain time frame see How Often Can I File Bankruptcy? ; and

3.      3.  completed an approved course in financial management course  

The court will enter the discharge order an opportunity for notice and if necessary a hearing.

The discharge releases the debtor from all debts provided for by the plan and these creditors may no longer initiate or continue any legal or collection action against the debtor.