Can bankruptcy actually help your credit score?

In the short run, no, your score will go down. But in the long run, it should help your score, otherwise there's probably no reason to file a bankruptcy.  If you have a great credit score, you'll notice a very large decline if you file a bankruptcy.  If your credit is already low because of missed payments or collection accounts, you'll notice just a small decrease.  

But you have to think about what would happen if you didn't file.  If you're going to go bankrupt, it's because bad things have already happened to your credit or will soon happen if you don't file. You might be making minimum payments right now to stay current, but you know you just can't hold on much longer.  Instead of letting the black marks on your credit start rolling in, you're deciding to file, knowing it will hurt in the short run, but help you in the long run.

Fast forward several years and your credit score should have climbed significantly.  Although a bankruptcy can stay on your credit report for anywhere from 7 to 10 years,  it carries less weight the older it gets.   Making payments on some loans, like mortgages, student loans, or very low-limit credit cards is the best way to build yourself back up.

Do I have to get credit counseling if I file bankruptcy?

There's a simple answer: yes. When Congress revised bankruptcy laws in 2005, they decided that everyone had to take a credit counseling class before they could file bankruptcy. If you don't take the class, the court dismisses your case.  What that means now is that before you file, you take a class online, in person, or over the phone. It takes about an hour, and at the end you get a certificate saying you've completed it. There aren't any tests; it's supposed to be educational.  The least expensive options start at about $8.  

It's frustrating, but everyone takes the same class no matter why you're having trouble with debts. Doesn't matter if you got sick and have medical bills or if you were in a car accident and got sued by the other driver. The law says you need the same "counseling" as someone who is struggling with credit card debt.  The bottom line is that it may not be the smartest requirement, but it is a requirement.

How to Choose a Bankruptcy Lawyer

Let's say you've decided you need to talk to someone about bankruptcy. How do you pick a lawyer?  Most of my clients have found me in one of three ways. They look in the phone book, they search online, or they get a recommendation from someone they trust.

 If you haven't gotten a recommendation, look in the phone book or online. Search for "bankruptcy lawyers" near you. Write down a few names. Look for someone who advertises themselves as handling bankruptcy. Look at their website. What kind of impression does it give you? Is it professional?  

Call these lawyers and say you are interested in bankruptcy.  See how you're treated on the phone.  Does the lawyer call you back, or do you get sent to their assistant? Are they polite? Do they make you feel comfortable?  Do they answer the questions you have? Be suspicious of any lawyer that quotes you a firm fee over the phone.  How can they know what to charge if they don't know your entire situation? Most lawyers will want to meet you before giving you a firm quote.  

Make an appointment with the lawyer you felt most comfortable with.  At your meeting, think about whether they answer all your questions and take the time to learn your entire story.  If you leave with a bad feeling, try someone else.  You can't always judge a lawyer by how many years they've been practicing, how many cases they've handled, or how low a fee they quote.  You have to feel comfortable with them and confident that they will work hard on your behalf.

You Can Discharge Student Loans in Bankruptcy--Sometimes

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Most people who come in to see me have heard that student loans can't be discharged in bankruptcy.  That's not quite right.  Student loans can be forgiven in bankruptcy, but it is hard to do so.  The bankruptcy law says that, unlike other types of debts, student loans can only be forgiven if the borrower can show the judge that it would be an "undue hardship" to pay them back.  Most judges have set a very high standard; usually the borrower has to be disabled or unable to work.  Your lawyer is best able to tell you if your situation gives you a shot at discharge. If it does, you sue the student loan lender during your bankruptcy case (the lawsuit is called an "adversary proceeding") and have a hearing in front of a judge.  

Most people won't be able to do this, and so in those cases, it makes sense to think about repayment plans.  If you have federal student loans, it's a good idea to look into consolidation and income-based repayment plans.  

Beware of Debt Settlements

You hear radio ads telling you about a company that can help you settle your credit card debt for pennies on the dollar.  Is this the answer to your debt problems? Probably not.  Debt settlements fail for most people. One study found that less than 10% of people enrolled in a debt settlement program complete it.

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Here's why these programs fail for most people:

-they make you go into default on your debts, which hurts your credit rating and jacks up your interest rates on credit card debts

-not all debts are included--some creditors won't work with debt settlement companies

-creditors can still sue you, even if you are enrolled in a program, and garnish your wages or levy a bank account if they win

-fees charged by debt settlement companies can be very high

In short, be very skeptical about whether debt settlement is right for you. If in doubt, speak with an experienced lawyer.


Online Payday Loans: The Worst Mistake You Can Make

Payday loans get a bad rap, and deservedly so. Their interest rates and fees are very, very high.   But if you absolutely must take out a payday loan, do so at a local store, not online.  If you've taken out a payday loan from your local payday lender and you fall behind, they will call you--a lot. You'll be annoyed by how aggressively they will try to collect from you. They might even call people you listed as references.  But if they step over the line into illegal collection actions, you can do something about it. You know where they are located, and with the help of a lawyer, you can get them to stop.

If you apply for a payday loan online, you are sending out a lot of very personal information to companies that may not be trustworthy.  Some times, the website you apply to is just in the business of selling "leads" to other companies.   That means your info is now all over.  I've heard from many people about how these companies will act illegally in trying to collect their debts.  Some people end up getting calls saying they owe money that they never borrowed in the first place.  Other clients have told me that the online lenders will call and threaten outrageous things, telling them they are going to jail unless they pay.  This is untrue, but there's usually not much to do about it. Even with the help of a lawyer, online payday lenders are often impossible to find or lare ocated outside of the U.S.  That means it's hard to enforce any kind of action against them.

Bottom line: avoid payday loans at all costs.  But if you absolutely must, apply in person, not online.

Stopping a Utility Shut Off

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This winter was a long and cold one, and it left many people with a pile of utility bills.  Now that warmer weather is here, so are shut off notices from providers like Alliant Energy, Jo-Carroll Energy, or Black Hills Natural Gas.  Your first, best step is to call the utility company and see if they can work with you to stop a shut off.  But if back utility bills are just one of your debt problems, bankruptcy might be a solution. 

Filing a bankruptcy will stop a shut off.  Utilities, just like other creditors, can't take actions to collect on their debts because the bankruptcy imposes an "automatic stay."   Back amounts that you owe on utility bills are dischargeable in bankruptcy.  If you owe Alliant $1,000 from past due bills, that amount can be written off in bankruptcy. One thing to know, though, is that some utility companies will require you to put down a deposit to get service going forward. So after you file, they may send you a letter requiring a deposit in the amount of one month's bill if you want to keep getting service under your name.  It is a deposit, so if you stay current, you should get it back eventually. 

My Top Three Tips for Rebuilding Credit

 Photo credit:  Lending Memo

Photo credit: Lending Memo

Credit scores have never been more important. If you're looking for an apartment, applying for a job, or trying to get utilities set up, your credit may be checked.  Having a good credit score can lower your interest rates on a mortgage or car loan.  It can even qualify you for better insurance rates.   So is there hope once you've gone through bankruptcy?  Of course.

Rebuilding your credit is a matter of time and discipline.  Here are what I consider the three most important tips.

1. Let time go by. Negative items (for example, a charge off or a late payment) can only stay on your credit report report for 7 years. Let some time go by and negative items will begin to disappear. 

2. Don't get behind again. You need to keep your post-bankruptcy credit report clean. That means don't fall behind on utility payments, cell phone bills, car loans, student loans, or other debts. If you need to figure out a strategy to make student loans affordable, look into consolidation or income-based repayment plans. 

3. Try credit again--in moderation.  Consider signing up for a credit card with a very low limit. Many banks will offer a card with a limit of a few hundred dollars.  Other banks offer "secured" credit cards.  That means you make a deposit of, say, $100, they give you a card with a credit limit of $100.  Even if you can't make a payment, you've already protected yourself by "pre-paying" the card. 

Protecting a Co-Signer in Bankruptcy

If you've decided to file bankruptcy, your attorney will ask you for a lot of information, including whether you have co-signed any debts.  They'll ask you for the name and address of anyone you co-signed a debt with, because that person is entitled to be mailed a notice of your filing.

But filing bankruptcy doesn't have to affect your co-signer's credit. Let say your mother co-signed your car loan.  So long as someone keeps paying that car loan on time, your mother's credit will not be hurt.  Your bankruptcy will release your liability on the car loan.  In other words, you could stop paying tomorrow and the bank could repossess, but they couldn’t sue you.  But they could still sue your co-signer.  While your bankruptcy is open,  though, the lender may not be able to take any action against you OR your co-signer, even if you're in default.

To consider a different situation, imagine that you co-signed a car loan for your brother.  Your brother gets overwhelmed by debts and files bankruptcy. Will your credit be hurt by his filing? Not necessarily. Again, so long as someone is paying the loan on time, your credit will not be hurt.  But realize that while he may get rid of his liability on the car loan through bankruptcy, the lender will still hold you liable.  So if he fails to pay, you have to step in, or deal with the lender's collection actions.

Why am I getting a 1099-C form?

Around this time of year, 1099-C forms may start to pop up in your mail.  This is a form a creditor sends you when they "forgive" your debt and won't try to collect it any longer.  Often, this happens when you've tried to settle a debt for less than the full balance.  Let's say you had a credit card balance of $5,000, and you agreed to settle it for $2,000.  Then the creditor sends you 1099-C form saying they forgave $3,000 in debt.  According to the IRS, this $3,000 may be income you need to pay taxes on.    Or let's say your house went into foreclosure.  You lost the house, and the bank decided not to come after you for the balance owed on the loan.  According to the IRS, this may also be taxable income.

The most important  thing is not to ignore these forms. The IRS won't, and if you don't report this income, they'll be getting in touch with you.  But it's important to know that forgiveness of debt doesn't always result in a higher tax bill. If your debts were discharged in bankruptcy, you don't pay tax on them. If you were insolvent (you owed creditors more than the value of the stuff you owned), you don't pay tax on it. In some cases, money you lost on your home may not be taxable.  Talk to your tax preparer about whether this is really income to you.  If not, you'll need to file Form 982  with your tax return.  If you usually prepare your own returns, consider hiring a professional this year unless you're very confident you know what you're  doing.