Why Bankruptcy Doesn't Ruin Your Credit

I've heard it time and again: "I can't file bankruptcy because it will ruin my credit! Won't it?"

No. Life goes on after bankruptcy and you will almost certainly be able to borrow and finance consumer purchases or even business investments afterwards. Most folks receive credit card and car loan offers shortly after filing. It is not unusual to qualify for a home mortgage loan - or a refinanced home loan - within two to three years of filing. And the repayment terms on these post-bankruptcy loans can be solid if you can wait a couple of years before borrowing again, using that time to re-establish your creditworthiness.

Bankruptcy does not ruin your credit. Plain and simple, what hurts a credit score more than anything is not paying bills. And the remarkable thing about bankruptcy is that it makes the dischargeable bills go away. You cannot be late on a bill that has a zero balance. There are credit consequences to filing bankruptcy. But for people who need help with overdue or unpaid bills, bankruptcy normally ends up helping their credit scores in the long run.

Think about it this way. The banks that lend money have one primary concern. They want to know if you will pay them back. If you ask for a loan while you already have tens of thousands of dollars in debts the bank knows that any loan they give to you will be only one of many that you have. The bank does not want to stand in line with everyone else that you owe. If, on the other hand, you just filed for bankruptcy the bank knows that any of your prior discharged debts are no longer due, making it much more likely that your new loan will be paid. Plus, the bank knows that you cannot file bankruptcy again anytime soon, making it very unlikely that the new loan will ever be discharged in bankruptcy. This makes you a better credit risk AFTER you file than you were before you filed.

The record of your bankruptcy filing will be on your credit report for some time (current laws require a Chapter 7 to be removed from a credit report after ten years). But the report will also show how long ago the bankruptcy was filed. Lenders place less importance on an older bankruptcy IF you have been good about paying bills on time after your bankruptcy was filed.

With some careful post-filing credit repair steps, a FICO score in the high 600s or low 700s is achievable within 18 months to two years of a bankruptcy filing. Lenders differ on how they use FICO scores but many treat a score like this as a high or "A-level" rating. 

How do you repair your credit after bankruptcy? Simple. Pay your bills on time. As time passes you'll build up better creditworthiness. We work with our clients to give them guidance tailored to their situation to help them repair their credit after filing.

There are, of course, other factors that will play into the decision to file. But when making the decision it is important to know that a bankruptcy will not ruin your credit. Over time it can actually help.

About the author: Dan Cooke

Image credit: 401(K) 2013

Filing Bankruptcy - What to File (#2 in a series)

"I declare bankruptcy!" - Michael Scott.

When Michael Scott, manager of the Scranton, PA branch of Dunder Mifflin Paper Company ran into debt issues, he figured bankruptcy might be a way out. He was right about his options but he was dead wrong about what it takes. Standing up tall in public and saying that you "declare bankruptcy" ain't gonna cut it. (Michael Scott, if you don't know, is a fictional character from the U.S. version of the television comedy "The Office" & if you need a laugh you might want to check it out).

Unless you live in a smaller community or your local newspaper still lists recent bankruptcy filings, normally no one but your lawyer and your creditors will know that you filed. Trustworthy, confidential support is valuable when you're dealing with debt. But, thankfully, you don't have to declare your intentions to your friends or even your family if you don't want to.

What you really need once you've decided that bankruptcy is the right move for you or your business is a big stack of forms.

In most situations the most valuable thing a lawyer can offer a client is counsel. Clear information and guidance about the law and its impact on whatever the client is facing, delivered with respect for the client's needs and wishes, is a lawyer's most valuable commodity. But a close runner-up in the value department in a bankruptcy law office is an understanding of how to fill out the forms and supporting documents required to start a bankruptcy case.

The stack begins with the bankruptcy "Petition." This is a relatively short (usually three- or four-page) document that contains a series of elections and signature lines. After the Petition and any Exhibits attached to it comes a long set of "Schedules" that are required in every bankruptcy case. Each Schedule deals with a different aspect of your finances, ranging from assets owned, to household income and expenses, to a correct and complete listing of your debts, separated into appropriate categories. The opportunities for mistakes on your schedules -- particularly in how you list and exempt your assets -- are lurking everywhere. This can make filling out the Schedules somewhat stressful.

But let's say you wanted to try your hand at filling out the Petition and Schedules on your own. You can get blank copies of the forms from the bankruptcy court clerk's office in your federal district. The "Petition" and "Schedules" portions of the bankruptcy papers work out to being about ten times longer than a complex tax return. If the case is simple enough, someone might be able to complete the Petition and Schedules with reasonable accuracy in ten to twenty hours. If you're lucky you might not even make any crucial mistakes.

But the stack doesn't stop there. After the Schedules are completed, you have to fill out a series of "Statements" about your finances and your financial history, including the lengthy "Statement of Financial Affairs", which contains a set of compound and sometimes confusing questions. And there are more questions for those with past or current business ventures.

And it doesn't end there. Even if you get through those forms with any sense that you've done it right, you still have to work your way through the bankruptcy means test. This is perhaps the most confusing form of all, because it requires you to know a great deal about both the federal standards used to determine how your money is counted and compared with the applicable median and what the local district court clerks expect to see on the form.

After all of that, you'll still have to compile another set of supporting documents. In most districts this includes properly-redacted pay records, separate signature forms, properly-formatted electronic listings of your creditors, certificates, etc. It's more than enough to make your head spin.

My point? If you haven't figured it out yet, what I'm saying is that if you want to try to prepare your own bankruptcy forms you're in for a world of pain. And even then you're likely to make one or more big mistakes that may force you to pay more money down the road when you need to try to convince a lawyer to help clean up any messes, assuming they are the kind that can be cleaned up. Believe me, lawyers do not like doing this and many won't even touch a case that was filed incorrectly.

I'm obviously biased here but bankruptcy lawyers -- and their well-trained staffs -- are incredibly valuable when it comes to their knowledge and understanding of the complex and lengthy bankruptcy paperwork. Don't believe me? Our District's website provides some helpful information about the forms, which should be enough to give you a sense of the amount of work involved. And if you absolutely, positively cannot afford to pay a lawyer a nickel for help, there are other resources out there where you can start. Because when it comes to filing the proper documents, you really shouldn't go it alone.

Next up in the series: Who files?

About the author: Dan Cooke

Image credit: Carl Malamud

Filing Bankruptcy - Where to File (#1 of a series)

Ask any good journalist how to tell a story and they'll say you need to make sure to cover five things: where, what, who, why, and how.

I'm starting this series to cover all of the basics of filing bankruptcy. We're going to start with something that's usually simple, but not always: Where do you file?

Bankruptcy is a federal proceeding, so the paperwork is going to be filed in a United States federal court. Federal courts are broken up into "districts", with each State and federal territory having one or more different federal districts (California, for instance, is broken up into four federal districts). Selecting the district to file in is sometimes called choosing a "venue" for your case. In Minnesota there is only one federal district court. If you're filing in Minnesota you file in Minnesota's one and only federal district court and that's your "venue."

So if you live in Minnesota your bankruptcy paperwork is filed with the federal court for the "District of Minnesota" and that's it - done deal, right? Well, maybe not. You still have to have lived in Minnesota for the majority of the last 180 days. So if you recently moved or are planning to move to or from Minnesota, you're going to have an option. For instance, if you are moving to Nebraska, you can either file in Minnesota up to 89 days after your move or wait until 91 days after you move and file in Nebraska.

Even if you haven't moved recently, you don't necessarily have to file where you live. You can also file in the district court where you have your primary place of business or where you have owned your "principal assets" for the better part of the last 180 days. So if you are currently living in Minnesota but own a business in Iowa and have your most valuable assets in Arizona, you can file in Minnesota, Iowa, or Arizona. And you get to choose.

And your choice may not end there! If you have a family member, partner or affiliate who also filed for bankruptcy protection, you can choose to file in the same district where that other case is pending. And if you do not have a business or principal assets in the U.S. but are being sued by someone in the U.S., you can even choose to file bankruptcy in the district where you are being sued.

At this point you may be asking why any of this matters. Besides the convenience of being able to choose where to go to court for your bankruptcy meeting, aren't the bankruptcy laws the same no matter where you file? For the most part they are but there can be important differences.

First, there are state laws that come into play in almost every bankruptcy case. The most important of these are the exemption laws that determine whether you have to turn over any of your property to the bankruptcy trustee. The test for which exemption laws apply is actually different than the venue test and looks back to where you were living between two and three years ago. But you can control this by deciding when to file your case. The important thing to know is that the state exemption laws are different, sometimes dramatically so. And even if you don't own much, you're going to want to make sure that the laws that apply in your case will protect as much as possible of what you own (ideally all of it).

Second, courts, judges and bankruptcy trustees have different procedures around the country. And even though the bankruptcy laws are the same, they can be interpreted differently in different parts of the country.

So the choice of where you file can have a big impact. If you've always lived and worked in Minnesota and never leave the Land of 10,000 lakes except for an occasional vacation, you may not have a choice to make. But many people are surprised to learn that they have an option. And making a wise choice can have a huge impact on the outcome of the case.

Next up: What to File.

About the author: Dan Cooke

Eight Mortgage Modification Tips

As you may have heard, the U.S. government's mortgage relief programs -- including the Home Affordable Modification Program, or "HAMP" -- have been extended through 2015. Applications made ahead of the December 31, 2015 deadline can help distressed homeowners save money on their monthly mortgage payments and extend the due date for balances that are past due. Just make sure to apply well before that deadline so your application can be processed in time.

There have been many complaints about the program. I've heard a bunch of them myself. Folks tell me their banks are not cooperating and are demanding a mountain of paperwork before they'll even get consideration. People are also frustrated by the delays. It can take months for a simple application to be approved or denied. Meanwhile, folks are left in the dark to worry about whether they may lose their home.

And sadly, most people who apply do not qualify for a mortgage modification. But if you need help it is definitely worth trying. Here are a few tips to help with the process:

1. It's generally a bad idea to pay anyone to help you with a loan modification application. There are companies out there that will take an up-front fee to assist you with the process. This is tempting, partly because you may think an "expert" can increase your odds. But as the Minnesota Attorney General's Office has warned, many of these are scams. If they ask you to pay up front, it's probably best to steer clear.

2. Instead, try getting help from a non-profit or governmental agency. The Attorney General has provided some links for places to start.

3. When trying to figure out who to call at your bank, it usually makes the most sense to start with the phone number on your mortgage bill. Even if you have received past-due notices from a collection agency or a law firm, it is still probably best to start with the phone number on your mortgage statement if your goal is to try for a mortgage modification. Note, however, that if you have already received a foreclosure notice it may be too late to work with the bank, in which case you may want to contact a debt relief attorney (like me) right away to find out about your options. There are things that can be done, including applying for foreclosure extensions or for Chapter 13 relief.

4. When you make the call to the bank, be prepared. Tell whoever answers that you're having trouble paying your mortgage and would like to apply for "any relief I am eligible for under the Making Home Affordable program." Making Home Affordable is the current umbrella term for all of the various mortgage-relief programs, including HAMP. By asking for this you are more likely to be directed down the application funnel correctly. Confusing? Yes. Sadly, the government isn't always so good at coming up with names for its programs.

5. Have a notepad and a working pen or pencil ready to go to take notes. It's also a good idea to have your financial paperwork in front of you. The bank's agent will be able to look up your payment history but having things like your most recent tax return and a recent paystub for each wage earner in your household may help streamline the first call, in case they ask for monthly income information. Write down the names of anyone you speak with and the date and time of the call. In fact, it's a good idea to do this for all calls that you make so you have a record of your efforts in case there is any misunderstanding later on.

6. A HAMP application -- or, possibly, a "Streamlined Modification Initiative" if your loan is guaranteed by Freddie Mac or Fannie Mae -- will involve you providing your bank with paperwork. Lots of it. Try not to get overwhelmed. Take it one step at a time. You may feel frustrated but keep telling yourself that it's worth the effort (because it is).

7. Whenever you send documents to the bank, it's a good idea to follow that up with a phone call to make sure they got everything they need. Do not be surprised if you need to re-send something.

8. The entire application process can take weeks. While you are waiting to hear back it will not hurt to call every so often to check up on your application. Once or twice a week is probably enough.

Will following these tips guarantee success? Absolutely not. The odds are stacked against you. But if you qualify for help you will see a significant benefit. In rare cases some of the principal owed on the home loan can be forgiven.

Don't give up if the application is denied. You are entitled to ask why you were denied and you can re-apply if your circumstances change later. For instance, people can be denied for having too much or too little income. Your income may change down the road and you can reapply if that happens.

If all else fails, there are legal options available. That is where my office fits in. And you're welcome to call me anytime for a free consultation about those options.

About the author: Dan Cooke

Image credit: Chris Scott

Don't Fear the Mailbox

When people file for bankruptcy relief, one of the most dramatic changes is what happens to their mail. On the one hand, pulling mail out of the box is a lot less stressful because the bills and collection notices for past-due debts are no longer there. This can take a few weeks to a month after the date of filing. It takes a week or so for your creditors to receive the official, mailed notice of filing. And there may be collection agencies out there that also need to be notified. But your lawyer can help you with any creditors or bill collectors who may have fallen through the cracks.

The good news is that the collection letters and bills will stop. And most folks assume this means their mail will go back to "normal". Not true.

Bankruptcy is a matter of public record. No one will know that you filed unless they check the public records, assuming they even know how to access them. Unless you owed them money, it's very unlikely that any friends, family, employers or associates will ever know that you filed. But there are companies that check the bankruptcy filing records regularly because they see recent filers as a source of business.

What kind of business? Lending, mostly. That's right, some lenders believe folks who recently filed are a great lending risk. This is partly because they know you don't have much (if any) older debt hanging over your head anymore. They also know you cannot file for bankruptcy relief again, at least not for many years (and hopefully never).

This is mostly fine. We live in a free-market economy after all and most of us are used to receiving junk mail and solicitations, even if we don't have unpaid debts. The problem is that some of these lenders send confusing letters that can look like official bankruptcy notices from a Court or a judicial office of some kind. I have seen letters sent directly to my clients from for-profit companies that tell them they need to sign up for "official bankruptcy notices" in their case, suggesting that they need to pay for this service (you don't). Receiving a letter like this can be very stressful and, worse, can draw you into signing up for something you don't need and don't really want.

I try to warn all of my clients about this and encourage them to contact me if they ever receive a letter they do not understand, even if they receive it months after their case was commenced. The good news is that even though some unusual mail may arrive after filing, none of it should have anything at all to do with paying older, discharged debts. And you really can start to breath easier when you reach for your mail.

About the author: Dan Cooke

Image credit: Wikimedia Commons (Steevven1)

How Bank Overdraft Fees can hurt you post-bankruptcy

Banks have changed over the past 30 years. Banks today earn a significant percentage of their profits from the "service" fees they charge. This is different from the good old days when banks focussed on what they were invented to do, which was to use our deposits to make loans and earn money on the interest (they still do that too, and in increasingly risky ways, but that's a subject for another article).

These days it's all about the fees. Economic research shows that banks made $32 billion from overdraft fees alone last year, up $400 million from 2011. Yep, that's billion with a "B". And most of the people I talk to who were charged these fees had no idea how fast they would pile up, even if they tried to call the bank to ask before incurring the charges. Congress is considering legislation to regulate these fees but given the snail's pace in Washington you can't wait for Congress to protect you.

It's not uncommon for folks to walk into my office with hundreds of dollars in overdraft fees on top of all of their other debts, sometimes from multiple banks. The good news is that those fees are almost always dischargeable.

But here's the rub: if you're not careful the fees can continue to accumulate after your bankruptcy is filed. And fees you incur after your case is filed -- even the day after -- can still be your responsibility. When you're dealing with a mountain of debt, including payday loans and overdraft charges, careful bank account planning is critical. Otherwise you can come out of bankruptcy with yet another big bill to pay.

An experienced bankruptcy attorney can help you plan for this and avoid the problem entirely. Your bank probably isn't making their fee-charging rules easy for you to understand. Many banks seem to make it confusing on purpose. But a good lawyer can help you sort all of that out before your case is filed.

People have enough on their plate when they're dealing with bankruptcy. The last thing they need is another bill.

About the author: Dan Cooke

Image credit: 401(k) 2013