Life After Bankruptcy - What's in Store for a Recent Filer?

What will your life be like after filing for bankruptcy protection? You've probably heard the words "fresh start" before. But what do those words mean when it comes to the nuts and bolts of living with a recent bankruptcy on your credit reports?

Here are some of the changes you can expect.

YOUR CREDIT SCORE WILL IMPROVE

Perhaps the thing that surprises people most is the improvement in their credit scores. According to a recently-published statistical analysis by the Federal Reserve Bank of New York, bankruptcy filers saw an improvement in their scores in the first year after filing. This is largely because filers have a much better debt-to-income ratio after their old debts are eliminated.

Things can get better even faster if you take steps to clean up your credit after bankruptcy.

SOME DEBTS MAY LINGER

With some exceptions, your student loans and income tax debts will not be discharged. And you will still be obliged to pay any domestic support obligations. BUT, you will undoubtedly have more money to devote to those payments after a bankruptcy discharge because the bankruptcy will take care of the other debts that have now been eliminated from your ledger. You won't have to worry about the other bill collectors and you can often arrange for reasonable payment plans on any non-discharged debts.

ALL THOSE UNPLEASANT CALLS AND LETTERS STOP

Once your bankruptcy is filed, your creditors and bill collectors are all notified and must immediately stop calling. Any wage garnishments stop any any lawsuits go away. And your mailbox is no longer something to fear.

YOU WILL HAVE AN OPPORTUNITY TO SAVE FOR THE FUTURE

If you've been working hard to pay your debts, you're going to suddenly have some extra cash flow. My advice? Save it. The best way to avoid going back into debt is to put away something each month - ideally in both a short-term savings account and in a retirement account of some kind (set up an IRA if you aren't eligible for an employee plan). A recent bankruptcy filing can clear the way for you to gain a better sense of financial freedom by creating a rainy-day fund.

About the author: Dan Cooke

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Top Five Myths About Bankruptcy

I get questions all the time about bankruptcy that still surprise me. What I've learned is that there is a lot of misinformation out there.

Here are my top five bankruptcy myths (in descending order):

MYTH #5: YOU CAN'T FILE IF YOU HAVE A JOB

"Means testing" was added to the bankruptcy laws in 2005 to ensure that people who could afford to pay their bills paid something. The idea behind means testing made sense. But in reality, your income has to be very high before the Courts will reject a Chapter 7 filing. Even if your income is over the means test, there are many factors that play into deciding whether you pass or not, too many for this post (call me and I'll tell you more). 

MYTH #4: YOU WILL LOSE MOST OF WHAT YOU OWN IF YOU FILE

The vast majority of bankruptcy filings are "no asset" cases. The fact is that most of your assets -- home, vehicles, retirement savings, modest bank savings, and all of the items folks typically own (clothing, furniture, electronic devices, etc.) -- are 100% protected. In Minnesota, if you own your home you can even have a significant amount of equity in your residence and protect all of it.

MYTH #3: YOU CANNOT ELIMINATE TAX DEBTS

There are strict rules about discharging income tax debts but the fact is that you can completely eliminate older tax obligations to the IRS and to the State by filing bankruptcy. The rules are a bit too lengthy to review here, but one rule is that the taxes have to have been first due at least three years ago. If need be, you can hire a bankruptcy lawyer to assist you while you organize your affairs and wait for the right time to file. And then say goodbye to the old tax debts.

MYTH #2: BANKRUPTCY DESTROYS YOUR CREDIT

For better or worse, we live in a society where credit is relatively cheap and easy to get, even after a bankruptcy filing. Chapter 7 filers frequently get credit card and car loan offers the month after they file. Chapter 13 filers can qualify for new loans during their case. Normally, credit scores can rebound significantly within 12 to 24 months after the filing date. I frequently hear back from clients who are buying homes or refinancing home loans three years after they hired me and they are getting competitive interest rate offers (not the absolute best rates but rates that are surprisingly good).

MYTH #1: BANKRUPTCY IS A PERSONAL FAILURE

Nearly all personal bankruptcy filings are caused by job loss, medical issues, divorce, or other factors that are largely things outside of our control. Bankruptcy is not welfare or a government handout. It is an economic safety valve to save people from being stuck with debts they can never repay.

If you are struggling with bills, talk with an experienced bankruptcy lawyer to learn more and to go over your options. When you call our office, there is no obligation and your first consultation is free.

About the author: Dan Cooke

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Do I Really Need to File For Bankruptcy Protection?

How do you know for sure whether bankruptcy is right for you? Can you avoid bankruptcy altogether? Depending on your situation, it might be possible. To decide, you first need to understand your options.

IT ALL STARTS WITH A BUDGET

First, you need to create a realistic monthly budget. Income is usually easy to calculate. If you get paid once every two weeks, just multiply your net pay from a typical paycheck by 26 and divide that by 12 (if your paycheck is weekly, multiply by 52 and divide by 12). This will give you a rough estimate of what you have to spend each month. To figure your monthly expenses, start with necessities and regular payments — like mortgage, rent or car payments — but leave out all other long-term debts (such as credit cards, bank loans, etc.). How much money is left over each month? With that amount, could you pay off your debts at current interest rates in three years? What about five years?

If you need help with the budget, you could speak with a non-profit credit counseling agency. There are also online tools that can help you calculate how long it will take to pay your debts with the money you can set aside each month for payments.

SELLING ASSETS, BUT NOT RETIREMENT SAVINGS

If you cannot find a way to pay off the debts over three to five years by budgeting, what about selling things that you own to pay off the debts? If you have valuable assets that you do not need to live — a boat or an antique of significant value, for instance — you might want to consider selling the items to pay your bills. But in most situations you NEVER want to sell any part of your retirement savings. Retirement savings are generally protected from collection by your creditors. Plus, cashing in retirement savings can create new debts in the form of income taxes and penalties for early withdrawal. You just end up trading one debt for another. But if you have other assets you might be able to sell, speak with a financial counselor or get a free consultation with a bankruptcy lawyer to go over the pros and cons of this option, ideally before you sell anything.

GETTING OUTSIDE HELP

If budgeting and selling off assets aren’t going to work, you can contact a trustworthy non-profit credit counseling service for assistance. In most areas, you can call the United Way’s 2-1-1 service to get a list of agencies you can trust (we also keep this information in our office). To be honest, there often isn’t much these agencies can do to reduce the debt amounts. But they can review your budget again and help you prioritize your payments if you have more than one debt. Sometimes that can be a good intermediate step before you commit to bankruptcy, just to get an outside opinion.

WHAT ABOUT DEBT SETTLEMENT?

When you are struggling with debt, it is hard to avoid all the ads for debt settlement schemes. Most of these agencies work for profit and promise to help you deal with all of your creditors if you just send them a regular monthly payment. These services almost never work. They might be able to settle a few smaller bills but they’ll take a hefty fee to do this. Meanwhile, the other bills just keep growing and you are often left with an even bigger problem months later.

SO WHEN DOES BANKRUPTCY MAKE SENSE?

There is no simple formula to calculate the bankruptcy decision, but if you cannot realistically pay off your debts within three to five years, you should at least get a free bankruptcy consultation. In general, the older you are, the more dependents you have, and the larger your debts, the more likely it will be that bankruptcy will significantly improve your financial situation and help you move forward towards a more comfortable and stress-free life.

About the author: Dan Cooke

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How to Fight Payday Loan Collection Scams

Scammers claiming to represent payday loan companies have been very active this year. State Attorney General offices across the country have ramped up their investigations and prosecutions of these scams. As I wrote in my last blog post, even folks who do not have an outstanding payday loan are being targeted.

Payday Loan

But what can you do to fight back if you are victimized? First, contact local law enforcement. You pay taxes to support law enforcement efforts and they need all the help they can get to track down these criminals. Minnesota residents can start by reporting any suspicious calls or emails to the Minnesota Attorney General.

Second, if a scammer is calling you it's usually because they've stolen information from a private database containing information about payday loans. This means that you have been the victim of a form of identity theft. The FTC has information for what you can do when this happens to protect yourself. 

Third, do not give the scammers any more personal information. They will often use subtle tricks to try and pry details out of you about where you work or bank. You obviously should not give away any of this information. But before you hang up, you can ask the scammer to provide "written proof" of the debt in question. Federal collection laws require legitimate collectors to stop calling and to provide written documentation about the debt if you ask. You would be required to give them a current address to do this, but it is a way to determine with certainty whether the call is from a scammer. A legitimate collector would follow the rules and deliver the information. A scammer will not. If they push back against your request, you can let them know that you plan to report their violations to your State Attorney General and the FTC. This would probably convince them to cross you off of their list as a potential target.

Finally, if anyone calling threatens you, hang up and call the police. Even if you think you still may have a lingering payday loan out there somewhere, you cannot be put in jail or punished criminally for failing to pay a debt. Someone who threatens you with criminal sanctions for failing to pay a debt is not only misleading you, they may themselves be committing a crime.

About the author: Dan Cooke

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How to Recognize a Payday Loan Collection Scam

I'm hearing stories more and more often these days about payday loan collection scams. And it is unfortunately happening to people who have already paid off the loan or who have had it discharged in bankruptcy.

What happens is the scammer gets just enough information about a real payday loan debt to construct a threat. The scammer then sends an email or calls, relying on ignorance about how collection laws work, and playing on fears or guilt about exposure. They also often threaten "federal" or even "criminal" action.

These are almost always scams. But how can you be sure? If the email or the caller uses poor English, it is likely a scam. Read the email out loud. If it sounds like it was written by someone who barely understands English, you can safely assume it was written by a fake bill collector. If the call or email is threatening and mentions possible criminal actions, it's almost certainly a scam. If the email or caller says things about "suspending a social security number" it is definitely a scam. 

The more serious the threats and the more complicated the demands are, the more likely you are dealing with off-shore predators and not a genuine bill collector.

I would never reply to one of these emails. That only shows the the scam artist that you're a live target and will probably just convince them to send you more frightening and false emails. But you can test a collection caller by asking for a "written statement on the account" and ask that it be mailed to you. There are collection laws that require the lender to cooperate when you ask for a written statement on your bill. If the caller will not assist with this, you can safely assume that the call is an attempt to swindle you.

In my next post, I'll discuss how you can fight back if you've been victimized by a bill collection scammer. But for now, just be sure to understand that there are more and more of these scammers out there and not every collection call or email is legitimate.

About the author: Dan Cooke

Minnesota Judgment Removals are Back to $5 Each, Where They Belong

For anyone with an adverse, prior Minnesota State Court judgment against them, the process of removing that judgment record from a credit report just got a whole lot less expensive.

Under Minnesota Statute Section 548.181, anyone who was sued in the past and wanted to petition for removal of the judgment record only has to pay the Court clerk $5 per judgment for the service. Because the mere record of a prior judgment can dramatically hurt someone's credit score and ability to obtain a loan -- particularly a home mortgage loan -- being able to remove the judgment record is important. While judgment records cannot be removed until paid or otherwise discharged, after they are satisfied or discharged they can be. But you have to take action to do it yourself. Otherwise, the written record of the judgment could still stick around as a blot on your credit.

Long ago, the Minnesota legislature recognized the importance of this by enacting the $5 fee for each removal. The problem is that a few years back, County Court Administrators across the State decided on their own to interpret the law to allow them to not only charge $5 for the judgment removal, but a full Court filing fee as well -- the same fee that was charged to anyone wanting to file papers to start a lawsuit. These fees vary by County but are often $300 or more. What this meant is that if you had a few judgments against you that you took care of and simply wanted to clean up your credit history, it could cost you well over $300 per judgment to do so. And mortgage lenders often required this step before allowing any home lending, even to refinance.

The Courts were essentially grabbing cash from folks who as a group are not particularly wealthy and who were simply trying to clean up their credit history by using a Court service that takes all of three minutes. That cash grab ends August 1, 2015. As part of the recent Omnibus public safety finance and policy bill signed into law by Governor Dayton, the statutes are being clarified to state that Court Administrators cannot charge more than $5 per judgment removal.

Some of my colleagues worked very hard to get this bill passed into law. The $5 fee is fair and its return is a welcome sight.

About the author: Dan Cooke

Image credit: Teresa Boardman