The Best Way to Clean Up Your Credit Report

Think paying your bills on time is all you need to do to ensure a good credit score? Think again.

More than one in every four credit reports contains some sort of error, according to a study by the Federal Trade Commission. And 5% of those errors, when corrected, placed the person in a different credit risk tier.

Every adult - and by that I mean everyone, not just those with debt issues - should check their credit reports once a year. It is incredibly easy to check your own report. It is also free if you check your report through the AnnualCreditReport website (steer clear of other "free" credit report sites that may try to charge you for other services you don't need).

Credit reports aren't that hard to read. If you find something on the report that looks like it might be an error, fix it right away. Here's the best way to do that:

1. Contact the Credit Reporting Agency. There are three major credit reporting agencies: TransUnion, Equifax and Experian. They all provide ways to dispute errors through their websites. But I've learned that contacting them in writing can be more effective. The FTC has a sample letter you can use. Include your full name and address and say exactly which item on your report you dispute. Include a copy of the report with the wrong item circled. You can also include a copy of any supporting documentation you have (such as a receipt or billing statement). The credit reporting agency must investigate your claim and report back to you with written findings (you can expect this to take two months). They'll also provide you with another free copy of your report if a change was made. They'll also tell you where the incorrect information came from, which you can use to...

2. Contact whoever provided the bad information. Once you know who provided the bad data that messed up your report, you should contact them in writing as well. Otherwise, they might make the same mistake all over again the next time they report your history to the credit bureaus. You can use the same FTC sample letter, just change the name and address of the recipient.

3. Follow Up. If the Credit Reporting Agency does not fix the error, you can ask that a statement of the dispute be included in future reports. The sad reality is that the big reporting agencies will sometimes deny a fix. If this happens to you, it may be time to call a lawyer who can help with Fair Credit Reporting Act (FCRA)violations. Hopefully you won't need this, but if you do I can offer a free consultation about your FCRA issue and your rights under the law.

The FTC also provides answers to some common questions about credit reports, which is a great place to learn more.

You want an accurate credit report not just so you can get loans and better interest rates. Your credit report might also be reviewed when you apply to open a bank account, rent an apartment, in insurance applications, or even by potential or current employers. So set aside a few minutes each year to get a free credit report and check it for errors.

About the author: Dan Cooke

Image credit: 401(K) 2013

Five Crucial Steps to Quickly Paying off Debt

Many of my clients with large and small debts who are making payments on their bills wonder, "how can I most effectively pay off my debt?"

When trying to pay down debts, there's a right way and a wrong way to do it. One size does not fit all. A consultation can help create a payment plan that specifically fits your needs and get you out of debt much faster. But let these general rules guide you in your quest for financial freedom:

1. Create a List. Write down your debts on a piece of paper or a computer spreadsheet. Next to each debt, write down the interest rate and the type of debt - credit card, medical bills, etc. If you don't know these numbers, check your credit report. You may not see all of your debts on the report but it's a good starting place. Setting aside secured loans - such as mortgage or car payments - and taxes, student loans, and other government debts, the rule of thumb will be to prioritize the loans with the higher interest rates. There's a temptation to pay the loans with the lower balances off first because there's some satisfaction in seeing a balance go to zero. But you'll get to the debt-free finish line faster if you focus on the higher interest rate loans first. Note that if you have significant tax or student loan debts, you will likely want to consult with a professional because there are more complex strategies that will go into how to handle the payment of those debts. You also should consult with an expert if any of your creditors have sued you or have a judgment against you.

2. Create a Budget. If you've never created a budget, it is much easier than in sounds. A budget is just a list of your total income and expenses over a given time period. Because many bills are paid on a monthly basis, most people use a sample month's worth of income for their budget. The income side is usually easier to figure out. Expenses can take a little longer. You don't have to add up every trip to the drive-through when estimating your food expenses so just do your best to estimate monthly food costs. But don't forget to write down things you might otherwise forget: such as occasional car and home repairs, clothing purchases, out-of-pocket medical expenses, haircuts, and recreational activities. Spend a sample month jotting things down and use that to test your estimates. Then look at how much you really have over each month for paying down debts. If this amount isn't enough to pay off unsecured debts within five years, think about ways to increase the income (part-time job?) or reduce the expenses. If this won't do the trick, it's a good time to talk to a professional.

3. Pay More than the Minimum. Credit card bills have a "minimum" payment amount to keep you current. This amount is often ridiculously low. Most of us know that if you only pay the minimum it may take a lifetime to pay the bill in full. Only pay the minimums if you are doing so to put more money into paying off other loans with much higher interest rates. Note that this tip also works with secured loans -- you can often reduce a 30-year mortgage to 20 years or less by making a surprisingly small additional principal payment each month.

4. Don't Borrow Trouble. If you can't pay off your bills in a given month, you're going to be tempted to take out an additional loan to make things work. Heck, your lenders will probably even send you a letter offering you a short-term loan to help out. This is almost always a bad idea and can add years to your repayment plan. So shred those checks the banks send you. And NEVER take out a payday loan. The interest rates on payday loans tend to be outrageous.

5. Don't Borrow from Yourself. You may be tempted to sell one of your most valuable assets: retirement savings. If you're lucky enough to have retirement savings, withdrawing it is arguably a worse move than taking out a payday loan because in this case the lender is you! Selling other unneeded assets is fine but your retirement savings is special, and is treated specially under the law. Depending on how you handle the withdrawal, you may have to pay significant taxes and penalties on the amount you borrow from yourself.

If you need help, I strongly recommend you call either a qualified debt-relief attorney or a non-profit credit counseling agency. NON-PROFIT is the key. There are many "debt settlement" agencies out there that will charge you an arm and a leg to get the same help you can get for much less money from a non-profit credit counseling service.

About the author: Dan Cooke

Image credit: Tax Credits

Got Student Loans? Beware a Newly Exposed Payoff Pitfall.

Part of our government's response to the massive 2008 economic collapse (aside from the massive bailouts) was to pass new financial industry regulations to try and prevent another collapse. This included the creation of the "Consumer Finance and Protection Bureau," which is in essence a watchdog for big banks and other lenders.

The CFPB has a Student Loan Ombudsman who recently wrote an "Annual Report" that reviews a large number of complaints they have received over the past year. Guess what they found? Student loan payments aren't always being processed properly. Instead of applying additional payments towards principal reduction (as is often requried with other loans, such as mortgages) some banks are escrowing those funds as "advance payments" toward future month's bills. The result? Honest borrowers end up paying more to settle their student loans.

So the private student loan banks are applying payments in confusing ways so they can make more money? What a shocker. 

The takeaway? Take advantage of the government's attempt to help and use the resources provided to you by the CFPB to learn more about how to pay off your student loans as efficiently and as quickly as possible. And be sure to file a complaint when something goes wrong.

If you're still left with questions about your student loans, call us. We can go over your options with you.

About the author: Dan Cooke

Image credit: Bossi

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