The Best Way to Repair Your Credit After Bankruptcy

Credit repair companies are known to play on your fears that bad credit will stand in the way of your dreams. They'll make you think that bankruptcy is the end of the world. 

Improving Your Score After Bankruptcy

The truth is, filing for bankruptcy can actually raise your credit score. The reasons are pretty simple: (1) after bankruptcy, you likely won't owe money to anyone (other than non-discharged tax debts, student loans, or domestic support obligations), (2) new lenders know that you don't have any open accounts you can use, and (3) you won't be able to file bankruptcy again anytime soon. 

When you take these these three factors into account, you’re a better credit risk after bankruptcy than you were before you went into the process.

BUT, your credit score will not improve if there are errors on your credit report.

Check Your Credit Reports After Bankruptcy

About three to four months after bankruptcy, go to AnnualCreditReport.com to get free copies of all three of your credit reports. If you find any errors, it's important that you take some simple steps to correct them. TIP: remember to save or print each report right away, otherwise, you might have to pay for a second look.

Once your bankruptcy case ends, all debts need to be updated to show a $0 balance due. If something doesn't look right, send a "dispute" to the credit reporting agency. Follow the instructions on each credit bureau's website - look for a link on the home page marked "Disputes". Follow the instructions carefully and send a copy of your bankruptcy discharge papers if requested.

Send the letter by certified mail. Keep a copy of the original signed letter and the certified mail receipt card. The credit reporting agency usually responds in 30-60 days, but it could be a longer or shorter.

You have now saved yourself a lot of money and time because you did it without hiring a credit repair company.

Why You Don't Need to Hire a Credit Repair Company

Frequently, the credit repair agencies simply complete the above steps and charge you a pretty penny to do it. It's just not worth it when the relatively simple process is explained on the credit bureau websites.

Worse, though, are those credit repair companies that don't follow the dispute mechanism through the credit reporting agencies. Instead, they send the disputes directly to the individual creditors. This can cause a short-term credit improvement. But the creditors can later upload another set of data to the credit reporting agency that reinstates the debt on your report. In other words, the credit repair agencies only fix things temporarily. This is a tactic many credit repair agencies use to temporarily remove accurate debt information from your credit report. But the bad marks will eventually reappear. 

About the author: Dan Cooke

Image credit: CafeCredit

What Happens to My Student Loans in Bankruptcy?

Current U.S. laws do not allow most student loans to be discharged in bankruptcy. So what can you do to deal with them? And what, if anything, happens to them if you do file for bankruptcy protection?

It mainly depends on what kind of bankruptcy you file: Chapter 7 or Chapter 13.

Chapter 13

Chapter 13 is sometimes called a "reorganization" or payment plan bankruptcy, where you agree to pay back at least part of your debts over time. Some of your debts will get better treatment than others and can be paid in full, such as priority income tax debts. Student loans are normally classified as "nonpriority unsecured debt", which means they're treated just like credit card debt and do not have to be paid in full. This means that you are not required to pay off your student loans in a Chapter 13. The bad news is that while any remaining balances on other debts, like credit cards, can be discharged at the end of a Chapter 13, your student loans are not. And the interest keeps accruing on the student loans during your bankruptcy case.

So while you may gain significant relief on your other debts in a Chapter 13, you'll likely finish your Chapter 13 payment plan with student loan debts that are similar in size to when you started.

This all probably sounds pretty bad. But Chapter 13 can still be helpful to folks with student loans. You can use Chapter 13 to buy yourself time to take care of other debts, and then focus on what to do about any remaining student loan debt afterwards. There are various income-based repayment programs available - call my office if you'd like to learn more about them.

Chapter 7

What about Chapter 7? In a Chapter 7 case, your student loans will not be discharged unless you file a separate Complaint to Determine Dischargability, where you're essentially asking the bankruptcy judge to eliminate your student loans, in part or in total, due to an "undue hardship." The lender (or its guarantor) will almost always object. The U.S. Department of Education has written a letter telling lenders exactly how they can object. This means you're likely in for a full-blown trial in front of a bankruptcy judge. 

Most of the time it boils down to showing that you are so impoverished and so deep in student loan debt that it would be impossible for you to pay your student loans off while maintaining a minimal standard of living. It's a tough thing to prove but there are cases where relief has been granted. If you can see no way to pay off your student loans over the next 10-20 years, give us a call. We can assess your situation for free and discuss your options.

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What Should You Do When You are Sued for a Debt?

Getting sued is stressful. A sense of panic can set in after the process server or sheriff knocks on your door and hands you or someone in your home an envelope full of legal papers, or just leaves the envelope on your doorstep.

But does a lawsuit mean you need to file bankruptcy right away to stop the lawsuit? Not necessarily. Even if you do end up filing for bankruptcy relief, you may not need to rush into anything IF you take the right steps to handle the lawsuit after you are served. While advice will differ depending on the specifics of the lawsuit and your overall financial situation, there are a few things you should know about how lawsuits over debts are handled.

In Minnesota, you have a short window of time to "Answer" the Complaint in writing. The deadlines for this will normally be spelled out on the first few pages of the legal documents. In Minnesota, your Summons should state that you have 20 days to respond. The clock starts running the day you are served. But be aware that this time frame can be shortened if you send your written response by mail, fax, or by any means other than by hand delivery. Pro tip: don't bother calling the lawyers who sued you. If you do call, they are likely to be friendly and supportive and willing to "work something out", but this is often just a stalling tactic to prevent you from asserting your rights by serving a written response.

It is critical that you Answer the lawsuit on time! If you do Answer in time some really good things happen. Well, good in the context of a bad situation. First, you will have to be notified by mail when anything further happens with the lawsuit (if you don't answer you will likely not be notified when the judgment is entered against you). Second, you will buy yourself time -- often an extra six months or more -- to figure out a way to deal with things while the lawsuit proceeds, potentially delaying any garnishments.

People can and do successfully Answer Complaints without a lawyer's assistance. But you should contact a lawyer or at least a free legal aid service quickly to make sure your are handling things correctly. Even if you don't think you want to go to court you still have the right to Answer the lawsuit to make the creditor prove its case and verify the amount it claims you owe.

If a judgment is entered against you, it's time to get serious about solutions, perhaps even bankruptcy. But you should know that If you do end up discharging the debt - in bankruptcy or otherwise - there is a procedure that will remove the record of a Minnesota judgment from your credit reports. We can help you with this process as part of a credit cleanup service.

Whether or not you end up filing bankruptcy, my office routinely advises folks about how best to handle a lawsuit. Feel free to call me if you are ever sued over a debt so we can guide you. Just don't delay!

About the author: Dan Cooke

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New Bankruptcy Means Test Amounts - Effective November, 2016

The U.S. Department of Justice has published new median, gross income data for use in bankruptcy cases filed on or after November 1, 2016. For Minnesota residents, the figures have increased, making it more likely that you will qualify for Chapter 7 relief.

The new figures are available on the Means Testing section of this site. The numbers for all federal districts as of November 1st are available on the DOJ's website.

Here is how much the median amounts will increase in Minnesota from numbers used in cases filed between April 1, 2016 and October 31, 2016:

• One person household: +$867 (from $51,260 to $52,127)

• Two person household: +$1,410 (from $68,596 to $70,006)

• Three person household: +$3,074 (from $80,900 to $83,974)

• Four person household: +$1,930 (from $98,564 to $100,494)

The increase for additional household members above the first four remains the same, at $8,400.

A reminder: the median income amounts are only part of the analysis for determining whether you qualify for Chapter 7 relief. You can sometimes be over the amount and still qualify after completing the full, long-form means test. How to count household income can be tricky as well, depending on sources (social security benefits do not count, for instance) along with the amounts that are contributed by other household members. And calculating your household size is not aways as straightforward as you might think.

As always, consultation with a qualified, experienced bankruptcy attorney is critical. But if you're struggling with debts, starting next month it is going to get a little easier to qualify for relief.

About the author: Dan Cooke

Image credit: Cafe Credit

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

Image credit: Cafe Credit

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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