How to Protect Your Credit When You Are Broke
Every so often a client will say, “I am hopelessly in debt, but I don’t want to ruin my credit score with bankruptcy. It is still very good.” This statement is just like the old joke, “I can’t be broke, I still have checks!” A credit score is supposed to be an indicator of your financial health. Unfortunately, many people assume that their financial health is indicated by the credit score. Consequently, they continue to misuse credit, in many cases borrowing from credit sources to pay monthly credit obligations. It is a vicious cycle of debt.
In today’s economy your credit score is not the only factor a lender considers when issuing credit. Financial institutions are using new sources to profile their customers. A recent article by Wall Street Journal writer Karen Blumenthal entitled New Ways Bankers Are Spying on You reports that banks are now examining rent and utility payments, bank deposits, as well as estimating your home’s value in order to gauge your financial health. Blumenthal writes that in one case a bank customer was denied a credit after the lender reviewed his home loan records, determined that the value of his California home had declined, and noticed that his mortgage principal wasn’t declining—giving away that he has an interest-only mortgage.
Financial good health is living within a budget, using credit responsibly, controlling debt and excess spending, working towards short and long-term financial goals, and contributing to savings and investments. It is difficult to manage just one of these aspects when a person is overwhelmed by debt.
Fortunately, the federal bankruptcy laws provide an answer for individuals living beyond their means and buried in debt. Bankruptcy offers a legal means to restructure or eliminate your debts while protecting your family’s assets including real estate, vehicles, or retirement accounts. During bankruptcy creditors cannot contact you directly and the vast majority of debtors do not lose any property.
If you are drowning in debt, don’t be fooled by a high credit score. Your financial house is built on sand and it is time to rebuild on solid ground. Consult with an experienced bankruptcy attorney and discover how the federal law can get you back on the path to financial health.
Credit During Bankruptcy
There are many situations when a person needs credit during an open bankruptcy case. Refinancing a home mortgage, redeeming an automobile, or simply applying for a new credit card are circumstances when a debtor needs to obtain credit during bankruptcy. Fortunately, the bankruptcy process allows the debtor to obtain the credit he or she needs while concurrently pursuing a bankruptcy discharge.
When a debtor applies for credit during an open bankruptcy case, the application not only affects the debtor and the creditor, but also concerns the trustee and the bankruptcy court judge. The creditor is concerned that the bankruptcy will interfere with the extension of credit, and the bankruptcy trustee and judge are concerned how the extension of credit will affect the bankruptcy case.
For Chapter 7 cases, the reach of the bankruptcy court is limited to those assets that you owned and debts that you owed on the date that you filed bankruptcy. The judge does not have jurisdiction on post-petition matters. While the bankruptcy court does have jurisdiction to approve or reject a reaffirmation agreement for a pre-petition debt, the court cannot forbid a post- petition extension of credit.
For Chapter 13 cases, the court has continuing jurisdiction over your finances during the bankruptcy case. A Chapter 13 debtor is required to commit all of his or her disposable income to repay creditors. Any new credit must be approved by the bankruptcy judge since a new payment obligation may impact the Chapter 13 repayment plan.
Automobile credit is often a concern for bankruptcy debtors. Obtaining a vehicle during Chapter 13 bankruptcy will generally require that the debtor show that the vehicle purchase is “necessary to the completion of the Chapter 13 bankruptcy plan.” In plain language, you need the car to get to work to make the money to pay the creditors in the plan. When a vehicle purchase is reasonable and necessary, the courts are generally willing to approve the purchase on credit.
If you have filed or are considering filing bankruptcy and are in need of credit, speak with an experienced bankruptcy attorney and discuss your situation. Your attorney can offer advice and recommendations for obtaining both a bankruptcy discharge and the credit you need.
What Happens During Pre-Bankruptcy Counseling?
Do you have test anxiety? There is nothing to worry about when it comes to pre-bankruptcy counseling. Pre-bankruptcy counseling can be done in person, by phone or on-line and takes about 30 to 40 minutes. It isn’t an option—you cannot file your bankruptcy case until you receive a certificate showing that you completed the course—but you can learn a thing or two if you pay attention.
During the counseling session, you disclose your debts, assets (home, car, furniture, bank accounts, etc.) and your income and expenses. This allows the counselor or automated system to assess your individual situation. Information is provided to you about the impact on your credit score if you have made late payments to your creditors or file bankruptcy. Also, the counselor will explain the differences between a Chapter 7 and Chapter 13 filing. Further, the counselor provides tips on prioritizing your debts—who should you pay first when you are strapped for cash.
Pay attention and read the sections. When you take the course on-line you are required to call the company and talk to a counselor before your certificate is issued. To verify that you are the person who actually took the counseling, the counselor will ask a few questions to see if you know the answers. Don’t worry, the questions are not hard and are based on the financial concepts that were covered in the counseling. There are no trick questions.
Everyone passes!