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13

Jul 2019

Credit scores after bankruptcy are close to national average, in just three years

Posted by / in After Bankruptcy, Blog, Weekly Posts /

I just finished a survey of people who filed bankruptcy with me three years ago. Here’s one big thing I found out: credit scores three years after bankruptcy are almost the national average.  

Right about half of the people who filed bankruptcy with me three years ago have a score above 670. A 670 score is considered “good” by Experian.  That’s a little less than the population as a whole, where 60% of people are above that 670 score. 

Some people will be surprised that credit scores after bankruptcy are that high. 

There’s an urban legend that you have to go for seven years with bad credit after bankruptcy.  People tell me all the time they expect to go seven years with bad credit. Other people wonder if there credit score will drop below 400.  

Have you heard anything like that?  It’s not true. 

Besides this survey of people who filed bankruptcy with me, I can point you to two studies by the Federal Reserve.  The Federal Reserve Bank of New York found that “the individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy.” And, the Philadelphia Federal Reserve found that people with a before bankruptcy 540 can expect an after bankruptcy credit score of around 620.

Debt settlement scammers, nosy family members, and some financial gurus will want you to think filing bankruptcy ruins your credit.  But, none of them will put it in writing, because it’s just not true.

I’m surprised the credit scores after bankruptcy aren’t higher.

I think nearly everybody can get their credit scores above 670 three years after bankruptcy.

credit scores after bankruptcy go up

I think nearly everybody should have a credit score after bankruptcy above 670 in three years.

The answer is in another question from my survey. My survey asked people if they got a new credit card in the first year after the bankruptcy. And 43% said, “No.”  That’s a problem.

People tell me, when we go to the bankruptcy hearing together, “I never want to see another credit card.” But, if you want a good credit score after bankruptcy, you have to.

Bankruptcy freezes your old bad credit, it doesn’t erase it. So you need to build good credit on top of it. 

That means you need to go out and get a credit card.  (You’ll get some offers in the mail, but you can also internet search ‘credit scores for bad credit.’) Charge gasoline every month; pay it in full every month.  In that way, within six months you’ll get several more good offers; use each card once a month and pay them in full.  Each week use a different credit card to charge your gasoline, and pay them all in full.  You want to get credit cards with higher credit limits, but you want to keep your actual balances low.

Summary What Does it All Mean?

If you are considering bankruptcy, don’t believe the urban legends. Three years after bankruptcy, your credit can be almost as good as new.  If you have filed bankruptcy, don’t turn your back on your credit. Carefully build a yourself a good credit score after bankruptcy.

Want to find out more on your after bankruptcy credit score? 

After bankruptcy, check these five websites. 

After bankruptcy, getting your credit report right.  

Mike’s after bankruptcy credit score is 681.

 

 

 

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14

Aug 2016

Bankruptcy: The Best Credit Repair for Most People

Posted by / in Weekly Posts /

Bankruptcy is The Best Credit Repair for Most People

Is bad credit costing you thousands of dollars every year?  It is, if you are paying more than 5% on your car loan.  People with great credit are paying less than 3.0%.  The difference between 3% car loan and an 18% car loan on a $24,000 car is $178 a month–$10,680 over a five year loan.

Some people try to fix this problem with “Credit Repair.”

What is Credit Repair Anyway?

Lexington Law says they are “the leading credit repair law firm.” 

Lexington Law does credit repair. I explain why bankruptcy is usually better.

Lexington Law does “credit repair.” I explain why bankruptcy is usually better.

They say you have “the legal right to dispute inaccurate items on your credit reports with the credit bureaus and your individual creditors.”

Is your bad credit caused by inaccurate items—or accurate items?

From what I see, as a bankruptcy lawyer, most of the bad credit on most people’s credit reports is accurate. Credit repair firms hint, but don’t dare say, they can remove accurate items from your credit report. (Sometimes they do, obviously, but they can’t promise it.) So, they mostly don’t do much good.

Lexington Law admits as much, if you read closely. They say on average their clients have “24% of their presenting negatives, removed within 4 months.” That means that 76% of the negatives are still there!

How is bankruptcy better?

Bankruptcy repairs your credit because it gets rid of your debts. The Federal Reserve, in two different studies, found that filing bankruptcy helps your credit score. Why is that a surprise? Your credit is better because you don’t have all those bad debts!

Isn’t bankruptcy is black mark on your credit? Of course it is. Then why does you credit score go up?

Evan Hendricks explained how it works in a case where I used him as an expert witness in a case against Capital One. He testified that the credit scoring models support the fresh start in bankruptcy, because bankruptcy counts as only one “derogatory” no matter how many debts it covered. 

Suppose your credit is wrecked. You have a repossession, three charge offs, three collections, and two accounts that are 60 days past due. That means you have seven derogatories, and two delinquencies. Try credit repair? On average, that gets rid of two of your nine problems. You still have seven.

Bankruptcy changes those nine problems into just one: the bankruptcy. (No, your credit history is NOT wiped clean; the bad credit is still there. But it does NOT drag down your score the way it did—because while the bad history is there, the debts are gone.)

Credit repair, on average, changes your nine black marks into seven. Bankruptcy can change them into one!

The Fresh Start is a second reason bankruptcy is better

Some of the time, credit repair does knock accurate information off your credit report. But that does NOT mean the debt is gone. 

Suppose you have a $5000 credit card that went to charge off, and is now owned by a debt buyer like Midland. Credit repair may some of the time knock Midland off your credit report. But that doesn’t help you if the sheriff bring a warrant in debt to your door.

When you file bankruptcy, the law gives you a fresh start. Besides helping your credit score, the creditors can’t call you, they can’t send you bills, they can’t take you to court or garnish you. Credit repair can never do all that.

For most people, bankruptcy is better for your credit score than “credit repair.” And the bankruptcy “fresh start” give you so much more.

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14

May 2016

Keep the Car In Chapter 7 Bankruptcy

Posted by / in After Bankruptcy, Weekly Posts /

Keep the Car In Chapter 7 Bankruptcy: What Are your Choices?

When you file Chapter 7 bankruptcy, you are “in the drivers seat” with some choices on how to keep the car.

One choice is to give it back.

One choice is to give it back.  Especially if you have a terrible interest rate on the car—and if you can put your hands on a junker—give them the car back. You are supposed to give the car back six weeks after you file your bankruptcy case. That gives you time to figure out another way to get around.

(Finding another way to get around is NOT going out and financing a car right after the bankruptcy. You’ll find car dealers eager to put you in a car at 24%—that gets you right back into financial trouble. But if you have a friend or family member who can give or lend you a car for a year or longer, you can then find some good financing deals. You can read about Alice, who got a 4.76% a year after bankruptcy. People who have a friend or family member who knows a lot about cars, also have good luck buying a car for cash, through a site like EBay.)

You can keep up the payments and keep it

Except for the special problems with Ford and Credit Unions, you can keep up the payments and keep your car. For most people, this is the best choice. No paperwork is required, you just need to be sure to make the payments on time. If you get late, they won’t call and yell at you. (That would violate the bankruptcy discharge.) They will just come and get the car.

Since they don’t want to violate the bankruptcy law, most car finance companies will stop billing you. You need to pay them on your own. Honda Financial Services has a good set of instructions. And here are sample instructions from USAA. Making the car payment will be like paying the rent—you gotta remember.

You can redeem your car.

If you owe more than your car is worth, but really like your car, you can redeem it. You can keep the car by just paying the book value. (Book value under the 2005 law is what you’d have to pay to buy it.) There are some honest lenders who will finance that straight out of bankruptcy.  One we use is called 722 Redemption. If you know your car is in good shape, this can be the way to go.

But you now have an after bankruptcy car loan. If you pay it, you are building up good credit. If you don’t, you are building up after-bankruptcy bad credit. You really don’t want after-bankruptcy bad credit.    

You can keep up the payments and change your mind later.

Keep the car

Suppose a year later, your car has mechanical problems. You can change your mind and give it back.

The good thing about keeping up the payments is, down the line you can change your mind. Suppose a year later, the car has mechanical trouble. You can give it back without owing anything and without damage to your credit.

Suppose a year from now, your uncle offers you his car. You can give the old one back, without owing anything and without damage to your credit.

Suppose two years from now, your credit union will offer you a car loan at 3.9%. You can give the old one back, without owing anything and without damage to your credit.

People often ask me, how long do I have the option to give the car back? My answer: Until it’s paid for. Once it’s paid for, you can’t give it back.

Is there any paperwork? None. Just call and tell them to come and get it. Or, stop paying and they will come soon enough.

Can I keep the car without making the payments?

The short answer is, No, you can’t keep the car without making the payments.  

At least, you can’t keep the car–unless the car finance company never bothers to come any get it.  Sometimes they never bother. If the car will bring good money at a car auction, they are going to come and pick it up.  But recently, a couple of people have told me nobody ever came and got their cars. Those were cars with about a hundred thousand miles on them–not junkers. But the credit union, in both cases it was a credit union, never picked them up.

So, you might get lucky. 

Can I reaffirm the car loan?

There are reasons why some people need to reaffirm car loans with Ford or with Credit Unions. Except for them, reaffirming a car loan is not a good idea.

The car loan people want you to reaffirm—because it benefits them, not you. When you call, they will tell you your lawyer should have reaffirmed—because it benefits them, not you.

Under the law, the judge will not approve a reaffirmation, unless I sign off that it’s a good idea. 

I don’t think it’s a good idea. So I’m not signing off. So the judge is not approving it. (The judge can, and often does, turn it down even if a lawyer signs off. Which I don’t.) 

I explain more on that, here. 

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22

Jul 2011

After bankruptcy–getting your credit report right!

Posted by / in After Bankruptcy / 19 comments

Here’s an email I got today from Jennifer.

Jen and Ken filed bankruptcy in February 2010. Because Jen’s bankruptcy does NOT show on her credit report, her credit score is much lower than Ken’s.

( Jennifer and Ken are not their real names.)

Bankruptcy lawyer Robert Weed

If your after bankruptcy credit report isn’t right, we’ll work with you on dispute letters to the credit bureaus. If letters don’t work, we’ll sue.

“Mr. Weed:

“Our discharge was a one year ago in June 2010. When we tried to buy a car back in December 2010, the Chapter 7 discharge was not on my credit report. I pulled my credit a few days ago and the discharge is still not showing, many accounts are marked as delinquent and my score is terrible. I filed several ‘disputes’ with Equifax but this could take up to 45 days. Why is the discharge not on my credit report? What can I do to fix this?? I am very frustrated that my credit looks terrible. The discharge is showing on Ken’s (husband) and his score is much better.

“Thank you for your help.

Thanks,
Jennifer H”

Jennifer, you are right.

If your bankruptcy is not correctly reported on your credit report, your credit score will stay terrible.  It will seem like forever getting back to good credit.

I spoke on this at the convention of the National Association of Consumer Bankruptcy Attorneys ten years ago.  Back then, seven out of ten people came out of bankruptcy with creditors ignoring the bankruptcy and hitting their credit report.   A couple dozen lawyers around the country have sued them on this a lot.  Now “only” about one person out of three has that problem.

Two of my staff, lawyer Brian McMorrow and paralegal Janet Robertson, spend almost full time fixing people’s credit reports.  (Besides credit bureaus, they also sue debt collectors.)

Here is the link to my instructions on getting your credit reports and getting them to Janet.  Janet has looked at ten thousand credit reports!  She’ll look at yours, write dispute letters–and if the disputes don’t work, Brian will sue.

A dozen times, I’ve seen creditors and credit bureau lawyers come into court and claim that bankruptcy is the reason people have low scores.  Jen and Ken’s example shows that argument is bogus.  After bankruptcy, people keep low scores when they don’t get their credit report right.  Ken has built his score back up–because the bankruptcy shows he cleared his debts.  Jen’s debts are still showing charge off.  That’s why her score is lower.

Jennifer, we’ll get that fixed.  Please follow up with Janet.  If the dispute letters don’t work, we’ll sue.

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25

Mar 2010

After bankruptcy what if I don’t pay my second mortgage?

Posted by / in Chapter 7 Bankruptcy / 610 comments

After chapter 7 bankruptcy, I often advise my clients, just don’t pay the second mortgage.

Now, if you don’t file bankruptcy and stop paying the second mortgage, two things would happen.  They will call you day and night; and eventually they would sue you and garnish you.  Bankruptcy keeps them from doing either of those.

Will they foreclose you?  That’s the big question.    The second mortgage can sell your house to a new homeowner only if they pay off the first mortgage.  If the value of your house has dropped below what you owe on the first, that’s just a way for them to lose more money.  They are not going to do that.

Virginia Bankruptcy Lawyer Robert Weed

I often advise my clients, just don’t pay the second mortgage. This is a strategy that takes nerves of steel.

To put it another way, the second mortgage won’t kick you out of your house just to be mean.  They will only do it to make money.  If they can’t make money, they won’t do it.

So, what are they going to do?  They will wait patiently for you to keep paying the first, and hope the value comes back up (and the balance on the first drops) that at some point you have equity that they can grab.

So, if you follow this just-don’t-pay-the-second strategy, you know you will never have any equity in your house.  If you go to sell five years or twenty years down the road, the second will still be sitting there.   (With five or twenty years of interest and late fees.)

So when does this just-don’t-pay make sense?  Suppose you have five more years before your youngest is out of high school.  Once that’s done, you might want to move to a smaller place anyway.  Then you can stop paying the first mortgage too, and move out.  The bankruptcy still protects you from both of the mortgages.  (You’d have to keep paying the HOA until the first mortgage forecloses.)

Does this strategy hurt your credit?  It does and it doesn’t.  It doesn’t hurt your credit score, because that second mortgage will  just show bankruptcy and can’t show any late payments after that.  (For my clients, we check to be sure.)  But it does hurt your being able to buy again.

For loans like car loans–or interest rates on your credit cards–your credit score pretty much controls, so you’ll be able to get a care loan at a good rate.  Your score will be good, if you’ve built up new, good credit.

But to get a mortgage, a different rule applies.  The March 2, 2010 manual released by Fannie Mae, (link here https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp) says what you have to do to get an insured mortgage. You have to be two years after the bankruptcy (with extenuating circumstances), but you have to be three years after a foreclosure.   Even though there will not be a foreclosure on your credit report, there will be one on the land records, and a mortgage lender will check there, too.

So if you follow this just-don’t-pay-the-second strategy, you keep the house for three or five or seven years; then you have to plan to rent for three years or so.  Then you’d be able to buy again.

If real estate goes up a lot over the next ten years, you’d be better financially to move out of the house right after the bankruptcy, rent for three years right away, and then buy again.  (If real estate stays flat, then not being able to buy for ten years doesn’t lose you anything.)

But if you want to keep your children in the same school and the same house, just-don’t-pay-the-second is a good plan.

What if you want to keep this house long term?  One way to do that would be with a second mortgage relief Chapter 13.  See my website on that.  http://virginiasecondmortgagerelief.com/

Or, you can not pay the second for a couple years, save some money, and then offer them a cash settlement.  Say you owe $75,000 on the second mortgage, file chapter 7 bankruptcy, and pay them nothing for three years.   If the value of your house is still less than you owe on the first, and you offer them $7000 to call it even, they might agree.   If you move out, they get nothing.

That strategy takes nerves of steel.  And it works best if you go for several years of not paying them–you want them to get used to getting nothing, so your offer of 10 cents on the dollar looks good.  I’ve seen it work.

Here’s an example where Chase, after getting nothing for four years, offers to settle at $20,000 second mortgage for $2000.  And here’s an example of HSBC offering to settle as $126,000 second mortgage for $12,600.

Here’s an offer to settle at $28,500 for $4250.  My client filed bankruptcy in 2010–this offer came in 2014.

 

PS  In January 2015, Bank of America forgives the whole amount.

Ahmad filed bankruptcy with me in 2011.  He got the best possible deal–Bank of America offered to forgive the whole amount of his seocnd mortgage.

 We had a BOA home equity line of credit for around $33K that was included in our BK back in 2011. I received a letter today from BOA that they have agreed to forgive this amount and we don’t owe them a penny on that. I had a question will that show up in our credit and will it hurt our credit in any way? It took us few years to build our credit and get back up and we don’t want this to damage our credit but we are grateful that is being forgiven…..

Don’t worry, Ahmad, this will nto hit your credit.  and not have any tax consequences either.  And I’ll straighten it out if it does.

This nerves of steel strategy does not always work; but it works a lot.

 

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23

Feb 2010

Your credit report after bankruptcy

Posted by / in After Bankruptcy / 16 comments

<h2>Your credit report after bankruptcy</h2>

Getting back to good credit is one of the three big reasons to file Chapter 7 bankruptcy.   (The other two are so your creditors can’t call you and so they can’t garnish you.)  Unfortunately,  probably half the people who go through bankruptcy don’t get their credit report fixed.

How should your credit report look?  In 1990, the Federal Trade Commission issued a staff commentary explaining what the credit bureaus had to do to meet the requirement that people’s credit reports be complete and accurate.  (UPDATE:  When the Consumer Finance Protection Bureau took over this area from the FTC, the FTC deleted their commentary.)

The Federal Trade Commission staff  said three things.

First, that a debt discharged in bankruptcy should show a zero balance.  ( “A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.” )

Second, that a debt discharged in bankruptcy should show a discharged in bankruptcy status.   (“Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy in consumer reports, but must accurately note the status of the debt (e.g., discharged …”)

Third, that the credit bureaus need to stay on top the the creditors to make sure they send in the required updates–specifically to update past due accounts that are then included in bankruptcy.  (“A consumer reporting agency must employ reasonable procedures to keep its file current on past due accounts (e.g., by requiring its creditors to notify the credit bureau when a previously past due account has been paid or discharged in bankruptcy…”)

In spite of these three requirements, spelled out by the Federal Trade Commission, probably half the people who are discharged in a chapter 7 bankruptcy still have errors on their credit report.  It’s better than it was ten years ago, when probably seven out of ten people came out of bankruptcy with these kinds of errors.  But it still stinks.

The problem now is largely practices that were legalized by a class action lawsuit in California that was supposed to fix the problem.  This is the Terri White class action and it didn’t help much.  To settle the law suit, the credit bureaus agreed to stop things that had already been stopped.  And they were allowed to ignore smaller problems that are getting more and more common, now that they have an official ok.

The big problem, that had mostly stopped, was putting after bankruptcy “charge offs”–meaning you owe the money but aren’t paying–instead of “discharge,” meaning you don’t owe it any more.

Ten years ago, several major credit card issuers always reported charge off instead of discharge.  First USA, Bank One and Fleet were the worst, and the credit bureaus did nothing about it.

A handful of law firms around the country started suing them.   James L Manchee in Texas,  http://www.mancheelawfirm.com/, Kathy Cruz in Arkansas, http://cruzlaw.com/ and Charles Juntikka, in New York City http://www.cjalaw.com/ .  Jason Krumbein, http://www.krumbeinlaw.com/, and myself here in Virginia.

All three of those brands were taken over in big mergers.  First USA and Bank One became part of Chase.  Fleet was gobbled up by Bank of America.  The new owners of those credit card lines didn’t want the hassle.  By the time of judge in the Terri White case told the credit bureaus they needed to fix that problem, it had pretty much been fixed.

New problems were created.    The credit bureaus are not required to update accounts that have been sold.  HSBC, when they get notice of a bankruptcy, always “sells” their accounts.   (Who is buying bankruptcy accounts?)   Then they say–both HSBC and the credit bureaus–that they don’t have to show the account was discharged in the bankruptcy.  It just stays as a zombie account on your credit report.  You’ll notice this is the opposite of what the FTC said (although never enforced)–the the credit bureaus were supposed be sure the creditors told them when a past due account had been discharged in the bankruptcy.

The same rule applied to “minor” derogatories.   If the credit card is only 90 days past due, they can leave it as past due and never show the bankruptcy.

Even worse.  They can leave the bad credit sitting on your credit report if your account is closed.  More and more we are seeing bank and credit card companies just “close” your account when they get notice of the bankruptcy–and just park it on your credit, ignoring the fact that it was discharged by the bankruptcy.

What’s the lesson of all this.  When your bankruptcy is over, your credit report will probably not be right.  Unless you or your lawyers, check it, disputes it, and sues to protect your rights, it will look like some of your debts were missed by the bankruptcy.

That will drag down your credit score; and cause problems with future lenders, possible employers, and security clearance agents, who will want to know why this or that debt was not taken care of.

The bankruptcy is not really over until the credit report is right.

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NORTHERN VIRGINIA BANKRUPTCY LAW OFFICES