Bankruptcy and how to recover from it.

A bankruptcy filing delivers a devastating blow to your credit and FICO score, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage. Many consumers who have filed for bankruptcy have been able to obtain a mortgage, although it is often at a higher rate than someone qualifying for a prime or "A-paper" loan.

While credit card companies may care about what happened before you filed for bankruptcy, many mortgage lenders are more interested in your recovery — what you’ve done since your filing. It won’t happen over night, but here are some tips and things to keep in mind when you inquire about a mortgage with a tarnished credit past:

Give explanations. No mortgage lender is going to ignore the fact that you’ve filed bankruptcy and he or she will likely want to know the cause of the filing. Your lender will be particularly interested in whether the same situation could happen again. Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of “just spending too much.”

If the bankruptcy resulted from a single event, it is important to show your lender paperwork describing the incident, such as the layoff notice or death certificate. You may also want to bring in court documents to indicate when the bankruptcy was filed.

Demonstrate good money habits now. Many people who file bankruptcy swear off credit altogether, however, it is important to re-establish your credit rating. Get a secured credit card or take on some sort of loan — furniture, a car or a major appliance — to demonstrate that you are able to make timely payments. Make sure you are making other payments (utility bills, cell phone, etc.) on time as well. You won't turn things around in a year but your credit score will improve over time.

Dispute any credit report errors. There’s no need to add to your troubled credit history with errors on your credit report. Get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the CRA in writing what information you believe to be inaccurate and request deletion or correction.

Save your money. Lenders may be more willing to loan you money if you’ve saved up a considerable amount of money for a down payment.

Live within your means. Even subprime lenders won’t risk loaning you money for an opulent oceanfront mansion. Think small when the time comes to look for a home. Smaller homes often mean smaller mortgages.

Filing for Bankruptcy Just Got Tougher: What You Need to Know

The sweeping overhaul to the bankruptcy code that went into effect October 17th makes bankruptcy tougher in every way. With much higher fees and increased burden of proving financial hardship, the hurdles a potential filer will have to jump over will make it next to impossible for many to wipe the slate clean of their obligations.

While the law, known as The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, aims to enforce more responsible spending habits in a nation consumed with consuming, the timing of the law is truly unfortunate as so many are faced with higher living expenses for even the most basic necessities, like heating their homes and putting gas in their cars.

Why the New Bankruptcy Law?
Credit card companies are at the core of the new law and they pushed hard for its passage. In doing so, they've locked most consumers into their debt by forcing a payment plan to amortize the obligation rather than erasing it. In a perfect world debtors would and should pay for their purchases. However, certain hardships can challenge an individual's ability to throw those standards out the window. Over 1 million people annually turn to bankruptcy because of the debt burden arising out of job loss, dire straits, divorce or an illness that impairs their ability to service that debt. In fact, it is during stressful times as described that borrowers would lean more heavily on their credit than ever before.

In light of the new law, it is of primary importance that every borrower completely understands there is no escape hatch for freeing themselves from their obligations and that the key is to avoid the circumstance of getting there in the first place.

KEY CHANGES TO THE LAW

Makes a "fresh start," Chapter 7 debt elimination bankruptcy, all but impossible. It’s core feature is a means test, designed to steer more people toward Chapter 13 bankruptcy (in which they refinance their debt to creditors and pay over a five-year period of time) -- if their household incomes are higher than their state's median incomes and they're able to pay $6,000 over five years, or about $100 a month, they'll have to go into Chapter 13 and face a court-imposed debt repayment plan.

Eliminates the judge's discretion to approve or deny a bankruptcy petition. A by the numbers determination will be made almost exclusively by a litmus test as to whether the petitioner rests above or below the median income level for the petitioner's state of residence.

Lawyers' fees will go up for filing bankruptcy by as much as 100% as they may charge another $500 or so because of new paperwork requirements. And the government's fee for a Chapter 7 filing is now $274, up from $209. And attorneys have to ensure accurate filings or face penalties if the petitions contain incorrect information about clients' finances.

If filing under Chapter 13, a judge will determine how much of their income they can use for living costs - a budget now based on formulas developed by the Internal Revenue Service. The rest will go to creditors, generally for a five-year period. It can be a grueling financial workout, judging by the two-thirds dropout rate of debtors who try to navigate Chapter 13.

People must get credit counseling before filing, a move that may help some avoid bankruptcy and no one can exit bankruptcy without taking a course in managing finances.

Certain types of debt, such as some education loans, will not be erased through bankruptcy.

An individual can file under Chapter 7 only once in eight years (up from six years).

WHAT THE NEW LAW DOES

The means testing and the higher fees will force many potential bankruptcy filers to go underground as the benefits of filing a Chapter 7 fresh start debt elimination have basically become extinct. The point is, the protection has become scarce and the impositions great. The result? Many would-be filers will become discouraged by the new law's stringency and the ranks of those who attempt to "hide" from their creditors could grow by leaps and bounds. On a positive note, many may achieve greater financial discipline. This is the ideal.

Staying on top of your credit can help you prevent the downward spiral that can evolve into a bankruptcy. Here are some tips for keeping your finances and credit on the straight and narrow to avoid the long-term pain a bankruptcy can bring.

STEPS FOR MANAGING THE PROBLEM

1. Be Aware of Your Credit Situation. Request copies of your credit report from each of the 3 major credit bureaus, Equifax, Experian, and Trans Union, so you will have full disclosure of your situation. Once you have an assessment of your credit situation, determine your best course of action for moving forward. If you're in good shape, stay that way.

2. Stay A Step Ahead of Your Creditors.

Create a budget and stick to it

Always live within, if not below, your means

Keep at least 3-6 months of expenses in the bank.

3. In Over Your Head? If you've stared debt in the face and you honestly feel you're in a trouble spot, but don't want to go the bankruptcy route, you have plenty of options for getting the monkey off your back. Here's a handful:

Ask your creditors to re-age your accounts. If you have enough money to make a small payment on your accounts, the creditor can lower the interest rate or payment temporarily to give you enough time to get caught up.

Get a second job. You might discover it's something you love to do. And it doesn't have to last forever if you don't want it to. You are just trying to get over the hump to make your credit worries go away. Always remember that you will feel so much better when you are seizing control of the situation.

Sell your assets to get caught up. We all have stuff that we just hold onto that we never use. Make it work for you. Depending on how much debt you are facing, you can start with small assets like antiques or jewelry. Small items that you will not even miss can make a huge difference in extricating yourself from your problems.

No assets - Do you have any family members who might be willing to help you out with a loan? This solution is especially appealing if you have hit a bump in the road and you believe your situation will turn around.

Negotiate with creditors to reduce the total amount due. In this scenario, you will have to pay the balance all at once. You will incur a negative rating on your credit, and the creditor will close your account. But, if you have some money that you can spare, this will allow you to negotiate a payoff for pennies on the dollar and avoid a BK-not a bad exchange to get rid of a big problem!

4. Work with a credit counselor. If your problems are beyond those that can be solved with a quick fix, and you are current on your mortgage and you car payments, but behind on your credit card accounts, try credit counseling. A credit counselor will help you negotiate a plan with your creditors to pay off balances over a period of 2-5 years. So if there's the slightest possibility that you're going to have to declare bankruptcy, go to a credit-counseling agency that has been approved by the government. This way, you'll get the help you need, and, if you end up declaring bankruptcy, you'll be one step ahead of the game with someone who's already in the government's system. Remember, the bankruptcy law requires that consumers complete a credit-counseling course with an agency approved by the federal government when filing for bankruptcy. Make sure your credit-counseling agency is not receiving a commission for getting you into their program.

5. Work with a debt settlement firm. Counseling plans can help consumers realign their debts and their credit, but they frequently require the debtor to repay the entire balance owed. If you are really struggling, debt settlement may be a better option. A settlement firm will negotiate with credit card companies to accept a reduced payment. Frequently, the percentage of the payment is 40%-50% of the amount owed, and sometimes even lower. If you are planning to go down this path, the debt settlement specialist will advise you to stop paying your bills in an attempt to make creditors more accepting of a smaller payment rather than none at all. For that reason, if you have a credit rating you'd like to protect, you should avoid this option, even with the reduced payments.

The real problem with debt settlement and credit counseling plans is they have a dramatically negative effect on your credit scores. While you're in the program, credit-card fees and interest accrue, and creditors and collection agents may keep calling and perhaps even sue.

Final Thought

As a veteran in this business, I have always been straightforward and honest with people when I could see it was in their best interest to file for bankruptcy. This law changes all of that and I am now forced to discourage people from filing Chapter 7 because this new law just slams the door on people getting debt relief. I am now advising all of my clients to do everything to avoid bankruptcy because it is now a fruitless and expensive endeavor that will do nothing more than land you right into credit counseling. Just cut to the chase and go straight to credit counseling. Avoid the expense of even bothering with a bankruptcy filing that will just use up precious resources you can't afford to throw away. My advice is that everyone become more aware of their debt to income ratios, credit scores, and be proactive in cutting credit issues off at the pass before they become problems. The best way to deal with the bankruptcy law is to never have to use it.

If you are faced with this decision, give me a call. I woud like the opportunity to walk you through the steps that you face and make sure your best financial interests are being considered!

And just say "NO" to those credit card companies who try to lure you with their offers. They're the ones behind this new law, and they don't deserve your attention. Only keep 2-3 credit cards, use them once every 1-2 months, and pay them in full. Make your credit work for you, not the other way around.