Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Bankruptcy Drives Credit Score Surprise

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credit score increaseBefore bankruptcy, a miserable credit score was no surprise.  My client reported a 498 credit score before he filed.

What was surprising is that, three month after he filed bankruptcy, his score was 614!

That’s a 116 point increase in his score in three months. 

That’s while his bankruptcy case is still active, and long before he gets a Chapter 13 discharge.

So let’s hear no more about bankruptcy always trashing your credit score.

Setting worries about future credit issue aside allows you to  focus on the health of your balance sheet.  And enjoy the peace that comes with reduced debts.

What credit scores measure

Credit reports and credit scores explained

Credit scores are supposed to measure the likelihood that a borrower will repay future credit. Makes sense that lenders would want to measure that.

But credit scores are based on information found in credit reports.  And credit reports are notoriously inaccurate. Twenty five percent of credit reports contain material errors, according to government studies.

Isn’t it ironic that the oh-so-precise number in your credit score is based on bad information?  As we say in number-obsessed Silicon Valley:  garbage in, garbage out.

Misuse of credit scores

As if inaccuracy isn’t bad enough, credit scores are increasingly used for issues far removed from the extension of credit.  Auto insurance rates, utility service,  employers and even immigration decisions are influenced by credit scores.

So questionable information invades your life far beyond issues of consumer credit.

And, even worse, in my view, is the commercial exploitation for profit of consumer’s focus on credit scoring.

Credit anxiety is profitable

The widening use of credit scores outside of finance created a entire industry of supplying credit scores, weekly or monthly, to consumers.

Originally credit scores were used by lenders, internally.  But these days, credit card companies, personal finance sites, and even my credit union, try to sell you access to your credit score.

And by the time they’ve convinced the public that their credit score is as vital a measure as blood pressure or body-mass index, lenders and debt collectors can use that belief to demonize bankruptcy.

But, as my client’s experience shows, it just isn’t so.  (And a national study says credit scores trend immediately upward after bankruptcy.)

More

Credit reports heal

The most compelling reason to file bankruptcy

Life after bankruptcy

Credit Scores Trend Upward After Bankruptcy

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After bankruptcy, credit scores go steadily up, says a 17 year study released by  the Consumer Financial Protection Bureau.

Got that?  Go UP.  Every year.

Importantly,  credit scores start improving the same year that the bankruptcy is filed.

Think on that for a moment.

How collectors stoke fears about bankruptcy

Creditors and their shills shout that bankruptcy trashes your credit score;  the data show just the opposite.  There’s no dip post filing, but instead an immediate uptick.

This is how the CFPB puts it:

Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition.

Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings.  http://bit.ly/33kgOaf

Bankruptcy improves your balance sheet

Let’s be clear about what is important in your financial health. Your credit score is far less important in the big picture than your balance sheet.

Credit scores are a side show

A balance sheet looks at what you own and what you owe.  That’s the information that appears on a loan application.

Ditch the debt in bankruptcy and there’s less debt to weigh down your net worth.

Goose your credit score

You can take actions that may increase the rate of improvement.

Remember that credit scores are based on credit reports.  And credit reports are notoriously inaccurate.

A government study in 2012 found that between 20 and 25% of credit reports had material errors.

Rest assured that the rate of errors on your credit report does not go down when you file bankruptcy.  That’s why you should pull your credit report a few months after you get your discharge, and look for errors.

Attorney Mike Cardoza lays out how to do that in How To Spot Credit Report Errors After Your Bankruptcy & Fix Them.

Is bankruptcy the right choice

Just because bankruptcy may improve your credit score is not a reason to file bankruptcy.  It’s just an issue to take off list of reasons not to file.

Lots of different facts influence whether bankruptcy is right, and whether the time is now.

I look at those factors in What Kenny Rogers Teaches Us About Getting Out Of Debt.

 

 

Your Right To Credit Reporting After Bankruptcy

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credit report after bankruptcy

You’ve finished your Chapter 13 and emerged from bankruptcy with your home loan current.

But your credit report is a blank page as to your mortgage.

The mortgage servicer isn’t reporting your payments to the credit reporting agencies [CRA’s].  

Nothing. Nada.  Crickets.

So, even though you’re making regular payments, you’re not visibly rebuilding your credit.

Ask the servicer and they’ll tell you that they can’t report your payments “because of your bankruptcy discharge“.

But they are wrong:  a little-discussed provision of Chapter 13 says that long-term mortgage debt is not discharged in 13.

Yup.  The mortgage loan is not discharged as a personal obligation.

And therefore, there is no bar to the servicer reporting your payments, and every danger should they not report.

Servicer’s obligation to report

Put simply, if a creditor reported to credit reporting agencies  before the bankruptcy was filed, then there is an obligation to report after the bankruptcy.  The “furnisher”, the creditor who supplies information to the credit reporting agency, has an obligation to make the information on file fully accurate.

In contrast to an unsecured debt like a credit card, which should be reported as having a zero balance after the discharge, the mortgage loan after Chapter 13 has a balance.

Presumably, it is also current.  Both facts which should appear on your credit report.

Mortgages excluded from Chapter 13 discharge

I’m certain you will have to cite to bankruptcy law when you challenge the improper reporting on a mortgage loan after Chapter 13.

Here’s the part of the Bankruptcy Code that excludes long term debt like your mortgage.

Section 1328 says,

(a)… the court shall grant the debtor a discharge of all debts provided for by the plan …, except any debt—

(1)provided for under section 1322(b)(5); 

 Section 1322(b), that §1328 refers to,  says

(b)Subject to subsections (a) and (c) of this section, the plan may—

(5) … provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

Get mortgage payments reported

If you find that your post discharge payments on your home loan aren’t being reported, challenge the accuracy of what is on your report about that loan with the credit reporting agency.

It is the CRA’s responsibility to see that information in your credit file is accurate.  The CRA is supposed to ask the furnisher to reinvestigate the challenged tradeline.

The Consumer Financial Protection Bureau has a how-to, with a template letter, on how to dispute inaccurate information on your credit report.

Get the good information reported.

More

How to find and fix credit reporting errors

Your post bankruptcy to-do list

Can You Get A Car Loan After Bankruptcy?

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car loan after bankruptcy

Wheels are essential for most of us to get to work.

And whatever you’re driving when you file bankruptcy will need to be replaced at some point.

So, how are you going to finance that next car if you’ve just filed bankruptcy and face 7-10 years with the bankruptcy on your credit report?

The credit industry tries to fan that worry;  after all, they want you to keep paying on impossible debt rather than get a fresh start.

They want you to believe that no credit is available for eons to those who have filed bankruptcy.

Hogwash.

Bankruptcy improves your credit score

Under the credit scoring system used by Fair Isaacs, your credit score improves after bankruptcy.  Upon entry of the discharge, your debt to income ratio improves dramatically.

When you sit down to pay your bills after bankruptcy, there are fewer creditors clamoring for a piece of your paycheck.

Now, granted, that’s just one element of the score.  But it makes the point that credit scores are not all about whether you paid your bills as agreed.

The negative impact of a bankruptcy fades over time, time that is far shorter than the 10 years that it may appear on your credit record.

People in bankruptcy get car loans

The most compelling evidence that credit for a car is available after bankruptcy is the fact that many debtors currently in Chapter 13  get loans to replace old cars.  They haven’t even gotten the discharge of their debts yet.

They pay a significantly higher interest rate for loans during bankruptcy.

But they are living proof that car loans are available.

The take away?  Bankruptcy affects the price you pay for credit but doesn’t usually bar you from credit.

Consider getting a replacement car before bankruptcy

I often send clients planning on filing bankruptcy who are driving cars on their last legs out to shop for a new car.

And lots of them report back that they got a loan even with all the nasty debt still on their credit report.

The auto industry can be counted on to see that you can get a loan to buy their product!

My only admonition to them is to tell the truth on the loan application.  To do otherwise creates problems far bigger than an unreliable car.

If you get a car loan on the eve of bankruptcy, you are also signing up to keep paying that loan through and after the bankruptcy.

Join a credit union

Credit unions are different than banks in lots of ways, but the most important one is that they are in business to make loans to their members.

Become a member.

Do your banking at the credit union.

Start creating a solid, post bankruptcy credit.  If your present car is paid off, start making a monthly “payment” to your  “replace the car” fund.

After all, you don’t have to finance all of the purchase price of the car.  Be ready to make a meaningful downpayment, making the size of the loan you need smaller.

Your budget will appreciate a smaller monthly car payment when the time comes to get a new car.

More

Reaffirming a car loan

Paring down a car loan in Chapter 13

Life after bankruptcy

 

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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