How to Get Credit after Filing Bankruptcy The Complete Guide to Getting and Keeping Your Credit Under Control

How to Get

Credit

After Filing Bankrupcy

The Complete Guide

to Getting and Keeping

Your Credit Under Control

By Mitch Wakem

HoW to Get Credit AFter FilinG BAnkruptCy: tHe CoMplete Guide to GettinG And keepinG your Credit under Control Copyright © 2007 by Atlantic Publishing Group, Inc.

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ISBN-13: 978-1-60138-137-8

ISBN-10: 1-60138-137-9

Library of Congress Cataloging-in-Publication Data Wakem, Mitch, 1982-How to get credit after filing bankruptcy : the complete guide to getting and keeping your credit under control / Mitch Wakem.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-60138-137-8 (alk. paper)

ISBN-10: 1-60138-137-9 (alk. paper)

1. Consumer credit--United States. 2. Bankruptcy--United States. I. Title.

HG3756.U54W335 2008

332.7’43--dc22

2008028009

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We recently lost our beloved pet Bear, who was not only our best and dearest friend but also the Vice President of Sunshine here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents. Bear was a rescue dog that turned around and showered myself, my wife Sherri, his grandparents Jean, Bob and Nancy and every person and animal he met (maybe not rabbits) with friendship and love. He made a lot of people smile every day.

We wanted you to know that a portion of the profits of this book will be donated to The Humane Society of the United States.

–Douglas & Sherri Brown

The human-animal bond is as old as human history. We cherish our animal companions for their unconditional affection and acceptance. We feel a thrill when we glimpse wild creatures in their natural habitat or in our own backyard.

Unfortunately, the human-animal bond has at times been weakened.

Humans have exploited some animal species to the point of extinction.

The Humane Society of the United States makes a difference in the lives of animals here at home and worldwide. The HSUS is dedicated to creating a world where our relationship with animals is guided by compassion.

We seek a truly humane society in which animals are respected for their intrinsic value, and where the human-animal bond is strong.

Want to help animals? We have plenty of suggestions. Adopt a pet from a local shelter, join The Humane Society and be a part of our work to help companion animals and wildlife. You will be funding our educational, legislative, investigative and outreach projects in the U.S. and across the globe.

Or perhaps you'd like to make a memorial donation in honor of a pet, friend or relative? You can through our Kindred Spirits program. And if you'd like to contribute in a more structured way, our Planned Giving Office has suggestions about estate planning, annuities, and even gifts of stock that avoid capital gains taxes.

Maybe you have land that you would like to preserve as a lasting habitat for wildlife. Our Wildlife Land Trust can help you. Perhaps the land you want to share is a backyard—that's enough. Our Urban Wildlife Sanctuary Program will show you how to create a habitat for your wild neighbors.

So you see, it's easy to help animals. And The HSUS is here to help.

The Humane Society of the United States 2100 L Street NW

Washington, DC 20037

202-452-1100

www.hsus.org

Table of Contents

Introduction .....................................................................7

SeCtion 1: BAnkruptCy overvieW ......... 11

Chapter 1: What Is Bankruptcy? ...............................13

Chapter 2: The Truth About Bankruptcy ..........25

Chapter 3: Bankruptcy & Family ..............................51

Chapter 4: Before You File for

Personal Bankruptcy ......................................................67

SeCtion 2: reBuildinG your

Credit AFter BAnkruptCy .......................... 73

Chapter 5: Credit Reports ..........................................83

Chapter 6: Credit Report Disputes ..........................95

SeCtion 3: HAve A plAn .................................. 103

6

How to Get Credit After Filing Bankruptcy

Chapter 7: Your Plan .....................................................105

SeCtion 4: Credit CArd AppliCAtionS ...119

Chapter 8: Applying for Credit Cards ....................121

Chapter 9: Your Fico Score .........................................131

Chapter 10: Buying a Car After Bankruptcy .......145

Chapter 11: Buying a Home After Bankruptcy .....171

Chapter 12: Getting an ApartmentAfter

Bankruptcy .........................................................................231

Chapter 13: The ChexSystems Blacklist ................245

Chapter 14: Your Insurance Rates

After Bankruptcy ............................................................257

Chapter 15: Bouncing Back ..........................................271

Chapter 16: Credit Counseling ..................................279

Conclusion ..........................................................................283

Bibliography ........................................................................285

Author Biography ...........................................................286

Index .......................................................................................287

Introduction

Bankruptcy can happen to anyone, from the young entrepreneur to the experienced businessperson. Legally, bankruptcy means that an individual has handed over control of his finances to the court system because he is no longer able to keep up with his debts. The word

bankruptcy can strike fear in your heart. Psychologists rank it as one of the top five stress-inducing events that can happen to us, along with death of loved one, divorce, disability, and serious illness. Certainly, bankruptcy should be a last resort.

So, you have sadly reached that lasts resort. The most important part here is to for you to not panic. You have many options, not only for now, but also for the future.

Bankruptcy is becoming a common event, but because of the high number of bankruptcies, there are many options for you as a consumer. There are a lot of programs designed to help people recover from bankruptcy.

People often go in to panic mode, thinking that they will

8

How to Get Credit After Filing Bankruptcy

never be financially secure again, and that is not the case at all. The truth is, there are many upsides to bankruptcy, and while I do not ever suggest it as a way out, it provides a lot of relief for whatever life-changing event you have suffered. Bankruptcy gives you a chance to start fresh.

With anything, there are positive and negative sides to that fresh start, and we are going to talk about all of those in this book — the good stuff and the bad stuff you do not want to hear. But you are going to get the truth, as hard as it might often be to hear.

This book is the result of consultations with some of the top bankruptcy experts across the United States. It presents a step-by-step process to help you rebuild your credit after your bankruptcy. The usual question is always,

Where do I start? And, while everyone’s situation is different, the guidelines given here will put you back on the track for financial success.

Prepare yourself mentally, as that will be the biggest challenge. You do not want this to tear your family apart.

Financial issues cause more stress than just about any other life event. You will need to be strong not only for yourself but for your family. Stay positive and realize that if you do things right you will only have to do this once.

This is not an overnight process, and realistically it is not even a one-year-long process. To completely recover from bankruptcy can take up to 10 years. You are going to have to put in a lot of hours, and there will be some serious frustration as you attempt to put your life back together.

Introduction

9

Take these small steps toward a long-term financial success. Read the whole book before you start out to rebuild things. You want to know the overall goal here before you start to achieve the little things. So read it from cover to cover, then go back and reference it as you begin your new life.

10

How to Get Credit After Filing Bankruptcy

Section 1

Bankruptcy

Overview

12

How to Get Credit After Filing Bankruptcy

1

What Is Bankruptcy?

Before exploring how to rebuild your life and credit after bankruptcy, it is important to know how you got to this point to begin with, in order to help avoid it again. The decision to file for bankruptcy is difficult and complex.

You should arrive at this decision after a careful review of all aspects of your financial picture, including legal, monetary, and credit implications. That means you need to have a thorough understanding of the real facts and not base your decision on hearsay or myths.

How Bankruptcy Works

When you file for bankruptcy, you effectively put yourself into the hands of the federal court process for bankruptcy protection. Under this process the court will either eliminate your debts completely or require you to repay some of them. There are two primary types of bankruptcy: Chapter 7 and Chapter 13. Under Chapter 7 bankruptcy, known as liquidation, you ask the court to wipe out

14

How to Get Credit After Filing Bankruptcy

or liquidate your debts. This is called discharging your debts. Creditors can no longer press you for payments.

Under Chapter 13, you file a plan to repay your debts.

This is known as Chapter 13 reorganization. The plan lays out a process for how you will pay off your debts. You may still be able to eliminate some debts, but you will be required to pay off as many as you can afford, either completely or at least partially.

From the moment you file for bankruptcy, your financial affairs are placed under the control of the bankruptcy court. The court assumes legal control of your property and your debts. You will not be allowed to sell or pay anything unless the court permits it. You will, however, retain control of any property acquired after you file for bankruptcy.

Once the court has assumed control of your finances, it appoints a trustee to deal with your creditors. The trustee is interested in what you own and what you owe. They will determine what assets you are allowed to keep and what assets must be liquidated. The assets you are allowed to keep legally are called exempt assets.

The trustee will go through the paperwork you submit when you file for bankruptcy and will have a meeting, or a hearing, which you must attend, called a creditors’

meeting, even though creditors themselves rarely attend.

After the meeting, the trustee collects any property that can be taken from you (your nonexempt property) so it can be sold. The trustee will allow you to surrender the value of the property rather than the property itself. You may be able to swap some exempt property for some nonexempt

Chapter 1: What Is Bankruptcy?

15

property; in this way, you can attempt to preserve certain assets that would otherwise need to be divided under the terms of the bankruptcy. Sometimes the trustee will

abandon property that is not very valuable or difficult to dispose of through sales. If the trustee abandons the property, you may end up being able to keep it.

After you file either kind of bankruptcy, the bankruptcy court issues an order to place an automatic stay on your debts. The stay prohibits creditors from taking action to collect the debts. This means that creditors cannot legally garnish your wages, empty your bank account, or repossess your car, your house, or any other property.

Nor can they cut off your utility service or your welfare benefits.

Even after you file for bankruptcy, there are some kinds of debt that cannot be discharged, and you will continue to owe them even after you file. For example, back child support cannot be eliminated through bankruptcy; you cannot discharge alimony payments or unpaid federal or state and local taxes. The conditions for discharging student loans are very stringent. Under some circumstances they can be discharged if you can demonstrate that you are completely unable to repay them. Creditors can apply to the court for repayment of their debt. If you cannot prove that you are completely unable to repay them, these debts might not be discharged. Lastly, you may not be able to discharge court-related costs.

Following enactment of the original bankruptcy laws in 1978, filing for bankruptcy as a means to escape debt became commonplace. Over the last ten years, the number

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How to Get Credit After Filing Bankruptcy

of bankruptcies filed has doubled. This huge increase provoked the government into drafting new bankruptcy laws to make filing more difficult. The new law went into effect in October 2005. As a result, it is harder to file for bankruptcy than it was before the new law went into effect.

The impact of the new law has been to tighten restrictions on who qualifies for Chapter 7 (liquidation). Conditions for filing Chapter 13 (reorganization) have also been tightened. Below is a summary of the significant impacts of the new bankruptcy law:

• Filers must obtain credit counseling for six months prior to filing for a bankruptcy.

• A person in debt must have the last four consecutive years of tax returns on file prior to filing for bankruptcy.

• A filer must be able to show good reason why the courts should discharge personal debts.

• A Chapter 13 bankruptcy (reorganization) must be paid off within three to five years.

• The result of this law is that more people try to pay off their debts rather than file for bankruptcy.

Bankruptcy will remain on your credit report for ten years.

This is an important consideration when deciding whether to file. Bad credit can make it hard to get a car or home loan.

If you do qualify for a loan, you are at risk of being subject

Chapter 1: What Is Bankruptcy?

17

to very high interest rates until you are able to rebuild your credit. You will also be subject to high fees for missed payments, origin points, and so on. The decision to file for bankruptcy should only be arrived at after talking with credit professionals, financial counselors, and attorneys.

There are often other possibilities for consolidating debt and paying down what you owe. Bankruptcy of any kind should always be a last resort.

Chapter 7 Bankruptcy (Liquidation)

Chapter 7 is reserved for those who have absolutely no resources with which to pay off debt. If you file Chapter 7, the court will completely liquidate your assets with the exception of your home, car, and other basic living necessities. Because this is total elimination of your debts, filing Chapter 7 is very difficult. If you plan to file this way you should seek the advice of an attorney.

Chapter 13 Bankruptcy (Reorganization)

Under Chapter 13, you must reorganize your finances and develop a plan to pay off your debts. If you file Chapter 13, you may be allowed to keep some of your assets. To qualify for filing this chapter, you must have some means of regular income. The court will review your plan and set up a repayment schedule, including a determination of how much your payment should be. Filing under Chapter 13 is suited to those people who are in over their heads financially and are experiencing difficulty in keeping up with their payments, but still have some means of income.

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How to Get Credit After Filing Bankruptcy

Under Chapter 13, payments are reported to the major credit reporting agencies. This means that, if you successfully continue to make payments as prescribed in your plan, your credit score will reflect your payment history and will gradually start to improve.

How Bankruptcy Affects Your Creditors

After an automatic stay goes into effect, creditors can no longer press you to repay debts. However, they may file a bankruptcy petition against a debtor. This is called an involuntary bankruptcy. If this happens, creditors will review your payment proposal, and they are entitled to attend creditors’ meetings and vote on the proposal.

The court prioritizes creditor claims and ensures that creditors are paid off as much as possible using all the assets available according to the priorities they decided upon by the court.

After you have filed bankruptcy your name will be filed in the insolvency register. Creditors refer to the insolvency register when determining your credit worthiness. This is why it is difficult to re-establish credit worthiness after filing bankruptcy.

What Happens To Your Property

The bankruptcy court will appoint a trustee to sell off any property that has value and is nonexempt. The proceeds of any sales will be used to pay off creditors in accordance with the payment plan. Payment amounts are determined

Chapter 1: What Is Bankruptcy?

19

by evaluating the payment plan, the value of properties you hold, along with your income and expenses. The value of a property is the difference between what is owed on the property and what it will sell for (equity), rather than what you paid for it.

Discharging Your Debts

Discharge refers to the elimination of a debt. Once you file bankruptcy