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Posts Tagged ‘Bankruptcy’

There’s a cruel irony to navigating your finances amid the ongoing credit crunch.

On the one hand, maintaining a great credit rating is more important than ever – especially if you’re looking for a job or need a loan of any kind. On the other hand, if you mess up royally in the credit department, rest assured that even the worst credit mistakes you can make probably aren’t as bad as you fear.

Here’s a look at a couple of the most severe credit catastrophes you can face – and why none of them is fatal to your financial life.

Bankruptcy

Bankruptcy is often described as the mother of all credit problems, and for good reason. A bankruptcy filing has very serious ramifications for your credit rating and typically stays on your credit files for 10 years.

But that doesn’t mean you’re a financial pariah for a decade. In reality, if you go through a Chapter 7 bankruptcy (where most of your consumer debts are wiped out), you’ll likely be getting credit card offers and other loan solicitations just six to 12 months after your bankruptcy is discharged.

Continue reading Your worst credit problems are not as bad as you think

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It sounds like you and your mother can not only not afford your home, but the house itself is also severely underwater. I understand your desire to improve your credit and get your own place, but honestly, you must fix problems A, B, and C before you can move on to issues D and E. In this case, problems A, B and C are: getting realistic about your financial past and present, learning how to create and live with a budget, and dealing with your home dilemma. Until you first do those things, you won’t be able to pay off your debts (issue D) or improve your credit (issue E). Without tackling first things first, you’ll also put yourself at risk of losing another home simply because you’ve neglected to learn certain financial lessons.

So let’s start with the first thing: a reality check. You seem to have attempted to throw your mother a lifeline, only to wind up nearly drowning yourself. Your email said you bought the home from her back in 2004 to help her avert bankruptcy and foreclosure. Despite your best intentions, you also stated that you and her wound up 3 months behind on the mortgage and in danger of being foreclosed upon anyway. That’s what led you to seek out the $10,000 loan you’re not saddled with. What happened to during the time of your unemployment? Your message indicated that you were twice laid off and that you “made some not so smart money decisions?” Whatever those decisions were, you have to truly acknowledge them, and make sure that you don’t repeat them.

It sounds to me as if you had your mother have been stuck in a cycle of making repetitive bad decisions. I hope you don’t think I’m being too harsh on you. Because I’m telling you these things honestly out of care and concern for your situation. I can sense your struggle and I know it’s very hard to be in such a tough predicament. I’m just giving you a bit of “tough love,” however, because I’ve seen cases like this time and time again. The only way people get out of these dilemmas is by actively breaking the cycle and ending the behavior that landed them in hot water.

Now let’s move on to the second issue: having a proper budget. Unfortunately, most of us grow up never having learned to create a realistic budget. This is likely true of your mother, and it’s probably true for you as well. Read this article I’ve written on budgeting and this post too, to get some ideas on how to budget to better manage your finances. Additionally, read this post about budgeting and financial planning when you go thorugh a layoff or have reduced income.

So what about the house? The fact that you’ve both faced foreclosure at least twice, and have even refinanced twice since 2004, yet you have still wound up deep in debt and deeply underwater tells me that you can not truly afford this home. I assume you refinanced in recent years to take advantage of relatively low interest rates. But I also suspect that you took cash out of your home as well. I could be wrong. But that’s certainly what many people did during the heydey of the housing market. How was that money used? Did you pay off debt, set aside any savings, or do something else with it? I recognize, of course, that part of the reason your house is likely under water is because home prices have fallen greatly in many parts of the country. But the fact that you owe twice as much as your home is worth signals that something else was going on.

If I were you, I would investigage the prospects of a short sale or a deed in lieu of foreclosure. I don’t know where you live, but it’s highly doubtful that your home will “come back” in value anytime soon. Unfortunately, short sales and deeds in lieu of foreclosure do have negative ramifications for your credit. But these are short-term hits from which you can recover, if you’re prepared to move on and do the right thing financially in the future.

You asked about the loan you got while you were unemployed. I don’t know of any way to legally get this loand eliminated or removed from your credit reports. Just because someone loaned you money at a time when you weren’t working doesn’t make the loan a “predatory loan.” Unfortunately, scores of lenders all across the country did this — both reputable lenders and not-so-reputable ones. Honestly, I don’t know which camp your lender falls into.

Nevetheless, again, I want you to be willing to take responsibililty for your own actions, and not put the blame elsewhere. You stated to me that you knew you shouldn’t have applied for the loan in the first place but that you were “desperate.” Plus, the reason you applied for the loan was because you were in arrears on your mortgage. That’s certainly not the fault of the lender that gave you the $10,000 loan. So it’s not fair to now accuse them of “predatory” lending. Predatory loans are characterized by unreasonably high interest rates, abusive pre-payment penalties, or excessive loan fees including enormous commissions for lenders or mortgage brokers.

Don’t worry about paying off 5-year-old debts at this point. You’ve got enough on your plate to try to pay your current bills. And trust me: In the long run, you will be far better off if you take my advice and deal first with these issues before you attempt to pay off old debts or improve your credit rating in order to try to get another place to live.

Even though you are currently going through a Chapter 13 bankruptcy, yes, you can begine to rebuild your credit. The key to establishing – or re-establishing – a great credit rating is to know what factors impact your credit score and how your own financial moves can help or hurt your credit profile. At the very least, make sure you pay all your payments on time as you go through your bankruptcy. You should also avoid opening new credit accounts unless they’re absolutely necessary since inquiries can ding your credit and lower your scores. Keep your credit card debt load (if you have any) as low as possible. And do not co-sign for anyone for anything for the next few years. Another tip: you might try to “piggyback” off the the credit rating of someone who has good credit. That means try to get added onto someone else’s accounts as a joint user or an authorized credit user. Lastly, be sure to pull your credit reports and make sure everything is accurate. If there are any errors in your credit reports, dispute them to give yourself the strongest possible credit profile. Getting through your Chapter 13 won’t be easy, but will a little time and diligence you can build your credit – even as you go through your bankruptcy.

You certainly sound like a candidate for bankruptcy. I assume that $30,000 in debt is credit card debt, and not student loan debt. If it’s college debt, you can’t wipe that out in bankruptcy court, so there’s no point in filing bankruptcy to deal with student loans. Since you have no savings or investments and you’ve been unable to pay your debts, I know that your bills must be exceesive relative to your income. Having three kids to raise by yourself can take a financial toll too. Given all of your circumstances, it’s not unreasonable to explore the option of filing Chapter 7, which would wipe out those debts and keep your wages intact, free from garnishment.

Since a bankrutpcy filing will remain on your credit report for 10 years, I would advise you to first make sure that you’ve tried everything else within reason before you seek bankruptcy. For example, have you tried to negotiate with your creditors? Have you considered credit counseling or attempted to enroll in a debt management plan? Also, when you look at the $30,000 in bills that you owe, is it realistic that you can pay those debts off on your own in about five years or so? If you’ve tried everything else and it hasn’t worked, and if you don’t think it’s feasible to pay off your debts in five years, then bankruptcy likely makes sense. Just get some expert help if you do file for bankruptcy protection. Go to a free legal aid clinic in your area or consult a qualified bankruptcy lawyer in your state for the specific bankruptcy laws where you live.

I don’t have all the facts about your predicament, but bankruptcy likely is not the best option for you. Based on what you described, you have about as much debt as the typical U.S. household – around $10,000. Normally, I wouldn’t suggest filing for bankruptcy protection with debts of just $10,000. But I recognize that all debt is relative. So being weighed down with $10,000 in debt in your early 20s may seem especially burdensome to you, particularly if you
have a very small income, or if you have no job whatsoever.

You told me that you are a graduate student. But you didn’t say if you were in school full time and whether or not you work. Not knowing this information makes it tougher for me to advise you on whether or not a bankruptcy filing truly makes sense. Nevertheless, my gut instincts tell me that you should avoid bankruptcy based on several key facts that you did reveal.

First, you stated that the bulk of your debts – $7,000 worth – haven’t been paid on in about five years. These debts have undoubtedly been charged off by your previous creditors. If they were charged off in, say, 2005 or in 2006, they’ll only be on your credit report for two or three more years — a far shorter time-period than a bankruptcy, which stays on your credit files for 10 years. Also, the statute of limitations may soon expire on your credit card debts, or may have already expired, meaning that those previous creditors won’t be able to legally sue you in court or get a judgment against you.

Obviously, I don’t know what field you will enter or how long it will be before you obtain an advanced degree. But the fact that you are currently earning a graduate degree also leaves me to believe that you will have above-average earning potential once you complete your studies. If you choose to pay off those debts, or have to, in the future, you may have more cash flow than you currently enjoy.

Lastly, as a general matter, I often tell people contemplating bankrutpcy to first answer two questions:

Have you exhausted all other options?
In other words, have you modified your budget, tried to negotiate with creditors, sought credit counseling help, considered a debt management plan, and so on?

Based on your current circumstances, can you realistically pay off your debts on your own in about 5 years or so?

If you’ve tried everything else and if it would be near-impossible to pay your debts over roughly 5 years, then bankruptcy is worth considering. Only you know whether you’ve tried everything and whether $10,000 is feasible to pay off in 5 years.