Bankruptcy Questions Answered

Understanding Credit Card Cancellations

Finding out your credit card has been canceled can be frustrating, embarrassing and worrisome.

Unfortunately, tough economic times may mean card cancellations become more common and more likely in the coming months.

Why Credit Cards Matter

Hopefully, you already know that your credit score is a number calculated through a formula developed by the Fair Isaac Corporation (FICO) and determines what kind of interest rates you’re likely to receive from lenders.

But what you may not have realized is that your credit card usage plays an important role in your credit score:

• Age of accounts: The longevity of various credit accounts, including loans and lines of credit, is a factor in your credit score. So maintaining a credit card for a number of years is better than opening up new ones and canceling old ones.
• Variety of account types: Another factor of your credit score is the diversity of your credit portfolio. Credit cards are one of the only tools that offer revolving credit, so they demonstrate how well a borrower handles this particular credit product.
• Credit utilization ratio: Finally, credit cards help by giving you more credit available. Part of your score comes from a comparison between how much credit you have available to how much you’re using (using less is better).

So having a card canceled on you may damage your score in three different ways, and there is no law that requires credit card issuers to notify consumers about cancellations.

Reasons for Credit Card Cancellation

Even if you’re a responsible credit card user - meaning you pay your bill on time every month - your credit card company may cancel your card. Common reasons include:

• Ratio shift: If your available-credit-to-debt ratio changes - that is, you start using significantly more credit - a card issuer may cancel your card due to "increased risk."
• Lack of profitability: Sadly, if you pay your bill in full every month, the issuer isn’t making much money from you, and may cancel your card.
• Lack of use: If you haven’t used your card in several months, it could get the shaft. Charge something small every month or so and pay it off immediately to prevent this.
• Bad economy: Market conditions, like unfavorable interest rates or housing prices, may cause card issuers to close accounts.
• Credit report information: Negative information in your credit report, whether true or not, can make an issuer pull the plug.

In some cases, you won’t be able to prevent cancellation, but you can stay on top of your finances by checking your credit report regularly and fixing any errors you notice. This will help you stay on top of any credit card problems before they arise.

Posted in Credit Card Debt, Credit and Bankruptcy | Comments Off

A Time for Credit Cards?

For most Americans, the allure of credit cards can lead to a financial trap. Credit cards make purchasing easier—but can make responsibility harder.

Credit card spending often brings freedom today while impacting your future. Whenever you buy with credit, you're promising your future income today. And if you're buying things that don't increase in value, that can be a poor investment.

If you're considering filing bankruptcy, using a credit card may be twice as bad—bankruptcy laws may prevent you from discharging recently racked-up credit card bills.

However, for those who have learned to use credit wisely, the purchasing power of credit cards can bring peace of mind, and even some added perks, while building credit.

Benefits of Purchasing with Credit

• Protect your money: Identity theft and credit card fraud can be a huge financial set-back. Luckily, most credit card issuers consider users liable for no more than $50 of purchases that turn out to be fraudulent. This protection is generally not available with debit cards, probably because credit cards involve a loan of the company’s money, and debit cards involve only the user’s money.
• Guarantee your gadgets: A lot of credit card issuers provide warranties for items purchased on credit—another reason that many store-offered warranty packages are a bad investment.
• Protect your purchases: A significant number of credit cards include clauses that offer refunds for items that are lost, stolen or damaged recently after being purchased on credit.
• Get reimbursements: Some cards offer users reimbursements if they find a price lower than what they paid for an item; others offer refunds even if they’re against store policy.
• Milk the rewards: Cash-back bonuses, airline miles and other bonuses can be extremely rewarding, as long as you pay off your balance in a reasonable amount of time.
• Travel smarter: Some cards provide insurance for car rentals, air travel, cancellations and accidents, which can cost lots of cash to buy during every trip.

The Golden Rules

Before whipping out your wallet and charging up a storm, though, keep in mind the two most important ingredients in making sure your credit card use doesn’t turn into a recipe for disaster:

• Know the cost. Don’t assume your card offers any of these benefits—read the details of your contract and ask an attorney, trusted friend, or call the company to clarify any muddling points BEFORE using any credit cards.
• Check your budget. Running up a high balance is never a good idea if you cannot pay it off. Remember that credit cards do not offer additional income; they merely offer an alternative way of purchasing with your existing finances.

Additional Resources

The Credit Card Model (PDF): A 1997 study of the debt cycle caused by credit cards and their long-term impact.

Posted in Credit Card Debt, Credit Cards, Credit and Bankruptcy, credit card bankruptcy | Comments Off

What It Takes to Get a Debt Canceled (or Reduced)

If you’re struggling with credit card debt, you’re certainly not alone. Research indicates that more than three-quarters (78 percent) of American households have at least one credit card, and among this group, the average debt is more than $10,000.

While credit card debt can be a significant financial burden no matter what the national economic climate, when the economy weakens, paying off such debt can seem almost impossible. But, if you make a commitment to eliminate your debt, you may have some alternatives to paying the entire amount you owe.

Ask for a Reduction

Deciding to pay off your credit card debt is an important part of actually becoming debt free. After you’ve laid out all your latest statements and calculated what you owe, it’s time to contact your creditors.

• Research your history: Review old bills and notices from your credit card issuers. Take notes on what accounts you’ve kept up to date, how much you owe where and what interest rates are on each card.
• Place a call (or several): If you’re like many Americans, you have more than one credit card. Choose the card you’ve been most diligent about paying on time and call the customer service number provided on the bill.
• Explain yourself: Explain to the representative that you’ve decided to pay down your balance, and you were wondering if they could lower your interest rate. Remain polite and point out the positive history you have with the account if you need a bargaining chip.

Repeat with as many of your cards as you can. Even if none of your issuers agrees to lower your rates, the worst anyone say is “no.”

Write a Letter

If you think your financial circumstances will prevent you from paying down your credit card debt regardless of your interest rates, it’s time to ask for a bit more.

• Contact your creditors. If your attorney believes that you are judgment proof (that is, that your creditors couldn’t collect any money even if they sued you), you can write to your creditors to ask for a complete cancellation of your debt.
• Contact a lawyer. A local attorney can help you determine whether your finances are truly as dire as you think. If they are—that is, if you have little enough income and few or no valuables that could be sold to raise money—you may be a good candidate for debt cancellation.

This method has worked in the past, as this post from Creditbloggers.com reports. Remember, credit card debt doesn’t have to ruin your finances. A little determination can go a long way.

Additional Resources

Credit Card Facts and Stats (PDF)

The Burden of Credit Card Debt (PDF)

Posted in Credit Card Debt, Credit Cards, Credit and Bankruptcy, debt elimination | Comments Off

Christmas Shopping and January Bankruptcy

As we approach the Christmas holiday season, I want to remind my readers of two things.  First and foremost, I want to wish all of my clients and blog readers a happy and healthy holiday season.   Financial struggles will come and go but if you have your family and your health, not a whole lot of other things matter.

Secondly, I would respectfully suggest that it is never too late to begin the process of tackling your financial issues.   Over the years I have met with many potential clients in January and February who bring me credit card bills containing charges incurred for presents in November and December.  They are ready to make a fresh start and want to file.

On more than one occasion I heard the explanation "well, I knew that I was going to have to file bankruptcy at some point – but I wanted my family to enjoy a nice Christmas first."

From my perspective as a bankruptcy lawyer, this attitude will get you in trouble.  Common sense should tell you that you cannot run up your credit cards buying gifts, then wipe out that debt a month or two later by filing bankruptcy.

Not surprisingly the Bankruptcy Code addresses the issue of "credit card binge" debt as well.

Section 523(a)(2) excepts from discharge debt that was obtained if an individual made material and false representations about his financial condition (i.e. , lies on the credit application).

Section 523(a)(2)(C) provides that:

1. consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services (luxury goods defined as goods or services reasonably not necessary for the support or maintenance of the debtor or a dependent of the debtor) incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and
2. cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable;

Section 523(a)(2)(a) excepts from discharge money, property or services incurred by false pretenses, a false representation, or actual fraud (i.e. incurring debt that you knew or should have known that you would not be able to repay)

Posted in Credit Card Debt, Creditor discharge actions, General consumer bankruptcy info, christmas presents, discharge litigation | Comments Off