Bankruptcy Questions Answered

Your Post-Bankruptcy To-Do List

If you’ve filed for bankruptcy, you’ve probably already heard a thing or two about how important it is to rebuild your credit. A recent post at CreditBloggers.com provides an excellent guide for how, precisely, a person can begin this daunting process.

Here’s a look at some of the key tips discussed on the post.

Know Where Your Credit Stands

If you haven’t already, now is the time to visit AnnualCreditReport.com and get a free credit report from each of the big three credit reporting bureaus (every American is entitled to one free credit report per year from each bureau). When you get the report:

• Review all the information carefully: Accounts that were discharged in your bankruptcy filing should have a balance of zero dollars and indicate that the debt was forgiven in bankruptcy.
• Look for mistakes: Check for any incorrectly reported information – this could include a report that you still owe money on an account that was discharged.
• Contest the mistakes so they can be removed: If you notice any incorrectly reported information, contact the credit reporting bureau and identify the problem. You’ll probably be asked to send written documentation that you no longer owe the debt, but the process will be worth it because the less your credit report says you owe, the better off your credit will be.

Start to Make Credit Amends

Once you’ve figured out how your credit looks, it’s time to start engaging in the kind of behavior that will replenish your credit report with positive credit actions and thus make you look like a more attractive credit risk to potential future lenders.

One of the most important things to keep in mind while focusing on rebuilding your credit is to be wary of credit scams – they abound, and scammers often target people who have recently filed for bankruptcy. Here are some common scams to avoid:

• Advance fee loan scams: This term covers a variety of scams, but for people trying to rebuild after bankruptcy, advance fee scams might involve someone posing as a lender and “guaranteeing” you a loan – if you agree to pay a fee in order to have that loan offered to you. If, in fact, you were able to get a loan and make regular payments on it, the loan would likely help you rebuild your credit. But if it’s an advance fee scam, what will likely happen is your loan will never materialize and the fee you pay will be gone forever.
• Credit repair scams: These, too, are sadly common. They involve a company promising to “repair” or “wipe out” your credit record – even if the information on it is completely accurate. Of course, this is not legal to do and will end up costing you money that you’d be better off saving or putting toward real credit-building ventures.
• New credit file scams: This variety of scam involves a company giving you a “new credit identity” – essentially, the company gives you an Employee Identification Number (EIN) to use with the credit bureaus in lieu of your Social Security Number. The claim is that you’d get to build credit from a clean slate, but the catch is that this is highly illegal and could lead to jail time and/or hefty fines. Plus, all the time you spend building your “new” credit identity is time in which your real credit identity just languishes.

Posted in Bankruptcy, Credit, Credit and Bankruptcy, Financial Literacy, Loans, after bankruptcy | Comments Off

Credit, Cosigning and Bankruptcy: What You Need to Know

If you’re thinking about cosigning a loan for a friend or family member to help him qualify for better interest rates or a greater loan amount, make sure you know your responsibilities if the borrower is unable to make payments or ends up in bankruptcy.

This post from WiseBread.com provides a reminder about the responsibilities of a loan cosigner. Here’s a recap and expansion.

Your Responsibilities in Cosigning

Before putting your signature on the dotted line of someone else’s loan, review the facts:

• You are considered a borrower: Even though you may have nothing to do with this loan or line of credit after you sign your name, it will appear on your credit report. This means that the primary borrower’s payment habits have the potential to affect your credit score.
• Your credit may take a hit: Besides the question of timeliness of payments, having an extra loan on your credit could affect your credit in another way: by shifting your credit-to-debt ratio. This ratio (which compares your total credit limit to how much debt you have) affects your credit score, which in turn could affect your ability to get future loans.
• You are agreeing to pay: According to figures from the Federal Trade Commission, of cosigned loans that go into default, 75 percent are paid by cosigners. And if the primary borrower decides to file for bankruptcy protection, you’ll likely be required to pay the loan as well.
• You agree to all loan terms: This means that if the primary borrower falls behind or defaults, you’ll be responsible not only for the loan payments but also for any late fees, penalties, increases in the interest rate, and so on. Further, a debt collector could conceivably approach you for payments, and might (in extreme cases) even resort to legal measures.

The Moral: Cosign with Caution

This isn’t meant to detract people from cosigning altogether – in fact, cosigning a loan can be a great way to help a loved one build or rebuild credit. But before you agree to put your signature on lending papers, make sure you understand the potential consequences. You may want to consider:

• Making a separate contract between you & the primary borrower to define expectations;
• Setting up an “emergency plan” for making payments if the primary borrower thinks she might miss a payment;
• Discussing the primary borrower’s income sources and spending habits to get an idea of what you’re working with financially; or
• Setting aside some money specifically for covering that loan.

The bottom line is to treat a loan you’re asked to cosign as you would any other loan – after all, it could have as big an impact on your credit score and financial health.

Posted in Bankruptcy, Credit and Bankruptcy, Financial Literacy, Loans | Comments Off

Credit, Cosigning and Bankruptcy: What You Need to Know

If you’re thinking about cosigning a loan for a friend or family member to help him qualify for better interest rates or a greater loan amount, make sure you know your responsibilities if the borrower is unable to make payments or ends up in bankruptcy.

This post from WiseBread.com provides a reminder about the responsibilities of a loan cosigner. Here’s a recap and expansion.

Your Responsibilities in Cosigning

Before putting your signature on the dotted line of someone else’s loan, review the facts:

• You are considered a borrower: Even though you may have nothing to do with this loan or line of credit after you sign your name, it will appear on your credit report. This means that the primary borrower’s payment habits have the potential to affect your credit score.
• Your credit may take a hit: Besides the question of timeliness of payments, having an extra loan on your credit could affect your credit in another way: by shifting your credit-to-debt ratio. This ratio (which compares your total credit limit to how much debt you have) affects your credit score, which in turn could affect your ability to get future loans.
• You are agreeing to pay: According to figures from the Federal Trade Commission, of cosigned loans that go into default, 75 percent are paid by cosigners. And if the primary borrower decides to file for bankruptcy protection, you’ll likely be required to pay the loan as well.
• You agree to all loan terms: This means that if the primary borrower falls behind or defaults, you’ll be responsible not only for the loan payments but also for any late fees, penalties, increases in the interest rate, and so on. Further, a debt collector could conceivably approach you for payments, and might (in extreme cases) even resort to legal measures.

The Moral: Cosign with Caution

This isn’t meant to detract people from cosigning altogether – in fact, cosigning a loan can be a great way to help a loved one build or rebuild credit. But before you agree to put your signature on lending papers, make sure you understand the potential consequences. You may want to consider:

• Making a separate contract between you & the primary borrower to define expectations;
• Setting up an “emergency plan” for making payments if the primary borrower thinks she might miss a payment;
• Discussing the primary borrower’s income sources and spending habits to get an idea of what you’re working with financially; or
• Setting aside some money specifically for covering that loan.

The bottom line is to treat a loan you’re asked to cosign as you would any other loan – after all, it could have as big an impact on your credit score and financial health.

Posted in Bankruptcy, Credit and Bankruptcy, Financial Literacy, Loans | Comments Off

The Problem with 401(k) Loans and Consumer Bankruptcy

Most of the clients who I represent in Chapter 7 or Chapter 13 cases view bankruptcy as their absolute last resort.  Usually, by the time they get to me, these clients have exhausted every other alternative – they have borrowed money from relatives and friends, sold possessions on eBay and cashed out or borrowed against retirement plans.

All of these choices, by the way, create unintended consequences – if you are reaching that point of desperation where you are thinking about selling things, cashing out retirement plans, etc., I would rather that you call me  before taking any action because of the risk that you might unknowingly lose some of the benefit from your bankruptcy filing, or possibly disqualify yourself altogether.

Retirement plan loans such as 401(k) loans create a variety of issues and are almost always a bad idea in a bankruptcy context.   Presumably you borrow against your 401(k) because you need cash now, you expect to repay that loan in the near term, you want to preserve your 401(k) account for the future, and because you do not want the tax consequences associated with cashing out your 401(k).

Bankruptcy trustees, however, look at 401(k) loans in a different light.   They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors.    401(k) loan payments cannot be counted as allowable deductions in your means test calculations.   And both Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13.

Since 401(k) plan funds are generally considered "exempt" or sheltered property in a Georgia Chapter 7 or Chapter 13, your best choice often means not using your 401(k) as a last gasp source of cash.

401(k) loans and on-going 401(k) contributions do not make bankruptcy impossible, but they do complicate matters.  If you are in financial trouble and are thinking about raiding your 401(k) or retirement plan but have not done so, you should not take any action until you have spoken to a bankruptcy lawyer.   If you have already cashed out or borrowed against your 401(k), make sure that your attorney is aware of this fact.

Posted in 401 k, 401(k) loans in bankruptcy, Bankruptcy budgets, Consequences, General consumer bankruptcy info, Georgia Bankruptcy, Loans, Retirement, Trustee objections in Chapter 13, allocation, allowable, altogether retirement, borrowed, cashed, cashing, counted, create, deductions, loan, plan, plans, plans all, repayment, trustee objections, unintended | Comments Off

Will Bankruptcy Issues Affect Georgia Governor’s Race?

If you have been reading your local newspapers, you may be aware that Nathan Deal, the Republican candidate for Governor of Georgia, is facing scrutiny about his personal finances and about the bankruptcy filings of his daughter and son-in-law.

According to the Atlanta Journal-Constitution, Mr. Deal personally guaranteed bank loans totaling over $2 million that was used to build and finance a sporting goods store owned by his daughter and son-in-law called Wilder Outdoors, located on Highway 365 near Gainesville.   Unfortunately for the Wilders, the sporting goods business failed, leaving about $2.5 million due.  Mr. and Mrs. Wilder filed Chapter 7 bankruptcy in 2009, discharging their obligations on the outstanding bank loans, leaving Mr. Deal exposed as the guarantor.

Mr. Deal and the Wilders were able to refinance the business loan several years ago prior to the closing of the business but now, a $2.5 million debt will come due in February, which would be about a month after he takes office if he wins.

Mr. Deal asserts that his financial quandary is no different from that faced by many parents who offered financial support to the entrepreneurial dreams of their children.   He has put his primary residence and other property on the market and no doubt hopes to generate enough cash to satisfy the bank's demands.  You can read more about the Wilder bankruptcy issues on my Bankruptcy Law Network post about this situation.

Democrats are pointing to Mr. Deal's financial troubles as proof of his questionable judgment, especially since it turns out that Mr. Deal's son-in-law, Clint Wilder, appears to have been ineligible to file Chapter 7 in July, 2009.  Mr. Wilder had filed an individual Chapter 7 case in Atlanta back in December, 2001.  Section 727(a)(8) of the Bankruptcy Code provides that a debtor must wait at least eight (8) years from the time a Chapter 7 case is filed before filing a second Chapter 7 – here the time period between the two filings was about 7 1/2 years.

Although the Wilders' case was closed in December, 2009, the United States trustee has the right to reopen this case and petition the judge to revoke the discharge.  From what I am hearing, this is what is happening now.

Candidate Deal correctly points out that issues relating to his son-in-law's bankruptcy are not his doings and should not be attributed to him.  On the other hand, the Deal campaign has to be concerned about the prospect of a candidate who could very well be insolvent the month after he takes office and who could face the prospect of filing a voluntary petition or having an involuntary bankruptcy file against him shortly after he takes office.  You may recall that former State school superintendent Kathy Cox chose not to run for re-election after she and her husband filed Chapter 7 following her husband's failed business deals.

I think that the main lesson to glean from this situation has to do with the inherent problems associated with co-signing a loan for anybody, especially when the money put at risk is more than you can afford to lose.

What do you think?  Will Mr. Deal's looming financial problems cost him your vote?  Or do his financial problems give him insight into the economic plight of struggling Georgians?

Posted in 2, 2009  , Business, Chapter 7 issues, Finance, Georgia Bankruptcy, Involuntary Bankruptcy, Loans, Nathan Deal, Revocation of Discharge-Section 727, a, and, bank, build, called, chose, correctly, cox, daughter, deal, failed, goods, guaranteed, guarantor mr, happening, hearing, ineligible to file Chapter 7, july, kathy, mr, now candidate, outdoors, owned, personally, points, recall, revocation of Chapter 7 discharge, school, son in law, sporting, state, store, superintendent, the, totaling, wilder, wilders | Comments Off

New Overdraft Rules Give Consumers a Choice

In response to consumer complaints about ballooning overdraft fees, the Federal Reserve will soon pass new rules aimed at stopping banks’ misleading overdraft tactics. According to the Los Angeles Times, banks will no longer be allowed to automatically enroll customers in overdraft protection plans for their bank accounts.

At first glance, this seems silly—why wouldn’t consumers want overdraft protection? Well, such “protection” means that banks will allow you to make purchases with a debit card beyond your checking account’s limits, thus allowing your balance to go negative. The bank then charges an overdraft fee, which reportedly can reach as high as $39 per overdraft.

Since many consumers assume that using a debit card prevents them from going over their account limits, this often comes as a surprise. In addition, many consumers would prefer their purchases to be turned down for lack of funds, rather than face overdraft fees. However, automatic overdraft plans do not allow consumers this option.

In defense to such criticism, banks argue that overdraft protection saves consumers the embarrassment of having their cards turned down. Further, it allows consumers to make emergency purchases even if their balance is negative. While some consumers may appreciate these benefits, many account holders are upset with the current rules that automatically enroll consumers in overdraft protection plans.

New Rules

Starting August 1, banks will not be able to automatically enroll customers in overdraft plans. Instead, account holders will be asked to “opt-in” to overdraft protection if they want to avoid having purchases denied due to insufficient funds.

As Nessa Faddis, a spokeswoman for the American Bankers Association explains, “It’s a general opt-in. If you don’t do it, you could have a debit purchase denied.”

While it comes as no surprise that bankers enjoy the fees collected through their overdraft plans, some consumers may prefer to have their debit purchases denied, rather than be charged high fees. The new Federal Reserve rule intends to give consumers this choice.

Exceptions

As with many banking regulations, there are exceptions to the new overdraft rules:

• Banks can still allow “regular” payments and debits to be made, even if they push you past your account balance. Such payments might include automatic withdrawals for services like a gym membership. In addition, banks can still automatically charge fees for these “automatic” overdrafts.
• Banks can also continue their practice of “reordering” your purchases, so that the largest purchases are tallied first. By depleting your account with big purchases first, banks increase the odds that subsequent smaller purchases may trigger several overdraft fees. Remember, each purchase you make while in the red triggers a separate overdraft fee.

Additional Resources

To learn more about the new overdraft rules, visit the Federal Reserve's website.

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Protecting Your Best Financial Interests

Part of becoming truly financially responsible and independent involves accepting responsibility for your financial situation. Not only do you have the power to improve your finances, you’re the only person who can (and will) consistently watch out for your rights as a consumer.

This point was driven home once again in this post from CreditBloggers.com, in which the author examines one aspect of banking that people probably don’t realize can cost them serious money.

Understanding Overages

Here's a look at how you could end up losing a couple thousand dollars in a few minutes (without even realizing it):

• You go into your bank to apply for a mortgage loan. A loan officer presents some numbers to you and offers you a loan, which comes with an interest rate that is determined largely by your credit score.
• If you’re lucky, you were offered the lowest interest rate that your credit status qualified you for.
• If you’re unlucky (as many thousands of Americans are), you were offered an interest rate with an "overage"—an interest rate slightly higher than the best rate your credit score allowed.

Why would lenders even offer such loans? Because it can be profitable for them:

• A higher interest rate equals a more profitable loan (because you, the borrower, pay more in interest).
• A more profitable loan is more attractive to investors (because they can collect more money on it).
• The bank gets a higher price for the loan, some of which goes to the loan officer as a reward.

According to the post, issuing loans with overages is fairly common, even at some large, well-established banks, which is why you must act as your own advocate when investigating significant purchases.

Protecting Yourself and Your Money

If you aren’t already monitoring your credit report, consider doing so. At the web site annualcreditreport.com, you can view a free copy of your credit report from each of the Big Three reporting bureaus once per year.

And, if you’re getting ready to apply for a mortgage, you may want to pay to view your actual credit score (visit MyFico.com). To determine what mortgage rate you’re likely to get, do some online research or speak with a financial guru you know before hitting the banks.

Additional Resources

Choosing the Mortgage that’s Right for You (PDF)

Posted in Financial Literacy, Interest Rates, Loans, Mortgage | Comments Off

Bankruptcy Loans: Equity Can Save Your Day

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