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Your Credit and Bankruptcy
The Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005: The changes
are now law so read these important revisions to the Act. Come October
2005 the changes are complete and will affect many considering bankruptcy.
Each year more than 800,000
Americans file for protection under the federal bankruptcy laws,
according to the American Bankruptcy Institute. Some are credit
abusers or are financially irresponsible. But average working families
who try to pay all of their bills can find themselves in financial
trouble, too. The sudden loss of a job, medical bills, a divorce
or even a natural disaster can quickly wipe out a life's savings.
For many, bankruptcy provides a second financial chance.
A bankruptcy filing stays
on your credit record for up to 10 years, but it need not be a permanent
problem. In fact, there are laws that forbid discrimination against
you if you have filed bankruptcy. If you show consistent
employment history and financial responsibility, you can rebuild
your credit. Bankruptcy can relieve the honest but unfortunate debtor
from the pressures of excessive debt by providing a fresh start.
It allows you to discharge much of your debt or
allows you time to get back on your feet without harassment by creditors.
Filing for bankruptcy is tough enough but what about after? How
do you begin to rebuild your credit so that you can move forward?
You need credit to get credit but who will give you credit and trust
you. Well, it is not as difficult as you may think. While
filing bankruptcy is devastating to your credit rating there are
options to make sure you have made the best of your credit situation
and most importantly made the history accurate.
Accuracy in a bankruptcy
So, you've filed bankruptcy and maybe a few months or even years
has passed. You have not even begun to rebuild because you have
no clue where to start. The few loans you did try to get were quickly
shot down. The biggest problem may not be your bankruptcy itself
but the data still in your credit reports months or years later.
You see, when a person files for bankruptcy, all debts that were
included must be listed accurately as "Included in BK"
If they are not, they still appear to be in collections! The potential
lender you just applied with sees a bankruptcy and collection accounts
and you appear to have filed and still running up unpaid debt.
You may not think this is important but it is very important. Part
of the rebuilding process is to get your credit absolutely free
of errors and then begin to rebuild.
All three
credit reports will contain all the adverse information from
before you filed. This information will be charge offs, judgments,
collection accounts and the like. Once your bankruptcy has been
successfully discharged, those debts are no longer collectable.
Believe it or not, creditors will rarely update your credit reports
to reflect "Included in BK." They will leave the debts
as they last were, because your the last person they are going to
do any favors for. Whether it is intentional or not, It's wrong!
According to the FCRA (Fair Credit Reporting Act), only accurate
debts can be listed.
Your credit reports should only show the actual
bankruptcy and then the debts as "included in BK." What
this does is take a sloppy unreadable report to a concise report.
This matters because creditors will see the date of the bankruptcy
and determine that all debts were included and you currently have
NO collection accounts or charge offs. Remember, we are talking
about Your Credit and a Bankruptcy, not perfect credit. Don't be
unrealistic and expect perfect credit overnight.
Below are some helpful pointer so you can achieve
the best possible credit reports and tips for rebuilding.
- Check your reports
for errors
- Correct the errors
- Apply for a few secured
credit cards
- Open a bank account and secure credit with
a savings book
- Keep employment stable
- Pay utilities on time (they report when delinquent)
How long may bankruptcy information
be included in my credit report?
Both the Bankruptcy Code and the Fair Credit Reporting Act
(which regulates what a consumer reporting agency may include in
your credit report) are federal law, so the same rules apply to
all states. A consumer credit report may include information on
a Chapter 7 and Chapter 13 bankruptcy for 10 years from the commencement
of the case. We have been advised that at least one major consumer
credit reporting agency removes information about Chapter 13 after
only 7 years although it is not legally required to do so. Most
other credit information may be reported for 7 years, except for
civil suits, civil judgments, and arrest records can be reported
for at least seven years, but may be reported longer if the governing
statute of limitations is longer. For example, in Arizona, a court
judgment is effective for 5 years however it may be renewed at the
end of that time for another 5 year period and again after that
period. As a result, a renewed civil judgment could be reported
for as long as it is effective.
The restriction on reporting any credit information
do not apply to reports for:
-
credit transaction involving, or which may
reasonably be expected to involve, a principal amount of $150,000
or more;
-
the underwriting of life insurance involving,
or which may reasonably be expected to involve, a face amount
of $150,000 or more; or
-
the employment of any individual at an annual
salary which equals, or which may reasonably be expected to
equal $75,000, or more.
The governing law, 15 U.S.C. § 1681c (renumbered
as § 605) can be viewed at the Federal Trade Commission's site,
Fair
Credit Reporting Act.
Can you still get a Federal guaranteed student
educational loan after you have filed bankruptcy?
Unlike most credit, the granting of government guaranteed educational
loans is not based upon credit history or income. They are
instead extended if you meet the statutory and administrative criteria.
Although default on an existing educational
loan may effect your ability to get a subsequent loan, the filing
of a bankruptcy in itself should not. As a matter of fact, under
§
525 of the Bankruptcy code the government is restricted from
discriminating against those who have filed bankruptcy. For more
information on educational loans, you can check with The
Financial Aid Information Page
, or the financial aid office at your local college. You may also
view our extensive section dedicated to student
loan default.
How long after filing bankruptcy will I be able
to get a loan to buy a house?
Will the interest be "sky high?"
What are some of the other credit effects of filing bankruptcy?
The short answer to your question is that you
may be able to finance the purchase a home two years after you have
gotten your discharge in bankruptcy, but you may qualify as early
as one year after filing Chapter 13, or one year after discharge
in Chapter 7. Since a large proportion of home loans depend on FHA
or VA loan guarantees, your ability to qualify for those guarantees
may determine when you are able to obtain a home loan. FHA will
insure mortgages to individuals who have filed Chapter 7 liquidation
bankruptcy two years after the discharge if "the borrower
has reestablished good credit (or has chosen not to incur new credit
obligations), and has demonstrated an ability to manage financial
affairs."
To obtain a loan within one year after the discharge,
the borrower must show that "the bankruptcy was caused by extenuating
circumstances beyond his or her control and has since exhibited
an ability to manage financial affairs and the borrower's current
situation is such that the events leading to the bankruptcy are
not likely to recur." FHA regulations also specify that
a borrower still in a Chapter 13 debt adjustment who has satisfactorily
completed one year of plan payments and gets court approval of the
transaction. [U.S.
Department of Housing & Urban Development, Office of Housing,
Handbook No.: 4155.1 REV-4 CHG-1, September 28, 1995. Chapter 2-3,
E]
VA has similar regulations. The VA handbook
for lenders includes provisions that "If the bankruptcy was
discharged more than 2 years ago, it may be disregarded." If
the discharge was between 1 and 2 years, the guarantee may still
be granted if the applicant or spouse has obtained consumer items
on credit subsequent to the bankruptcy and has satisfactorily made
the payments over a continued period and the bankruptcy was caused
by circumstances beyond the control of the applicant or spouse such
as unemployment, prolonged strikes, medical bills not covered by
insurance, etc.
VA regulations allow granting of the loan guarantee
to a person in a Chapter 13 when the plan payments are finished
satisfactorily, or after 12 months payments and the Trustee
or the Bankruptcy Judge approves of the new credit. [Veterans
Benefits Administration VA Pamphlet 26-7, Change 34, November 13,
1997] If you obtain home loan financing with a loan guarantee,
the loan rate should be based on the guarantee status of the loan.
As a result, I would not expect that the rate would be affected
by the bankruptcy. Other effects of bankruptcy on credit are difficult
to assess. Credit is extended by individual lenders, and is
not generally regulated by law. Lenders do not generally make
their criteria public. We do know that there are two factors
which are important to creditors in extending credit.
Ability to make payments
Any lender will want to be sure that you have the ability to pay
back a loan before extending you credit. The discharge in
a bankruptcy should improve your ability to make payments.
You will no longer owe the debt that you did when you filed, and
you will no longer be subject to judgments, garnishment and other
collection activities which would impair your ability to pay back
the new loan. In addition, the restriction against you filing
a Chapter 7 for 6 years from the filing of your previous case may
give the creditor some assurance of their ability to collect new
debt.
Credit history
Lenders look at the way you have paid your bills in the past
as an indication of how you will pay your bills in the future.
A bankruptcy is an adverse rating in this respect, but creditors
can also see how your credit was before the circumstances which
caused the bankruptcy. If you had a good credit history and
paid your bills on time before the bankruptcy, you may find that
it is easier to reestablish credit than if you were perpetually
behind on your payments and had judgments against you.
Some
portions courtesy Doney.net www.doney.net
What if I filed Bankruptcy and it was dismissed.
What is the statute of limitations, the date last paid before the
BK or the date of the BK petition to promise repayment. Here
is an excellent article that answers just that.
Related: Bankruptcy
FAQ | Bankruptcy
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