Bankruptcy may be the best of bad options
Dear Liz: I am having a terrible time with my finances. I am a single woman with no kids, and I work as a teacher at a charter school making $40,000 a year. I am working with a debt management program to pay off my credit cards. But I am constantly late in paying my bills and often bounce checks, which costs me money I don’t have to cover the fees. I can’t even save. I’m actively seeking another job or an additional part-time job, but no luck so far. I am in default on my student loans (they want me to pay $700 a month, but I can’t). I am very depressed and am so tired of this. I have holes in my tennis shoes and I can’t afford new ones. I am on a strict budget, I use coupons, don’t go out much anymore (which makes me more depressed because I am cooped up all the time). I have house problems that I need to deal with but can’t. I hate living like this. I honestly don’t know what to do. Please help.
Answer: The first thing you need to do is opt out of your bank’s bounced-check protection program. You may think you need to borrow money this way to make ends meet, but as you’ve discovered, it’s driving you further into the hole.
Next, rethink your participation in the debt management program. It was honorable of you to try to avoid bankruptcy, but it’s pretty clear you can’t afford to continue with this program if doing so leaves you in default on your student loan obligations. Credit card debts can be erased in Bankruptcy Court; student loan debt can almost never be wiped out that way.
If you have federal student loans, you may be able to qualify for the income-based repayment program, which caps your payment at a reasonable amount and erases any remaining balance after 10 years in a public service job (such as teaching in the public school system). Otherwise, the balance is erased after 25 years of payments. If you have private loans, you have far fewer options for repayment, but wiping out the credit card debt would free up more money to pay these loans back. Talk to your lenders to see what options you may have.
Another factor to consider is how much you’re spending on housing. If you own a home, the mortgage and related home-owning costs may simply be too much for you on your current income. Getting rid of the house in a short sale, or even letting it go into foreclosure, may be a far better option than continuing to cling to a home you can’t afford.
Bankruptcy, short sales and foreclosures are all drastic options. But some financial problems are so great that a drastic solution is the only reasonable choice if you ever want to get back on your financial feet.
Recovering from bankruptcy takes 5+ years
Dear Liz: I filed for bankruptcy this year. There was no way to avoid it. What do I do to start reestablishing credit and raising my credit score? How long does it take for life to get back to normal so that I can go to a regular car dealership to buy a vehicle instead of using some seedy automobile dealership with 22% rates?
Answer: It can take five years after a bankruptcy for your FICO credit scores to return to the 680 range, which is about where auto loan interest rates start to get more reasonable. People with FICOs in the 660 to 690 range got interest rates averaging about 7.5%, according to the MyFico.com site, compared with 11% and up for those with lower scores. It can take seven or more years to boost your scores above 720, which is where the truly low rates (4% and below) can be had.
To rehabilitate your scores as quickly as possible, first review your credit reports at http://www.annualcreditreport.com to make sure all the debts that were included in bankruptcy are listed that way. If you have any open credit card accounts, use them lightly but regularly and pay them off in full every month. “Lightly” means using less than 30% of your credit limits. If you don’t have a card, consider applying for a secured card, which gives you a credit limit equal to an amount you deposit with the issuing bank, typically $200 to $1,000. You can find secured card offers at several websites, including LowCards.com, CreditCards.com, CardRatings.com and NerdWallet.com.
After a year or so, consider adding an installment loan such as a personal loan or an auto loan to your credit mix. A credit union may give you a more reasonable rate than a traditional bank. Paying off that loan should help boost your scores.
Don’t close accounts or apply for a bunch of new accounts. Pay all your bills on time and don’t let disputes or medical bills wind up in collections.
There aren’t any quick fixes, so don’t waste your money on credit repair firms or other pitches that promise instant results. What will repair your score is using credit responsibly over time.
Like elephants, some card companies never forget
Dear Liz: I was recently solicited by a credit card company. I didn’t need another credit card, but this offered airlines miles that I collect, so I applied. They didn’t approve the application because: “You have filed for bankruptcy and your previous account(s) with us was included in that filing. This includes any of your accounts issued by (us) such as Visa, MasterCard, store cards or gas cards.” Liz, the bankruptcy was 12 years ago, and I am very well financially situated now. I thought there was an expiration date on bankruptcies appearing on your credit report.
Answer: There is. Bankruptcies have to be removed from your credit reports after 10 years.
Individual lenders, though, are allowed to have much longer memories. And some have opted not to forget. If you ever file a bankruptcy that wipes out debt on one of the accounts they issue, they may never again approve you for credit. That’s perfectly legal.
Not all lenders are so unforgiving, of course, and those who don’t know about your bankruptcy likely will be perfectly willing to extend you credit as long as your credit scores are good. But you’re probably wasting your time trying to induce this once-spurned lender to change its mind.
Bankruptcy won’t erase student loans
Dear Liz: I was hurt on the job and was fired. I have a lawyer helping me fight the company, but I have no income and I’m being haunted by collection agencies. I owe $5,000 on credit cards and have a student loan that started at $20,000 but is now $30,000. I was thinking of filing for bankruptcy. I have nothing, and I feel bad all the time. I can’t afford Christmas or birthday presents or find a job that I can do. Any advice would be helpful.
Answer: Bankruptcy could wipe out your credit card debt but probably won’t erase your student loans. Student loan debt usually can’t be discharged in bankruptcy unless you’re totally and permanently disabled. Since you’ve been looking for work, that doesn’t seem to be your situation.
Besides, filing for bankruptcy costs money that you probably don’t have. A Chapter 7 filing can easily cost $1,500.
What you might want to do instead is discuss your situation with a bankruptcy attorney to find out if you might be “judgment proof.” If you are, your creditors can still sue you, but they’ll be unable to collect — at least until your circumstances improve.
Many bankruptcy attorneys offer free or discounted initial sessions. You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys, or find an attorney through its website at http://www.nacba.org.
In the meantime, you can visit DebtCollectionAnswers.com for strategies on how to deal with collection agencies when you can’t pay.
Big debts may not justify bankruptcy
Dear Liz: You dropped the ball badly in your response to the man who was in debt after an ill-advised career change. Why didn’t you mention the “B” (bankruptcy) word? Like the gentleman in your article, my wife and I found ourselves overloaded with debt. We took on too much debt in starting our own small business in 2005. Things went very well for a couple of years and then we, like the rest of America, got caught up in the Great Recession. We went through consumer credit counseling and the counselor advised us that bankruptcy was an option we should consider. We filed in November 2010 and it was finalized in January 2011. We were able to keep our business. We also kept our house and our vehicles, which have loans outstanding, by “reaffirming” those debts. Bankruptcy is not a crime. It is the last resort, and it is unpleasant but it is an option. And here’s the kicker for us: Two months after the finalization of our bankruptcy, both my wife and I started receiving credit card offers in the mail (again). Don’t worry, history will not repeat itself in our case.
Answer: Bankruptcy is frequently mentioned in this column as a possible solution for overwhelming debt. Having a lot of debt isn’t the same as being overwhelmed by it, however. What matters is whether you’re able to make sufficient progress on paying down that debt.
The gentleman in question might discover that getting rid of a too-expensive house frees up money to pay down the family’s debt. Otherwise, it would be smart to talk to both a legitimate credit counselor (the National Foundation for Credit Counseling, at http://www.nfcc.org, has referrals) and an experienced bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys are at http://www.nacba.orghttp://www.nacba.org).
