How Bankruptcy Affects Your Credit Score

CREDIT SCORE IMPROVEMENT AFTER BANKRUPTCY

Most people are terrified that their credit will be destroyed if they file bankruptcy. This fortunately is not true. Most people who file bankruptcy have a credit score somewhere in the mid 500’s. The report has many accounts that are in collection and the only chance for these people to clean the slate is to file a Chapter 7 or Chapter 13 bankruptcy and wipe out the debts. Based on many years experience a client whose FICO score is in the mid 500’s will see a relatively quick boost in the score within a year of the filing. The credit report service that we use at Broumas Law Group LLC has a feature that estimates for our bankruptcy clients what the FICO score will be one  year after the Chapter 7 or Chapter 13 bankruptcy is filed. Surprisingly almost every client sees a 30 to 100 FICO score improvement based on that report.

WHAT EFFECT CREDIT SCORE

There are a few clients who arrive at our door with a 700 plus FICO score. These clients tend to come from one of two different groups. The first group, consisting of clients who have suffered a catastrophic life event,  loss of a high paying job, illness, business failure or similar sudden tragedy. These clients are just in a bad place and will most likely see a real loss in their FICO credit score in the short term. The question for people in this group is what the prospect of a quick recovery is before all of their loans are delinquent and start reporting negatively.

As unfortunate as their situation is in many cases a poor credit score is just around the corner. Depending on the magnitude of their obligations it is most likely going to be impossible for these clients to maintain a great credit score. The prospect of filing even if there is a short term drop in the score is still better long term since they should recuperate faster after filing a Chapter 7 or Chapter 13 bankruptcy.

The second groups of clients with a 700 plus FICO score are the clients that are over extended and keep using the credit cards and credit lines to stay current. They often tell me they are “robbing Peter to pay Paul”. For these clients the credit score should be in the 500’s but they desperately try to maintain their credit by becoming more and more in debt. The solution for these clients is simple: they have to cut the credit card cycle, stop buying necessaries like food and gasoline on credit and file bankruptcy. They need to get on a cash basis. I tell them if you cannot afford to pay for it then it does not make much sense to pay 24% more when you add the interest to the price.

BUYING ABILITY AFTER BANKRUPTCY

Although bankruptcy will stay on your record for 10 years, bad credit stays there for 7. If it takes you 5 years to pay off the bill and it stops reporting 7 years after that it will probably be there longer than the bankruptcy.

Clients report a dramatic improvement in their ability to buy cars within months of a filing with a reasonable interest rate. Buying a home, which is impossible if you have many delinquent accounts, is very realistic 3 years after the bankruptcy is over. If you have questions about the effect of bankruptcy on your credit an experience Maryland bankruptcy attorney can help you.

WILL BANKRUPTCY HELP ME IF I AM BEHIND WITH MY GAS AND ELECTRIC BILL

UTILITY BILLS IN BANKRUPTCY

Utilities like the gas or the electric company have special rules that need to be followed when you file bankruptcy in Maryland. Clients in distress often have fallen behind with all the bills even the gas and electric bills. The utility bills often have accumulated to a very significant number because the utilities rarely actually turn off service right away. This is especially true in the winter months when a turn off could be life threatening to the elderly or children. It’s not uncommon to have a client that lost a job come in with a turn off notice with a $3,000 to $5,000 balance after a hard winter.

UTILITY PROTECTION AFTER FILING BANKRUPTCY

Utilities are given special protection under all chapters of the bankruptcy code. Once a bankruptcy is filed they are required to keep the power and the gas on even if they have sent out a termination notice and are about to shut the gas and electric service off. The way the system works once a Chapter 7, Chapter 12, Chapter 13 or Chapter 11 is filed and they have notice of the filing the power company or other utility needs to maintain service. The bill is then generated for the time period before the bankruptcy was filed and a new billing cycle with the post-bankruptcy filing period is opened and started.

The bill for the pre-bankruptcy period is then included in the bankruptcy and either discharged in the Chapter 7 or dealt with in the plan under the other bankruptcy Chapters. While the very large utility bill is in the bankruptcy is in the bankruptcy the Client is not without some significant obligations. First the utility company is entitled to a reasonable security deposit to insure performance with regard to the post bankruptcy filing bill. This needs to be arranged for and paid by the client within 20 days of the bankruptcy filing or the utility company can terminate service. Most utilities will have a standard amount they require for a deposit. Depending on the utility company usually the deposit will be one and a half to two months of the average bill. Some will use a percentage of the yearly bill. Regardless, the amount of the deposit is going to be much less than the original turn off. This deposit is the client’s money, so at some point in the future if the client continues to perform the funds will be reimbursed.

BANKRUPTCY LAWYER CAN HELP WITH TURN OFF NOTICE

If the deposit request is unreasonably high an experienced Maryland Bankruptcy lawyer can help you ask the bankruptcy court for help in a hearing to set a proper deposit. Some of the reasons the utility company might give a very high deposit can be caused by creative and illegal ways a client might have coped with a turn off. In the past I have seen client that broke seals on the meters and turned power back on, connected to another power source and took electric power from neighbors. These acts will cause the utility to give a client a hard time about the security deposit requirements.

Even if the turn off has already happened and the client is in the dark, the utility company is required to turn the power back on once they have notice of the bankruptcy filing. They of course are entitled to the security deposit. It will not happen overnight in many cases especially if the turn off is at the street and not remote. Under those circumstances the sooner the client files the bankruptcy case the sooner he or she will have gas and electric power.

Chapter 7 Bankruptcy for Persons with Above Average Income

ABOVE AVERAGE INCOME BANKRUPTCY REQUIREMENTS

In October of 2005, Bankruptcy laws were changed with a view towards making it harder for people with above median income to file a Chapter 7 case. The law before 2005 did not set any specific income guidelines but it in many ways still restricted people with substantial incomes from discharging their debts in Chapter 7 if after deducting reasonable expenses there were funds left over in the budget. If a client does not fit the income and expense requirements they are not allowed to get a Chapter 7 discharge and if they want relief need to file a Chapter 13 bankruptcy.

CHAPTER 13 BANKRUPTCY WITH HIGH INCOME

To understand the difference between the two most common bankruptcy chapters, a Chapter 7 bankruptcy does not have a payment component. You file the case and if everything is in order you ordinarily will finish the process in three and a half to four months and at the end discharge most debts. Chapter 13 is not a bad alternative; it’s a restructuring with a discharge at the end of the process. Chapter 13 is an income based repayment plan. This means in its simplest form the first test for what must be paid in the Chapter 13 is 100% of all disposable income after normal expenses for the 36 to 60 month plan period. In many cases there is very little money left over in the budget and the client ends up using the Chapter 13 to catch up back mortgage and car payments and taxes. Because there are no additional funds left over in the budget the credit card, medical bills etc. get nothing and are discharged at the end of the plan.

CHAPTER 7 BANKRUPTCY WITH HIGH INCOME

A person with high income who wants a Chapter 7 discharge needs to show that:

1. His or her reasonable expenses do not leave enough money to fund a Chapter 13 plan.
2. The monthly average of all gross income earned in the six months preceding the filing of the bankruptcy is less than the median income for that State of residence.

Once the client goes over the median monthly gross income average the client is restricted to using the arbitrary monthly living expenses permitted in the statute to determine if there is money left to fund a plan.

IRS AND BANKRUPTCY GUIDANCE FOR REASONABLE EXPENSE TEST

Most of the arbitrary expenses that are used in the means test are the same ones the Internal Revenue Service uses to determine a person’s ability to pay. Other expenses are set by the bankruptcy statute. Both the arbitrary timing and arbitrary expenses lead to some absurd results in many cases. A well paid school teacher who does not receive pay in the summer might not pass the means test at the end of the school year but may pass in August when school resumes. A real estate agent who makes most of her commissions in the spring might pass in January. This area is complex and full of issues that require the knowledge of an experienced Maryland Bankruptcy lawyer. Just because the client passes on paper does not mean a high income person will be able to weather the scrutiny that will inevitably be given in a close case.

ATTRIBUTES OF MEANS TEST          

Not only is the timing of the calculation important and arbitrary. Some of the expenses that can help beat the means test are:

1. Very large alimony or child support
2. You owe an enormous tax liability that will not be discharged
3. You have a very high mortgage expense
4. Your children have learning disabilities and you have to pay for private school
5. You have very large car payments

These won’t guaranty that you will pass but they may help get the means test to work.

GET HELP FROM BANKRUPTCY LAWYER WITH MEANS TEST

The expense side also gives rise to some absurd results. The person, who is frugal, buys a small inexpensive car and does not have a loan on that car will get almost no means test deduction for owning that vehicle. The person who bought a $50,000.00 Lexus at 24% interest and still has 50, $850.00 per month payments gets to deduct the standard ownership allowance for the car plus the car payment. Similarly, someone with a $1,000,000.00 mortgage who pays a $4,500.00 a month payment gets to deduct that payment. The homeowner with a normal $250,000.00 house gets the IRS standard allowance. Despite passing on paper however this is an area where an experienced bankruptcy lawyer will make a difference. Even if you pass the requirements on paper there will be many questions that need to be addressed before you will make it through the process. These high income cases are not simple Chapter 7 cases. They require a great deal of experience and skill before and after they are filed.

HOW TO DEAL WITH CAR LENDERS WHO REFUSE TO PROVIDE STATEMENTS OR ELECTRONIC ACCESS IF YOU DO NOT REAFFIRM THE DEBTS

DEBT REAFFIRMATION

If you recently filed bankruptcy you may find that some lenders, notably many automobile finance companies will stop providing statements and electronic access to your account information. They don’t repossess a car or take action against you, they just make it just a little more complicated for you to make payments or get account information. They do this under the pretext that they would be violating the bankruptcy stay by giving this information to you or giving you access. This is absurd especially if you file bankruptcy in Maryland with a Maryland bankruptcy lawyer. The local Bankruptcy Rules in Maryland make it very clear that there is no legitimate reason for these lenders to discriminate against persons who filed a bankruptcy. Local Bankruptcy Rule 4001-5 States:

POST PETITION PAYMENT NOTICES AND ACCOUNT ACCESS

Creditors and lessors may continue to provide customary notices, including, but not limited to, monthly statements, payment coupons, and escrow adjustment analyses to debtors regarding post-petition account activity. Further, to the extent available, creditors and lessors may allow debtors to access, obtain information, and make post-petition payments through electronic, telephonic and/or on-line means.

Because the bankruptcy rules in Maryland are very clear one can only wonder what improper reason the lenders might have for telling their customers that the information is only available to customers who either did not file bankruptcy or who reaffirmed the debt. From the calls we get I can guess at a plausible reason. The scene painted by the client is one where the car lender, mortgage company or bank refused to let the client pay using the normal electronic system. After trying unsuccessfully customer service informed them that because they filed a bankruptcy and did not reaffirm the debt they are forbidden as a creditor from providing the access or information. That then is followed with a recommendation that they call their bankruptcy lawyer and have the debt reaffirmed or if its after the case is closed with a suggestion that it’s a shame the lawyer did not help them reaffirm the obligations.

WHAT IS REAFFIRMATION AGREEMENT?

It’s an agreement to make the debt pass through the bankruptcy unaffected. If you are current on your mortgage the mortgage company cannot foreclose. There is no possible reason to reaffirm the debt. If you don’t and you get sick and lose the house the mortgage company cannot come after you personally for a balance. If you reaffirm the debt you will be liable for the deficiency after foreclosure. Even if the reaffirmation agreement could be approved by the court it would be a very bad idea to reaffirm this debt just so you can avoid mailing the mortgage company a check and pay on the website.

With vehicles it is a little different. We almost never recommend that a client reaffirm vehicles. Only a handful of car companies will repossess a car if it is current. An experienced Maryland bankruptcy lawyer will be able to tell you from experience which ones is a potential problem. The benefit of not reaffirming the debt is that you can give the car back once your credit score improves and buy a better car that does not have negative equity. The Bankruptcy Court will not approve a reaffirmation agreement unless you have a positive budget (very few people have a budget showing they have funds left over in a Chapter 7 case). In some cases the Bankruptcy Court might approve the reaffirmation agreement if the car company reduces the balance or interest rate. The car companies very rarely will agree to this.

The way many car companies try to get around negative budget problem is to encourage the bankruptcy lawyers to “create” a new budget for the reaffirmation that does not show a negative number. This is disturbing since the original budget is done under oath. This would also avoid the need for a hearing so the lawyer can just sign it, avoid a hearing and you are stuck with something the Court should not approve. We get a very high callback from past clients on the few reaffirmation agreements that do get approved asking if they can put the car back in the bankruptcy because it is no longer running nor has problems.

GET HELP FROM BANKRUPTCY LAWYER WITH UNDERSTANDING REAFFIRMATIONS

The lenders’ policy of refusing to provide normal services to customers who filed bankruptcy often backfires. On the one hand telling my clients something is wrong with their case because we do not do the reaffirmation might generate a few concerned calls to the office. On the other hand they invite me to educate the client regarding their right to take advantage of their improved credit, give the car back and get a better one.

An experienced bankruptcy lawyer can always help to find the best solution to protect clients’ interests.

Dealing With Vehicles in Chapter 7

EFFECT BANKRUPTCY ON VEHICLES

When we file chapter 7 bankruptcy we always think how it effects our assets, like house or a car. Our vehicle is very important. It is needed to get to work, go to the grocery store and to do just about anything that we need to do. Sometimes when clients file bankruptcy the client just wants to be done with the vehicle; it is often in poor condition, with high mileage and subject to more debt that it is worth. Those cases are relatively simple. If you file a bankruptcy and don’t want your car you have the option to surrender it.

IS THERE A VALUE IN THE CAR?

In most cases in bankruptcy the client wants to keep the car and is willing to continue making the payments to the lender. The first thing to look at is the whether there is any value in the vehicle over and above the amount of the car loan. If there is no value or we can use the clients exemptions to protect that value the bankruptcy estate will have no interest in selling the car and the likely result as far as the bankruptcy trustee is concerned is that the car will pass through the bankruptcy. In that case the client will be probably able to keep it so long as he is current and maintains the payments on that vehicle.

3 WAYS TO DEAL WITH CARS IN BANKRUPTCY

When dealing with car lenders there are three official ways to deal with a vehicle in Chapter 7. First, you can surrender a vehicle that you do not want. Second you can enter into a reaffirmation agreement making yourself completely responsible for that debt after the bankruptcy, meaning if you miss a payment and they repossess the car they will come after you for a balance. Third you can redeem the car with a court order lowering what you have to pay for the car to its actual value.  The problem with this option is that you have to pay the value in a lump sum and who has several thousand dollars available to do this.

Each of these options has problems. With a reaffirmation you don’t get rid of the debt. With a reaffirmation you also often end up owing more on the car than it is worth. The court will sometimes enter an order disapproving the reaffirmation but directing the lender not to repossess the car so long as it remains current. There is no guaranty the court will enter this order however and you will have to attend an additional hearing to get it. With redemption you have to be able to pay the full retail value of the vehicle when the redemption order is entered. Most clients cannot afford to do this.  While there are a few lenders who will help you redeem a vehicle the interest rate is often high enough to make the effort questionable.

UNOFFICIAL ALTERNATIVE

There is an unofficial alternative. So long as the client is current and continues to make her payments on time, very few car lenders will repossess a vehicle. The benefit of this approach is that one can keep the car and later should it break or become a liability the client can simply voluntarily return the vehicle and in the absence of a reaffirmation have no liability for a balance. The number of car companies allowing this treatment changes and it is important to get good advice from a Maryland Bankruptcy Attorney before making any of these decisions.

What to Do if you Already Filed a Chapter 7 Case and Need Help Again.

BANKRUPTCY AFTER BANKRUPTCY

You are able to receive a Chapter 7 discharge once every 8 years. This time period is calculated from date of filing the first case to the date the second case is filed.  Unfortunately life does not always follow this schedule. Sickness, job loss, accidents unexpected events can mean having mounting debt problems even after bankruptcy.  The solution could be a Chapter 13 bankruptcy.  Chapter 13 allows you to get a discharge within 4 years of a Chapter 7 case shortening the time by 4 years. While the Chapter 13 is a payment plan in many instances the income situation is similar to what it was when the original Chapter 7 case was filed meaning there is little if any money left over after the client pays his normal living expenses.

In that situation a Chapter 13 case could be approved with a minimal monthly payment based on relative low disposable income. The way the minimal payment Chapter 13 would work is to pay creditors a small token payment every month for 36 months based on the few dollars the client has left after he pays his living expenses. At the end of the 36 month payment plan the remaining balance of the debt is discharged just like it was in the previous chapter 7 case.

GET HELP FROM EXPERIENCED BANKRUPTCY LAWYER WHEN YOU NEED TO FILE BANKRUPTCY AGAIN

If the unexpected life problem happens before the 4 year anniversary of the filing of the Chapter 7 case the Chapter 13 still can be used to stop collection by the creditors it just will not allow the debt that remains unpaid to be discharged. An experienced bankruptcy lawyer can help you with your debt problems even if you have already filed a prior bankruptcy. These actions require careful planning and understanding of the limitations you have which the bankruptcy lawyer at Broumas Law Group LLC can help you with.

Another place where a Chapter 13 which is filed after a Chapter 7 case can provide some relief is in the situation where the client files the Chapter 7 case discharges the debt and then after that becomes delinquent on her mortgage. This is often referred to as a Chapter 20. While “Chapter 20” does not exist officially under proper circumstances, where there is no bad faith, a Chapter 13 filed after a Chapter 7 (the Chapter 20) can allow you to save your home by catching up the arrears on the mortgage over 5 years even after you filed a previous Chapter 7 case. This is definitely where you want to have an experienced bankruptcy lawyer to help evaluate whether this sort of relief is available to you.

Stripping a Lien on a Principal Residence in a Chapter 13 Case.

ELIMINATE SECOND AND THIRD MORTGAGE IN CHAPTER 13 BANKRUPTCY

The ability to strip off or eliminate second and third mortgages from the client’s principal residence is one of the things that makes Chapter 13 a great bankruptcy alternative. In a Chapter 13 case a property that has lost value because of the poor housing market can be made into a better more affordable investment. You own a home that is your principal residence. You owe a mortgage and a few years ago when the real estate market was good you took out a home equity line. Now the market has fallen and the value of the house is less than the amount owed on the first mortgage. Now you have a home that has very large negative equity.

GET HELP FROM BANKRUPTCY ATTORNEY TO STRIP OFF THE SECOND MORTGAGE

In a Chapter 13 bankruptcy you can eliminate that negative equity under the right circumstances. Based on a valuation of the home, A knowledgeable bankruptcy attorney can file a motion asking the court to take that equity mortgage of the home and strip it off the real estate so you no longer have a second or third mortgage. For this to work you need a proper valuation showing that the first mortgage holder is owed more than the value of the home. At Broumas Law Group LLC our bankruptcy lawyer has extensive experience helping Maryland clients save their home, eliminating valueless mortgages and by doing this getting rid of the burdensome payment obligation of that second or third mortgage.

IF LOAN MODIFICATION DOES NOT WORK

Chapter 13 does not let you change the amount owed the first mortgage on your principal residence. Chapter 13 does  give you the ability to take however many months you are behind with that mortgage company and force them to let you catch those arrears up over a 5 year period. Chapter 13 is an excellent tool to empower you and prevent mortgage companies who have not been cooperative with the loan modification process from taking your home away from you.

VERY AFFORDABLE PRICE FOR CHAPTER 7 BANKRUPTCY FROM A VERY EXPERIENCED LAWYER IN MARYLAND.

AFFORDABLE BANKRUPTCY SERVICE

Our Maryland Bankruptcy Lawyer believes that bankruptcy legal services should be affordable, efficient and the quality of the services should be excellent.

SIMPLE CHAPTER 7 BANKRUPTCY

At Broumas Law Group LLC, the pricing for our simple Chapter 7 bankruptcy cases reflects that policy. We Charge $999 for what we call a simple Chapter 7 case for legal fees. This means that most of our clients will be paying $999 for the services by our bankruptcy lawyer and staff.

MORE COMPLICATED CHAPTER 7 BANKRUPTCY

Some cases are more involved than the everyday case. For example a case with multiple properties, a business case, a case where the income is very high and significant time and effort will be needed to analyze and deal with complications cause by the means test and other income related issues. Those cases will require substantially more time that a routine case. When you meet with our lawyer for the first time he will be able to tell you if your case is unusual and will require additional expense to be filed. The more complicated cases are usually cases that arise when the client has a more complicated business, larger income and so most often the client is also able to afford the extra service the client needs to get through the process.

MOST CLIENTS QUALIFY FOR A SIMPLE CHAPTER 7 BANKRUPTCY

I tell clients if you own a house, a couple of cars, a cat and a dog, don’t have a high income, have not defrauded anyone, you most likely will be paying $999 for a Chapter 7 case at Broumas Law Group LLC.
At Broumas Law Group LLC our practice is almost exclusively  limited to all aspects of bankruptcy.  At Broumas Law Group LLC you get excellent service from bankruptcy lawyer with over 35 years of bankruptcy experience for an extremely low price of $999 for Chapter 7 cases.

LOST YOUR DRIVER’S LICENSE? BANKRUPTCY COULD BE THE SOLUTION TO A BIG PROBLEM.

BANKRUPTCY RELIEF IF YOU LOST A DRIVER LICENSE

Maryland State and many other states will suspend your driving privileges if you have an accident, are not insured and the state has to pay under the State uninsured motorist insurance.

This is one area where bankruptcy can provide very significant relief. Section 525 of the Bankruptcy Code prohibits all governmental units from discriminating against someone who has filed bankruptcy or has not paid a dischargeable debt. This includes a prohibition from refusing to issue a license or a permit.

GET HELP FROM BANKRUPTCY ATTORNEY TO REMOVE MVA FLAGS

Under this section if you have been in an automobile accident while your insurance lapsed an experienced Bankruptcy attorney can help you with the process of having the flags removed by the Motor Vehicle Administration and force the State to issue a license to drive. Another place that you can benefit is when you owe the State taxes and have had your license suspended.

Once again in either Chapter 7 or Chapter 13 an experienced bankruptcy lawyer can help you get your driving privileges back. The Relief in Chapter 7 will only be temporary however unless the taxes are able to be discharged.

You should consult a bankruptcy attorney to help you determine whether this relief will be available and under what circumstances it will be permanent. A bankruptcy will not resolve a Debtors problems if they have a license that is suspended because of fines or violations.  Those are not going to be discharged and are not subject to the protection in Section 525 of the bankruptcy code.