Myth 2: I’ll Never Be Able To Get Credit Again

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It is a misconception that obtaining credit after filing for bankruptcy is next to impossible. Before we get into the details, your credit score should be one of the last things to worry about when making the decision to file for bankruptcy. This decision should be a sound one, taking the totality of circumstances into consideration, including your income, the amount you pay to your creditors each month, and the psychological toll of having a large amount of debt with little likelihood of paying it off. 

Credit card companies are really good about marketing. They make you believe that a you have to have a good credit score in order to live a happy and successful life. You see it everywhere: television commercials, radio ads and whenever you apply for any kind of loan. They drill the idea into your head that only a good credit score will allow you to purchase that dream car or dream home and that the number one reason why your credit score will go down is bankruptcy. The credit companies force the idea that it is infinitely better for you to pay that minimum payment each month for the debt that will take you decades to pay off just to preserve that good score rather than to file for bankruptcy. The truth is, however, that if you file for bankruptcy, the credit card companies will, in most cases, get paid cents on the dollar or nothing at all.

There is no doubt that filing for bankruptcy will damage your credit score and that bankruptcy may stay on your record for up to 10 years, but the impact bankruptcy will have on the score depends in large part on what your score was before filing. If your score was low already, bankruptcy will not have much of an impact on the score. In fact, over time, it will most likely increase it. Why? Because bankruptcy gets rid of the toxic debt that prevents you from paying your bills on time, and thereby damaging your credit as a result. With a clean slate, you are more likely to pay your bills on time.

But can I get a loan or a credit card after bankruptcy? Yes, you can. It may be tougher and the rate may be higher, but banks do offer loans post-bankruptcy. In fact, many report that they start seeing credit card offers in their mailboxes shortly after obtaining their bankruptcy discharge.  Many financial institutions offer secured credit cards where you can put down a couple hundred dollars, something like a deposit, and then you are able to use it as a regular card. If you make your payments on time each month, those payments will be reported to the credit agencies, raising your score. If you are planning on getting a car loan, you may consider having someone to co-sign on the loan. Again, the payments will get reported to the agencies which will have a positive impact on your score.

Again, filing for bankruptcy is not an easy decision to make. But the notion that you will not be able to get credit again after bankruptcy is simply false. Please contact our office if you are struggling with debt in order to obtain a competent evaluation of your financial situation. 

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Chapter 7 v Chapter 13

Once individuals decide they need bankruptcy relief, the next question usually is: what kind of bankruptcy is the best option for me? People know about Chapter 7 or Chapter 13 but they are not clear what the difference between the two options is. First of all, the names Chapter 7 and Chapter 13 are simply the chapters found in Title 11 of the United States Code. Title 11 contains all the laws related to bankruptcy law. Think of Chapter 7 as the process of liquidation and Chapter 13 as the process of reorganization.

Chapter 7 – Once filed, the trustee appointed by the bankruptcy court takes the Debtor’s non-exempt assets, sells them, and payoffs of the unsecured creditors. In majority of Chapter 7 cases, the Debtors do not have any assets of value, their major debt is unsecured debt: such as credit cards, medical bills, or court judgments. Within three to four months of the filing, any qualified Debtor receives a discharge and all his or her debt is wiped out.

What if I have a house? Can I still keep it if I file for Chapter 7? That depends whether you have equity in the house or not. If your house is underwater and is secured by mortgages, the trustee will generally not bother with selling the house because there won’t be any funds left over after the sale. If there is equity, the trustee will sell the property, payoff the creditors, and if there are any funds left over, they will be turned over to the Debtor.

What if the house is underwater and I am late with my mortgage payments? In this situation you will have to continue to make mortgage payments if you want to stay in your home. Otherwise, there is nothing to stop the bank from filing a foreclosure action against you. If a foreclosure action was already filed before filing of the Chapter 7 case, the filing will only temporarily stop the foreclosure.

Chapter 13 – This is a reorganization form of bankruptcy where you reorganize your debts by paying the unsecured creditors a percentage of what you owe. The Debtor proposes a repayment plan that lasts three or five years during which time the Debtor makes monthly payments to the bankruptcy trustee. The trustee in turn disburses those funds to the creditors. If the Debtor is behind mortgage payments, Chapter 13 allows the debtor to become currents on the mortgage payments by including the mortgage arrears in the plan. The Chapter 13 plan also allows for the removing of a second mortgage if certain conditions are met. This process of “lien stripping” will be discussed in greater detail in the next article.

This was just a short overview of the differences between a Chapter 7 and Chapter 13. Each bankruptcy case is unique, with its different set of circumstances. Call attorney Artur Zadrozny today at 312-375-1704 to discuss your situation to see if bankruptcy is the answer for you.