How do I Rebuild my Credit after Bankruptcy?

A common question from our bankruptcy clients after they receive their discharge is: "How do I rebuild my credit?"

First and most importantly, time heals all wounds. Only time can fully repair the damage that bankruptcy (and being significantly behind on a lot of credit card debt beforehand) inflicted.

The best thing you can affirmatively do right now is to start developing a history of on-time payments to creditors that report to your credit bureaus. Pay your bills early, or if anything, pay them on time.

Because of the way the bankruptcy system works and the way creditors report reaffirmed debts, you will not get credit for on-time mortgage payments or car payments. Therefore, it is necessary to establish a new account that you can make solid, on-time payments on. We recommend applying for a secured credit card or gas card. Before you apply, take the time to confirm that the card management company reports to all three credit bureaus every month. If they don’t report every month, or if they do not report to all three, go elsewhere. Use the card, but pay it off on time, every month. Carrying a small balance (less than $100 is OK), but never utilize more than 50% of the available credit.

If you have a mortgage, then as soon as feasibly possible, refinance your mortgage. Paying off the current loan and keeping a new loan current will, once again, give you credit for on-time mortgage payments.

As soon as you feasibly can, refinance your car loan, or sell your car and purchase a new car. Again, the key is to obtain a new loan that will report to the credit bureaus. Post-bankruptcy, many current secured lenders will not report payments to the credit bureaus. Of course, be sure to keep that loan current.

Obtain copies of your credit reports approximately 90 days after receiving your discharge. Ensure every debt is reported as “Discharged in Bankruptcy” or something similar. If they are not, send a letter to the creditor and the credit bureau requesting that information be reflected accurately. Remember, your credit report is a list of your “debts”, and right now, you have no debts aside from your house and car. Make sure your credit reports accurately show that, although you had debts discharged in bankruptcy, you should not currently owe any money to dischargeable creditors.

Besides paying the above-described loans on time there are also a number of things you should avoid doing:

1. Avoid opening credit accounts with co-signers, if possible. Having a co-signer on an account indicates you are a greater credit risk.

2. Avoid financing with finance companies or sub-prime lenders, if possible. Doing business with these companies can actually lower your credit score.

3. Avoid future financial risk. Bulk up your savings account. Develop a budget, and stick to it. That way, when emergencies or unexpected expenses come up, you can pay in cash, rather than increasing your debt.

4. Some industry experts recommend that you obtain a small personal loan, and use the funds to open a CD account. Pay the loan on time, and when the loan is paid off, you will have some funds in savings, which you can take out once the CD matures. Of course, this only works if you can fit these payments into your budget. Setting up a workable budget should be your first priority.

What Will Happen to My Car if I File for Bankruptcy?

When filing for Bankruptcy under Chapter 7 and Chapter 13, certain property of the debtor is exempt from the Bankruptcy estate, which means simply that the debtor can keep that property (and the trustee and creditors can't take it).

When filing a Bankruptcy as a resident of Massachusetts a debtor can choose to use the exemptions allowed under either State or Federal law, but you must choose one or the other. There are many exemptions that are similar under both schemes and many that are different.

As of April 14, 2009, the allowable exemption for motor vehicles was $3,225 under the Federal Exemptions and $700 under the Massachusetts Exemptions. This means that if you choose the Federal Exemptions you can keep your car so long as it has less than $3,225 in equity (value of the car minus balance of the loan).

In addition to the value of the motor vehicle exemptions, the Federal Exemptions also allow for some "wild-card" exemptions: $1,075 generally and $10,125 of unused homestead exemption. If you have few other assets besides your car you may be able to use these "wild-card" exemptions to exempt further equity in your car if it has equity over $3,225.

If your car is subject to a loan you will have to reaffirm said loan or the car will be surrendered to the lender or trustee for sale. For more information about available exemptions click here.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.

Should I Reaffirm my Mortgage Debt? What about a Second Mortgage?

Addressing mortgage debt is often a primary concern in many consumer bankruptcies. Debtors that decide to continue to pay the mortgage on their current house may be setting themselves up for future financial problems if they have difficulty paying the mortgage, post-bankruptcy. Alternatively, a debtor may be able to discharge the underlying mortgage and surrender the house back to the bank if the payments are not affordable, but is then faced with finding a new place to live. The decision of whether or not to re-affirm comes down to the specific facts of your case and what is a realistic future budget for your household.

Popular mortgage packages offered in the past ten years often featured “jumbo” financing: that is, financing of nearly one-hundred percent of the purchase price of the home. In many cases, this was done with a primary traditional mortgage, which financed approximately 80% of the purchase price, then a second mortgage or home equity line of credit that financed the balance.

Today, with the decline in home prices, many borrowers find themselves owing more on their homes than they are worth; in extreme cases, the second mortgage may be completely unsecured because the home is worth less than the balance of the first mortgage, without even adding in the balance of the second. In some cases, it is possible to “strip off” an unsecured second mortgage in bankruptcy, leaving the borrower with only one mortgage to pay. It is generally accepted that in Chapter 13 bankruptcy, a second mortgage can be avoided, and treated as unsecured debt.

Although, most attorneys believed that this could be done in a Chapter 7 case, an Eastern District of New York bankruptcy case may suggest otherwise. Here, the Debtors owned a house, where the fair market value was less than the balance of the first mortgage, leaving the second mortgage unsecured. After filing bankruptcy, the bank requested for permission to foreclose on the second mortgage the debtors opposed; arguing that the bank could not foreclose because the second mortgage should be avoided as wholly unsecured and not treated as secured debt.
The Court agreed.

The bank was not permitted to foreclose, and the lien was permanently voided. Judge Eisenberg explained that the well-recognized holdings in Chapter 13 clearly demonstrate that under the Bankruptcy Code it is appropriate to distinguish partially secured liens from wholly unsecured liens, and that there is no reason why in a Chapter 7 context the same language in the Bankruptcy Code should not void the lien of a wholly unsecured claim.

Of course, this is the outcome of a single New York case, and the bankruptcy Judges in Massachusetts are not obligated to follow this outcome. However, given the proper circumstances, it may be an option to consider. If you would like

Kelsey & Trask, P.C. would like to thank Dan Press, Esq., a Maryland Bankruptcy Attorney, for inspiring this article.

Protecting your Home: Reaffirmation of Mortgage Debt

Upon filing for bankruptcy, the assisted debtor has the option of discharging mortgage debt, meaning that they are not obligated to continue to make a monthly mortgage payment. Of course, it is a near certainty that the secured creditor will foreclose on the mortgage and take the debtor’s house. Occasionally, during the course of a bankruptcy proceeding, a debtor will determine that it is in his or her best interest to keep their primary residence, and continue to pay the mortgage.

Reaffirmation is an undertaking not to be considered lightly. Once you receive a discharge under Chapter 7, you may not file bankruptcy again for 8 years. So, if you experience economic hardship after you have received your discharge and re-obligated yourself to pay the mortgage, you may be held personally liable for any deficiency in the event of a foreclosure. This could mean liens, wage garnishments and personal property attachments.

If you and your attorney believe it is in your best interest to reaffirm mortgage debt, you must execute a reaffirmation agreement: a contract between you and your creditor indicating that you wish to remain liable on a debt. The reaffirmation is complete when the creditor prepares the formal reaffirmation agreement, which the debtor reviews and signs, and is then filed with the bankruptcy court by the creditor.

Unfortunately, you cannot force a creditor to reaffirm a debt – you can only indicate your willingness to do so. A creditor’s refusal to reaffirm happens more often than you may think. Unlike personal property, the bankruptcy law does not require an executed reaffirmation agreement for a debtor to retain real property securing a debt. (Put another way, if your lender is unwilling to reaffirm your car loan, you can either pay off the loan in full or allow the lender to repossess the car. If your mortgage company refuses to reaffirm, there is no requirement that you must turn the house over to the bank unless the bank initiates a foreclosure). In the current market, lenders will rarely, if ever, attempt to foreclose on a loan if the creditor is current with the payments and remains current on the mortgage. Practically speaking, the lender wants to continue to earn interest on the loan and not inherit the burden and expense of foreclosing the mortgage and auctioning your property.

So, even if your lender refuses to reaffirm despite your intention to do so, if you stay current, you can keep the home. If the lender attempted to foreclose at a later date (say, when you had significant equity accumulated after paying down the principal), certain equitable remedies (e.g., latches) would provide you with a defense to a foreclosure action.

Often, the greatest impact of a bank’s refusal to reaffirm mortgage debt is that after discharge, subsequent “on time” payments will not be reflected on your credit report, thus hampering your ability to repair your credit post-discharge. To get 'credit' again, you may want to refinance, and you would start fresh with a new loan.