Appendix K
Bankruptcy Client Handouts
K.1 Introduction
This appendix contains
three client handouts. The National Consumer Law Center provides
copyright permission for individuals and organizations to copy or adapt
these handouts for distribution without charge to consumers. No permission
is granted to include these materials in other publications for sale.
K.2 Answers
to Common Bankruptcy Questions
K.3 Your Legal Rights
During and After Bankruptcy: Making the Most of Your Bankruptcy Discharge
K.4 Using Credit Wisely
After Bankruptcy
Additional Client Resources
NCLC Guide to Surviving
Debt is NCLC’s most popular book, and a new edition was released in
2006. NCLC Guide to Surviving Debt provides precise, practical
advice on how to deal with an overwhelming debt load, including such topics
as:
* Bankruptcy
rights;
* Dealing with debt
collectors;
* What consumers need
to know about their credit rating;
* Which debts to pay
first;
* Refinancing do’s
and don’ts;
* Saving a home from
foreclosure;
* Automobile repossessions;
* Evictions and utility
shutoffs;
* Credit card debt;
* Student loans.
A number of bankruptcy
practitioners and credit counselors purchase bulk-discounted quantities
of this book to distribute to clients. Such purchases may be arranged
by calling NCLC at (617) 542-9595. Consumers can also purchase individual
copies by calling the same telephone number or by ordering securely on-line
at www.consumerlaw.org.
The second and third
handouts, Appendices K.3 and K.4, infra, are available in bulk in
color, nicely designed, printed, and folded. While supplies last,
there will be a modest charge for such bulk orders. Contact NCLC
Publications at (617) 542-9595.
A large number of additional
consumer education brochures are found on the CD-Rom accompanying this
volume, and are also available free of charge at www.consumerlaw.org.
K.2
Answers to Common Bankruptcy Questions
A decision to file
for bankruptcy should be made only after determining that bankruptcy is
the best way to deal with your financial problems. This brochure
can not explain every aspect of the bankruptcy process. If you still
have questions after reading it, you should speak with an attorney familiar
with bankruptcy.
There have been many
news reports suggesting that changes to the bankruptcy law passed by Congress
in 2005 prevent many individuals from filing bankruptcy. It is true
that these changes have made the process more complicated. But the
basic right to file bankruptcy and most of the benefits of bankruptcy remain
the same for most individuals.
What Is Bankruptcy?
Bankruptcy is a legal
proceeding in which a person who can not pay his or her bills can get a
fresh financial start. The right to file for bankruptcy is provided
by federal law, and all bankruptcy cases are handled in federal court.
Filing bankruptcy immediately stops all of your creditors from seeking
to collect debts from you, at least until your debts are sorted out according
to the law.
What Can Bankruptcy Do for
Me?
Bankruptcy may make
it possible for you to:
* Eliminate
the legal obligation to pay most or all of your debts. This is called
a “discharge” of debts. It is designed to give you a fresh financial
start.
* Stop foreclosure
on your house or mobile home and allow you an opportunity to catch up on
missed payments. (Bankruptcy does not, however, automatically eliminate
mortgages and other liens on your property without payment.)
* Prevent repossession
of a car or other property, or force the creditor to return property even
after it has been repossessed.
* Stop wage garnishment
(in states where garnishment is allowed), debt collection harassment, and
similar creditor actions to collect a debt.
* Restore or prevent
termination of utility service.
* Allow you to challenge
the claims of creditors who have committed fraud or who are otherwise trying
to collect more than you really owe.
What Bankruptcy Can Not
Do?
Bankruptcy can not,
however, cure every financial problem. Nor is it the right step for
every individual. In bankruptcy, it is usually not possible to:
* Eliminate
certain rights of “secured” creditors. A creditor is “secured” if
it has taken a mortgage or other lien on property as collateral for a loan.
Common examples are car loans and home mortgages. You can force secured
creditors to take payments over time in the bankruptcy process and bankruptcy
can eliminate your obligation to pay any additional money on the debt if
you decide to give back the property. But you generally can not keep
secured property unless you continue to pay the debt.
* Discharge types of
debts singled out by the bankruptcy law for special treatment, such as
child support, alimony, most student loans, court restitution orders, criminal
fines, and most taxes.
* Protect cosigners
on your debts. When a relative or friend has co-signed a loan, and
the consumer discharges the loan in bankruptcy, the cosigner may still
have to repay all or part of the loan.
* Discharge debts that
arise after bankruptcy has been filed.
What Different Types of Bankruptcy
Cases Should I Consider?
There are four types
of bankruptcy cases provided under the law:
* Chapter
7 is known as “straight” bankruptcy or “liquidation.” It requires
an individual to give up property which is not “exempt” under the law,
so the property can be sold to pay creditors. Generally, those who
file chapter 7 keep all of their property except property which is very
valuable or which is subject to a lien which they can not avoid or afford
to pay.
* Chapter 11, known
as “reorganization,” is used by businesses and a few individuals whose
debts are very large.
* Chapter 12 is reserved
for family farmers and fishermen.
* Chapter 13 is a type
of “reorganization” used by individuals to pay all or a portion of their
debts over a period of years using their current income.
Most people filing bankruptcy
will want to file under either chapter 7 or chapter 13. Either type
of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case
under chapter 7, you file a petition asking the court to discharge your
debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge)
your debts in exchange for your giving up property, except for “exempt”
property which the law allows you to keep. In most cases, all of
your property will be exempt. But property which is not exempt is
sold, with the money distributed to creditors.
If you want to keep
property like a home or a car and are behind on the mortgage or car loan
payments, a chapter 7 case probably will not be the right choice for you.
That is because chapter 7 bankruptcy does not eliminate the right of mortgage
holders or car loan creditors to take your property to cover your debt.
If your income is above
the median family income in your state, you may have to file a chapter
13 case (the national median family income for a family of four in 2006
was approximately $65,796--your state’s figures may be higher or lower).
Higher-income consumers must fill out “means test” forms requiring detailed
information about their income and expenses. If the forms show, based
on standards in the law, that they have a certain amount left over that
could be paid to unsecured creditors, the bankruptcy court may decide that
they can not file a chapter 7 case, unless there are special extenuating
circumstances.
Chapter 13 (Reorganization)
In a chapter 13 case
you file a “plan” showing how you will pay off some of your past-due and
current debts over three to five years. The most important thing
about a chapter 13 case is that it will allow you to keep valuable property--especially
your home and car--which might otherwise be lost, if you can make the payments
which the bankruptcy law requires to be made to your creditors. In
most cases, these payments will be at least as much as your regular monthly
payments on your mortgage or car loan, with some extra payment to get caught
up on the amount you have fallen behind.
You should consider
filing a chapter 13 plan if you:
* Own your
home and are in danger of losing it because of money problems;
* Are behind on debt
payments, but can catch up if given some time;
* Have valuable property
which is not exempt, but you can afford to pay creditors from your income
over time.
You will need to have
enough income during your chapter 13 case to pay for your necessities and
to keep up with the required payments as they come due.
What Does It Cost to File
for Bankruptcy?
It now costs $299 to
file for bankruptcy under chapter 7 and $274 to file for bankruptcy under
chapter 13, whether for one person or a married couple. The court
may allow you to pay this filing fee in installments if you can not pay
it all at once. If you hire an attorney you will also have to pay
the attorney fees you agree to.
If you are unable to
pay the filing fee in installments in a chapter 7 case, and your household
income is less than 150 percent of the official poverty guidelines (for
example, the figures for 2006 are $19,800 for a family of two and $30,000
for a family of four), you may request that the court waive the chapter
7 filing fee. The filing fee can not be waived in a chapter 13 case,
but it can be paid in installments.
What Must I Do Before Filing
Bankruptcy?
You must receive budget
and credit counseling from an approved credit counseling agency within
180 days before your bankruptcy case is filed. The agency will review
possible options available to you in credit counseling and assist you in
reviewing your budget. Different agencies provide the counseling
in-person, by telephone, or over the Internet. If you decide to file
bankruptcy, you must have a certificate from the agency showing that you
received the counseling before your bankruptcy case was filed.
Most approved agencies
charge between $30/-/$50 for the pre-filing counseling. However,
the law requires approved agencies to provide bankruptcy counseling and
the necessary certificates without considering an individual’s ability
to pay. If you can not afford the fee, you should ask the agency
to provide the counseling free of charge or at a reduced fee.
If you decide to go
ahead with bankruptcy, you should be very careful in choosing an agency
for the required counseling. It is extremely difficult to sort out
the good counseling agencies from the bad ones. Many agencies are
legitimate, but many are simply rip-offs. And being an “approved”
agency for bankruptcy counseling is no guarantee that the agency is good.
It is also important to understand that even good agencies won’t be able
to help you much if you’re already too deep in financial trouble.
Some of the approved
agencies offer debt management plans (also called DMPs). A DMP is
a plan to repay some or all of your debts in which you send the counseling
agency a monthly payment that it then distributes to your creditors.
Debt management plans can be helpful for some consumers. For others,
they are a terrible idea. The problem is that many counseling agencies
will pressure you into a debt management plan as a way of avoiding bankruptcy
whether it makes sense for you or not. You should not consider a
debt management plan if making the monthly plan payment will mean you will
not have money to pay your rent, mortgage, utilities, food, prescriptions,
and other necessities. It is important to keep in mind these important
points:
* Bankruptcy
is not necessarily to be avoided at all costs. In many cases, bankruptcy
may actually be the best choice for you.
* If you sign up for
a debt management plan that you can’t afford, you may end up in bankruptcy
anyway (and a copy of the plan must also be filed in your bankruptcy case).
* There are approved
agencies for bankruptcy counseling that do not offer debt management plans.
It is usually a
good idea for you to meet with an attorney before you receive the required
credit counseling. Unlike a credit counselor, who can not give legal
advice, an attorney can provide counseling on whether bankruptcy is the
best option. If bankruptcy is not the right answer for you, a good
attorney will offer a range of other suggestions. The attorney can
also provide you with a list of approved credit counseling agencies, or
you can check the website for the United States Trustee Program office
at www.usdoj.gov/ust.
What Property Can I Keep?
In a chapter 7 case,
you can keep all property which the law says is “exempt” from the claims
of creditors. It is important to check the exemptions that are available
in the state where you live. (If you moved to your current state
from a different state within two years before your bankruptcy filing,
you may be required to use the exemptions from the state where you lived
just before the two-year period.) In some states, you are given a
choice when you file bankruptcy between using either the state exemptions
or using the federal bankruptcy exemptions. If your state has “opted”
out of the federal bankruptcy exemptions, you will be required to chose
exemptions mostly under your state law. However, even in an “opt-out”
state, you may use a special federal bankruptcy exemption that protects
retirement funds in pension plans and individual retirement accounts (IRAs).
If you are allowed
to use the federal bankruptcy exemptions, they include:
* $18,450
in equity in your home;
* $2950 in equity in
your car;
* $475 per item in
any household goods up to a total of $9850;
* $1850 in things you
need for your job (tools, books, etc.);
* $975 in any property,
plus part of the unused exemption in your home, up to $9250;
* Your right to receive
certain benefits such as Social Security, unemployment compensation, veteran’s
benefits, public assistance, and pensions--regardless of the amount.
The amounts of the
exemptions are doubled when a married couple files together. Again,
you may be required to use state exemptions which may be more or less generous
than the federal exemptions.
In determining whether
property is exempt, you must keep a few things in mind. The value
of property is not the amount you paid for it, but what it is worth when
your bankruptcy case is filed. Especially for furniture and cars,
this may be a lot less than what you paid or what it would cost to buy
a replacement.
You also only need
to look at your equity in property. That means you count your exemptions
against the full value minus any money that you owe on mortgages or liens.
For example, if you own a $50,000 house with a $40,000 mortgage, you have
only $10,000 in equity. You can fully protect the $50,000 home with
a $10,000 exemption.
While your exemptions
allow you to keep property even in a chapter 7 case, your exemptions do
not make any difference to the right of a mortgage holder or car loan creditor
to take the property to cover the debt if you are behind. In a chapter
13 case, you can keep all of your property if your plan meets the requirements
of the bankruptcy law. In most cases you will have to pay the mortgages
or liens as you would if you didn’t file bankruptcy.
What Will Happen to My Home
and Car If I File Bankruptcy?
In most cases you will
not lose your home or car during your bankruptcy case as long as your equity
in the property is fully exempt. Even if your property is not fully
exempt, you will be able to keep it, if you pay its non-exempt value to
creditors in chapter 13.
However, some of your
creditors may have a “security interest” in your home, automobile, or other
personal property. This means that you gave that creditor a mortgage
on the home or put your other property up as collateral for the debt.
Bankruptcy does not make these security interests go away. If you
don’t make your payments on that debt, the creditor may be able to take
and sell the home or the property, during or after the bankruptcy case.
In a chapter 13 case,
you may be able to keep certain secured property by paying the creditor
the value of the property rather than the full amount owed on the debt.
Or you can use chapter 13 to catch up on back payments and get current
on the loan.
There are also several
ways that you can keep collateral or mortgaged property after you file
a chapter 7 bankruptcy. You can agree to keep making your payments
on the debt until it is paid in full. Or you can pay the creditor
the amount that the property you want to keep is worth. In some cases
involving fraud or other improper conduct by the creditor, you may be able
to challenge the debt. If you put up your household goods as collateral
for a loan (other than a loan to purchase the goods), you can usually keep
your property without making any more payments on that debt.
Can I Own Anything After
Bankruptcy?
Yes! Many people
believe they can not own anything for a period of time after filing for
bankruptcy. This is not true. You can keep your exempt property
and anything you obtain after the bankruptcy is filed. However, if
you receive an inheritance, a property settlement, or life insurance benefits
within 180 days after filing for bankruptcy, that money or property may
have to be paid to your creditors if the property or money is not exempt.
Will Bankruptcy Wipe Out
All My Debts?
Yes, with some exceptions.
Bankruptcy will not normally wipe out:
* Money owed
for child support or alimony;
* Most fines and penalties
owed to government agencies;
* Most taxes and debts
incurred to pay taxes which can not be discharged;
* Student loans, unless
you can prove to the court that repaying them will be an “undue hardship”;
* Debts not listed
on your bankruptcy petition;
* Loans you got by
knowingly giving false information to a creditor, who reasonably relied
on it in making you the loan;
* Debts resulting from
“willful and malicious” harm;
* Debts incurred by
driving while intoxicated;
* Mortgages and other
liens which are not paid in the bankruptcy case (but bankruptcy will wipe
out your obligation to pay any additional money if the property is sold
by the creditor).
Will I Have to Go to Court?
In most bankruptcy
cases, you only have to go to a proceeding called the “meeting of creditors”
to meet with the bankruptcy trustee and any creditor who chooses to come.
Most of the time, this meeting will be a short and simple procedure where
you are asked a few questions about your bankruptcy forms and your financial
situation.
Occasionally, if complications
arise, or if you choose to dispute a debt, you may have to appear at a
hearing. In a chapter 13 case, you may also have to appear at a hearing
when the judge decides whether your plan should be approved. If you
need to go to court, you will receive notice of the court date and time
from the court and/or from your attorney.
What Else Must I Do to Complete
My Case?
After your case is
filed, you must complete an approved course in personal finances.
This course will take approximately two hours to complete. Many of
the course providers give you a choice to take the course in-person at
a designated location, over the Internet (usually by watching a video),
or over the telephone. Your attorney can give you a list of organizations
that provide approved courses, or you can check the website for the United
States Trustee Program office at www.usdoj.gov/ust.
If you can not afford the fee, you should ask the agency to provide the
course free of charge or at a reduced fee. In a chapter 7 case, you
should sign up for the course soon after your case is filed. If you
file a chapter 13 case, you should ask your attorney when you should take
the course.
Will Bankruptcy Affect My
Credit?
There is no clear answer
to this question. Unfortunately, if you are behind on your bills,
your credit may already be bad. Bankruptcy will probably not make
things any worse.
The fact that you’ve
filed a bankruptcy can appear on your credit record for ten years from
the date your case was filed. But because bankruptcy wipes out your
old debts, you are likely to be in a better position to pay your current
bills, and you may be able to get new credit.
If you decide to file
bankruptcy, remember that debts discharged in your bankruptcy should be
listed on your credit report as having a zero balance, meaning you
do not own anything on the debt. Debts incorrectly reported as having
a balance owed will negatively affect your credit score and make it more
difficult or costly to get credit. You should check your credit report
after your bankruptcy discharge and file a dispute with credit reporting
agencies if this information is not correct.
What Else Should I Know?
Utility services--Public
utilities, such as the electric company, can not refuse or cut off service
because you have filed for bankruptcy. However, the utility can require
a deposit for future service and you do have to pay bills which arise after
bankruptcy is filed.
Discrimination--An
employer or government agency can not discriminate against you because
you have filed for bankruptcy. Government agencies and private entities
involved in student loan programs also can not discriminate against you
based on a bankruptcy filing.
Driver’s license--If
you lost your license solely because you couldn’t pay court-ordered damages
caused in an accident, bankruptcy will allow you to get your license back.
Co-signers--If
someone has co-signed a loan with you and you file for bankruptcy, the
co-signer may have to pay your debt. If you file under chapter 13,
you may be able to protect co-signers, depending upon the terms of your
chapter 13 plan.
How Do I Find a Bankruptcy
Attorney?
As with any area of
the law, it is important to carefully select an attorney who will respond
to your personal situation. The attorney should not be too busy to
meet you individually and to answer questions as necessary.
The best way to find
a trustworthy bankruptcy attorney is to seek recommendations from family,
friends or other members of the community, especially any attorney you
know and respect. You should carefully read retainers and other documents
the attorney asks you to sign. You should not hire an attorney unless
he or she agrees to represent you throughout the case.
In bankruptcy, as in
all areas of life, remember that the person advertising the cheapest rate
is not necessarily the best. Many of the best bankruptcy lawyers
do not advertise at all.
Document preparation
services also known as “typing services” or “paralegal services” involve
non-lawyers who offer to prepare bankruptcy forms for a fee. Problems
with these services often arise because non-lawyers can not offer advice
on difficult bankruptcy cases and they offer no services once a bankruptcy
case has begun. There are also many shady operators in this field,
who give bad advice and defraud consumers.
When first meeting
a bankruptcy attorney, you should be prepared to answer the following questions:
* What types
of debt are causing you the most trouble?
* What are your significant
assets?
* How did your debts
arise and are they secured?
* Is any action about
to occur to foreclose or repossess property, to attach your wages or bank
account, or to shut off utility service?
* What are your goals
in filing the case?
Can I File Bankruptcy
Without an Attorney?
Although it may be
possible for some people to file a bankruptcy case without an attorney,
it is not a step to be taken lightly. The process is difficult and
you may lose property or other rights if you do not know the law.
It takes patience and careful preparation. Chapter 7 (straight bankruptcy)
cases are somewhat easier. Very few people have been able to successfully
file chapter 13 (reorganization) cases on their own.
Remember: The
law often changes. Each case is different. This pamphlet is
meant to give you general information and not to give you specific legal
advice.
K.3
Your Legal Rights During and After Bankruptcy: Making the Most of
Your Bankruptcy Discharge
About Bankruptcy
Bankruptcy is a choice
that may help if you are facing serious financial problems. You may
be able to cancel your debts, stop collection calls, and get a fresh financial
start. Bankruptcy can help with some financial problems, but does
not guarantee you will avoid financial problems in the future. If
you choose bankruptcy, you should take advantage of the fresh start it
offers and then make careful decisions about future borrowing and credit,
so you won’t ever need to file bankruptcy again!
How Long Will Bankruptcy
Stay on My Credit Report?
The results of your
bankruptcy case will be part of your credit record for ten (10) years.
The ten years are counted from the date you filed your bankruptcy.
This does not mean
you can’t get a house, a car, a loan, or a credit card for ten years.
In fact, you can probably get credit even before your bankruptcy is over!
The question is, how much interest and fees will you have to pay?
And, can you afford your monthly payments, so you don’t begin a new cycle
of painful financial problems.
Debts discharged in
your bankruptcy should be listed on your credit report as having a zero
balance, meaning you do not own anything on the debt. Debts incorrectly
reported as having a balance owed will negatively affect your credit score
and make it more difficult to get credit. You should check your credit
report after your bankruptcy discharge and file a dispute with the credit
reporting agency if this information is not correct.
Which Debts Do I Still Owe
After Bankruptcy?
When your
bankruptcy is completed, many of your debts are “discharged.” This
means they are canceled and you are no longer legally obligated to pay
them.
However, certain types
of debts are NOT discharged in bankruptcy. The following debts are
among the debts that generally may not be canceled by bankruptcy:
* Alimony,
maintenance, or support for a spouse or children.
* Student loans.
Almost no student loans are canceled by bankruptcy. But you can ask
the court to discharge the loans if you can prove that paying them is an
“undue hardship.” Occasionally, student loans can be canceled
for reasons not related to your bankruptcy when, for example, the school
closed before you completed the program or if you have become disabled.
There are also many options for reducing your monthly payments on student
loans, even if you can’t discharge them. For more information, look
at the NCLC Guide to Surviving Debt.
* Money borrowed
by fraud or false pretenses. A creditor may try to prove in court
during your bankruptcy case that you lied or defrauded them, so that your
debt cannot be discharged. A few creditors (mainly credit card companies)
accuse debtors of fraud even when they have done nothing wrong. Their
goal is to scare honest families so that they agree to reaffirm the debt.
You should never agree to reaffirm a debt if you have done nothing wrong.
If the company files a fraud case and you win, the court may order the
company to pay your lawyer’s fees.
* Most taxes.
The vast majority of tax debts can not be discharged. However, this
can be a complicated issue. If you have tax debts you will need to
discuss them with your lawyer.
* Most criminal
fines, penalties and restitution orders. This exception includes
even minor fines, including traffic tickets.
* Drunk driving
injury claims.
Do I Still Owe Secured Debts
(Mortgages, Car Loans) After Bankruptcy?
Yes and No.
The term “secured debt” applies when you give the lender a mortgage, deed
of trust, or lien on property as collateral for a loan. The most
common types of secured debts are home mortgages and car loans. The
treatment of secured debts after bankruptcy can be confusing.
Bankruptcy cancels
your personal legal obligation to pay a debt, even a secured debt.
This means the secured creditor can’t sue you after a bankruptcy to collect
the money you owe.
But, and this is a
big “but,” the creditor can still take back their collateral if you don’t
pay the debt. For example, if you are behind on a car loan or home
mortgage, the creditor can ask the bankruptcy court for permission to repossess
your car or foreclose on your home. Or the creditor can just wait
until your bankruptcy is over and then do so. Although a secured
creditor can’t sue you if you don’t pay, that creditor can usually take
back the collateral.
For this reason, if
you want to keep property that is collateral for a secured debt, you will
need to catch up on the payments and continue to make them during and after
bankruptcy, keep any required insurance, and you may have to reaffirm the
loan.
What Is Reaffirmation?
Although you filed
bankruptcy to cancel your debts, you have the option to sign a written
agreement to “reaffirm” a debt. If you choose to reaffirm, you agree
to be legally obligated to pay the debt despite bankruptcy.
If you reaffirm, the debt is not canceled by bankruptcy. If you fall
behind on a reaffirmed debt, you can get collection calls, be sued, and
possibly have your pay attached or other property taken.
Reaffirming a debt
is a serious matter. You should never agree to a reaffirmation
without a very good reason.
Do I Have to Reaffirm Any
Debts?
No. Reaffirmation
is always optional. It is not required by bankruptcy law or any other
law. If a creditor tries to pressure you to reaffirm, remember you
can always say no.
Can I Change My Mind After
I Reaffirm a Debt?
Yes. You
can cancel any reaffirmation agreement for sixty days after it is
filed with the court. You can also cancel at any time before your
discharge order. To cancel a reaffirmation agreement, you must notify
the creditor in writing. You do not have to give a reason.
Once you have canceled, the creditor must return any payments you made
on the agreement.
Also, remember that
a reaffirmation agreement has to be in writing, has to be signed by your
lawyer or approved by the judge, and has to be made before your bankruptcy
is over. Any other reaffirmation agreement is not valid.
Do I Have to Reaffirm on
the Same Terms?
No. A
reaffirmation is a new contract between you and the lender. You should
try to get the creditor to agree to better terms such as a lower monthly
payment or interest rate. You can also try to negotiate a reduction
in the amount you owe. The lender may refuse but it is always worth
a try. The lender must give you disclosures on the reaffirmation
agreement about the original credit terms, and any new terms you and the
lender agree on must also be listed.
Should I Reaffirm?
If you are thinking
about reaffirming, the first question should always be whether you can
afford the monthly payments. Reaffirming any debt means that
you are agreeing to make the payments every month, and to face the consequences
if you don’t. The reaffirmation agreement must include information
about your income and expenses and your signed statement that you can afford
the payments.
If you have any doubts
whether you can afford the payments, do not reaffirm. Caution is
always a good idea when you are giving up your right to have a debt canceled.
Before reaffirming,
always
consider your other options. For example, instead of reaffirming
a car loan you can’t afford, can you get by with a less costly used car
for a while?
Do I Have Other Options for
Secured Debts?
You may be able to
keep the collateral on a secured debt by paying the creditor in a lump
sum the amount the item is worth rather than what you owe on the loan.
This is your right under the bankruptcy law to “redeem” the collateral.
Redeeming collateral
can save you hundreds of dollars. Because furniture, appliances,
and other household goods go down in value quickly once they are used,
you may redeem them for less than their original cost or what you owe on
the account.
You may have another
option if the creditor did not loan you the money to buy the collateral,
like when a creditor takes a lien on household goods you already have.
You may be able to ask the court to “avoid” this kind of lien. This
will make the debt unsecured.
Do I Have to Reaffirm Car
Loans, Home Mortgages?
If you are behind on
a car loan or a home mortgage and you can afford to catch up, you can reaffirm
and possibly keep your car or home. If the lender agrees to give
you the time you need to get caught up on a default, this may be a good
reason to reaffirm. But if you were having trouble staying current
with your payments before bankruptcy and your situation has not improved,
reaffirmation may be a mistake. The collateral is likely to be repossessed
or foreclosed anyway after bankruptcy, because your obligation to make
payments continues. If you have reaffirmed, you could then be required
to pay the difference between what the collateral is sold for and what
you owe.
If you are up to date
on your loan, you may not need to reaffirm to keep your car or home.
Some lenders will let you keep your property without signing a reaffirmation
as long as you continue to make your payments. Sometimes lenders
will do so if they think the bankruptcy court will not approve the reaffirmation
agreement.
And What About Credit Cards
and Department Store Cards?
It is almost never
a good idea to reaffirm a credit card. Reaffirming means you
will pay bills that your bankruptcy would normally wipe out. That
can be a very high price to pay for the convenience of a credit card.
Try paying cash. Then in a few years, you can probably get a new
credit card, that won’t come with a large unpaid balance!
If you do reaffirm,
try to get something in return, like a lower balance, no interest on the
balance, or a reasonable interest rate on any new credit. Don’t be
stuck paying 18/-/21% or higher!
Some department store
credit cards may be secured. The things you buy with the credit card
may be collateral. The store might tell you that they will repossess
what you bought, such as a TV, washer, or sofa, if you do not reaffirm
the debt. Most of the time, stores will not repossess used merchandise.
So, after a bankruptcy, it is much less likely that a department store
would repossess “collateral” than a car lender.
However, repossession
is possible. You have to decide how important the item is to you
or your family. If you can replace it cheaply or live without it,
then you should not reaffirm. You can still shop at the store by
paying cash, and the store may offer you a new credit card even if you
don’t reaffirm. (Just make sure that your old balance is not added into
the new account.)
For Example
Some offers to reaffirm
may seem attractive at first. Let’s say a department store lets you
keep your credit card if you reaffirm $1000 out of the $2000 you owed before
bankruptcy. They say it will cost you only $25 per month and they
will also give you a $500 line of credit for new purchases. What
they might not tell you is that they will give you a new credit card in
a few months even if you do not reaffirm. More importantly, though,
you should understand that you are agreeing to repay $1000 plus interest
that the law says you can have legally canceled. That is a big price
to pay for $500 in new credit.
K.4
Using Credit Wisely After Bankruptcy
Beware of Credit Offers
Aimed at Recent Bankruptcy Filers
“Disguised” Reaffirmation
Agreement
Carefully read any
credit card or other credit offer from a company that claims to represent
a lender you listed in your bankruptcy or own a debt you discharged.
This may be from a debt collection company that is trying to trick you
into reaffirming a debt. The fine print of the credit offer or agreement
will likely say that you will get new credit, but only if some or all of
the balance from the discharged debt is added to the new account.
“Secured” Credit Card
Another type of credit
marketed to recent bankruptcy filers as a good way to reestablish credit
involves “secured” credit cards. These are cards where the balances
are secured by a bank deposit. The card allows you a credit limit
up to the amount you have on deposit in a particular bank account.
If you can’t make the payments, you lose the money in the account.
They may be useful to establish that you can make regular monthly payments
on a credit card after you have had trouble in the past. But since
almost everyone now gets unsecured credit card offers even after previous
financial problems, there is less reason to consider allowing a creditor
to use your bank deposits as collateral. It is preferable not to
tie up your bank account.
Credit Repair Companies
Beware of companies
that claim: “We can erase bad credit.” These companies rarely
offer valuable services for what they charge, and are often an outright
scam. The truth is that no one can erase bad credit information from
your report if it is accurate. And if there is old or inaccurate
information on your credit report, you can correct it yourself for free.
Avoid High Cost Predatory
Lenders
Don’t assume that because
you filed bankruptcy you will have to get credit on the worst terms.
If you can’t get credit on decent terms right after bankruptcy, it may
be better to wait. Most lenders will not hold the bankruptcy against
you if after a few years you can show that you have avoided problems and
can manage your debts.
Be wary of auto dealers,
mortgage brokers and lenders who advertise: “Bankruptcy? Bad Credit? No
Credit? No Problem!” They may give you a loan after bankruptcy, but
at a very high cost. The extra costs and fees on these loans can
make it impossible for you to keep up the loan payments. Getting
this kind of loan can ruin your chances to rebuild your credit.
Mortgage Loans
If you own your home,
some home improvement contractors, loan brokers and mortgage lenders may
offer to give you a home equity loan despite your credit history.
These loans can be very costly and can lead to serious financial problems
and even the loss of your home. Avoid mortgage lenders that:
* Charge excessive
interest rates, “points,” brokers’ fees and other closing costs;
* Require that you
refinance your current lower interest mortgage or pay off other debts;
* Add on unnecessary
and costly products, like credit insurance;
* Make false claims
of low monthly payments based on a “teaser” variable interest rate;
* Include a “balloon”
payment term that requires you to pay all or most of the loan amount in
a lump sum as the last payment;
* Charge a prepayment
penalty if you pay off the loan early;
* Change the terms
at closing;
* Make false promises
that the rate will be reduced later if you make timely payments;
* Pressure you to keep
refinancing the loan for no good reason once you get it.
Small Loans
It is always best to
save some money to cover unexpected expenses so you can avoid borrowing.
But if you are in need of a small loan, avoid the following high cost loans:
Payday loans
Some “check cashers”
and finance companies offer to take a personal check from you and hold
it without cashing it for one or two weeks. In return, they will
give you an amount of cash that is less than the amount of your check.
The difference between the amount of your check and the cash you get back
in return is interest that the lender is charging you. These payday
loans are very costly. For example, if you write a $256 check and
the lender gives you $200 back as a loan for two weeks, the $56 you pay
equals a 728-percent interest rate! And if you don’t have the money
to cover the check, the lender will either sue you or try to get you to
write another check in a larger amount. If you choose to write another
check, the lender gets more money from you and you get further into debt.
Auto title loans
For many years, pawn
shops have made small high-interest loans in exchange for property.
A new type of “pawn” is being made by title lenders who will give you a
small loan at very high-interest rates (from 200 percent to 800 percent)
if you let them hold your car title as collateral for the loan. If
you fall behind on the payments, the lender can repossess your car and
sell it.
Rent-to-own
By renting a TV, furniture
or appliance from a rent-to-own company, you will often pay three or four
times more than what it would cost to buy. The company may make even
more profit on you because the item you are buying may be previously used
and returned. And if you miss a payment, the company may repossess
the item leaving with you no credit for the payments you made.
Tax refund anticipation loans
Some tax return preparers
offer to provide an “instant” tax refund by arranging for loans based on
the expected refund. The loan is for a very short period of time
between when the return is filed and when you would expect to get your
refund. Like other short-term loans, the fees may seem small but
amount to an annual interest rate of 200 percent or more. It is best
to patient and wait for the refund.
What You Can Do to Avoid
Problems
* If you don’t
want it, don’t get it. If you have doubts about whether you really
need the loan or service, or whether you can afford it, don’t let yourself
get talked into it by a salesperson using high-pressure tactics.
You can always walk away from a bad deal, even at the last minute.
* Shop around.
You may qualify for a loan with normal rates from a reputable bank or credit
union. Don’t forget that high-cost lenders are counting on your belief
that you cannot get credit on better terms elsewhere. Do not let
feelings of embarrassment about your past problems stop you from shopping
around for the best credit terms.
* Compare credit terms.
Do not consider just the monthly payment. Compare the interest rate
by looking at the “annual percentage rate,” as this takes into account
other fees and finance charges added on the loan. Make sure you know
exactly what fees are being charged for credit and why.
* Read before you sign.
If you have questions, get help from a qualified professional to review
the paperwork. A lender that will not let you get outside help should
not be trusted.
* If you give a lender
a mortgage in a refinancing deal, remember your cancellation rights.
In home mortgage refinancings, federal law gives you a right to cancel
for three days after you sign the papers. Exercise these rights if
you feel you signed loan papers and got a bad deal. Don’t let the
lender talk you out of cancelling.
* Get help early.
If you begin to have financial problems, or you are thinking of consolidating
unmanageable debts, get help first from a local non-profit housing or debt
counseling agency.
Ten Things to Think
About Before Getting a New Credit Card
1. Don’t apply for
a credit card until you are ready.
Unfortunately, bankruptcy
may not have permanently resolved all of your financial problems.
It is a bad idea to apply for new credit before you can afford it.
2. Avoid accepting
too many offers.
There is rarely a good
reason to have more than one or two credit cards. Having too much
credit can lead to bad decisions and unmanageable debts, and it will lower
your credit rating. This can make it harder for you to get other
lower interest rate loans. Avoid accepting a credit card just to
get a discount at a store or a “free” gift.
3. Remember that lenders
are looking for people who run up big balances, because those consumers
pay the most interest.
You may find that credit
card companies are pursuing you aggressively by mail and phone even though
you filed bankruptcy. Do not view this as a sign that you can afford
more credit. The lender may have a marketing profile telling them
you are someone who is likely to carry a big credit card balance and pay
a good deal of interest. Or they may see you as a good credit risk
because you cannot file a Chapter 7 bankruptcy again for quite a few years.
4. Interest rate is
important in choosing a card but not the only consideration.
You should always try
to get a card with an interest rate as low as possible. But it is
rarely a good idea to take a new card just because of a low rate.
The rate only matters if you carry a balance from month to month.
Also, the rate can easily change, with or without a reason. Remember
that even the best credit cards are expensive unless you pay your balance
in full every month. And other credit terms can add to your cost,
like annual fees, late charges, over-the-limit fees, account set-up fees,
cash advance fees, and the method of calculating balances. Sometimes
a credit card that appears cheaper is actually more expensive.
5. Beware of temporary
“teaser” rates. A teaser rate is an artificially low initial rate
that applies only for a limited time.
Most teaser rates are
good only for six months or less. After that, the rate automatically
goes up. Remember that, if you build up a balance under the teaser
rate, the much higher permanent rate will apply when you repay the bill.
This means that the permanent long-term rate on the card is much more important
than the temporary rate.
6. If your rate is
variable, understand how it may change.
Variable interest rates
can be very confusing. Some variable rate terms can make your rate
go up steeply over time. Read the credit contract to understand how
and when your rate may change. And don’t be misled by advertisements
that claim “fixed rate,” as this may mean the rate is fixed only until
the lender decides to change it again.
7. Check terms related
to late payment charges and penalty rates of interest.
Most credit card contracts
have terms in the small print for late charges or penalty interest rates
that increase if you make even a single late payment. Try to avoid
cards with late fees as high as $25–$35 or penalty interest rates of 21–24
percent or higher. Even if you are not having financial problems,
these terms may become important, because they apply equally to accidental
late payments.
8. Get a card with
a grace period and learn the billing method.
It is important to
understand how you will be billed. Look for a card with a grace period
that lets you pay off the balance each month without interest. If
the card does not have a grace period and interest will apply from the
date of your purchase, a low interest rate may actually be higher than
it looks. The terms of the grace period are also important, as it
may not apply to balance transfers and cash advances. And look out
for different interest rates that may apply depending upon the type of
charge: these usually include a higher rate for cash advances.
9. Don’t accept a card
just because you qualify for a high credit limit.
It is easy to assume
that because a card offer includes a high credit limit, this means the
lender thinks you can afford more credit. In fact, the opposite may
be true. Lenders often give high credit limits to consumers hoping
that they think will carry a bigger balance and pay more interest.
You must evaluate whether you can afford more credit based on your individual
circumstances.
10. Always read both
the disclosures and the credit contract.
You will find disclosures
about the terms of a credit card offer, usually in small print on the reverse
or at the bottom of the offer. Review these carefully. However,
the law does not require that all relevant information be disclosed.
For this reason, you must also read your credit contract, which comes with
the card. This will include terms such as late payment fees, default
rates of interest, and a description of the billing method. Since
these terms are not easy to understand, you may want to call the lender
for an explanation. Or better yet, refuse credit with too many complex
provisions, because those terms are likely to work to your disadvantage.
Ten Things to Think About
Before Using Your Credit Card
1. Establish a realistic
budget.
Before using a credit
card after bankruptcy, try paying cash for a while. This will help
you learn how much money you need each month to pay the basic necessities.
Don’t forget to budget for the payments on any debts you reaffirmed in
your bankruptcy.
2. It is important
not to use credit cards to make up for a budget shortfall.
Credit card debt is
expensive. Sometimes credit cards are so easy to use that people
forget they are loans. Be sure to charge only things you really need
and plan to pay the balance off in full each month. If you find you
are constantly using your card without being able to pay the bill in full
each month, you need to consider that you are using cards to finance an
unaffordable lifestyle.
3. If you get into
financial trouble, do not make it worse by using credit cards to make ends
meet.
If you find that you
are using credit cards to get through a period of financial difficulty,
it is likely that additional credit will only make things worse.
For example, if you use cash advances on your credit card to pay bills,
the interest due will only add to your debt burden sooner rather than later.
4. Don’t get hooked
on minimum payments.
Credit card lenders
usually offer an optional “minimum payment” in their monthly billing.
These are usually set very low (usually 2 percent of the balance), barely
covering the monthly interest charge. If you pay only the minimum,
chances are that you will be paying your debt very slowly or not at all,
and you may think you are managing the debt when you are really getting
in over your head. For example, if you make only the monthly minimum
payments to pay off a $1000 balance at a 17 percent interest rate, it will
take over 7 years to pay your debt! If you are also making new purchases
every month while making minimum payments, your debt will grow and take
even longer to pay off. This means that your monthly interest obligations
will increase and you will have less money in the monthly budget for necessities.
5. Don’t run up the
balance based on a temporary “teaser” interest rate.
Money borrowed during
a temporary rate period of 6 percent is likely to be paid back at a much
higher permanent rate of 15 percent or more. Also be careful about
juggling cards to take advantage of teaser rates and balance transfer options.
It takes a great deal of time and effort to take advantage of terms designed
to be temporary. Remember that all teaser rate offers are designed
to get you locked into the higher rate for the long term, because that
is how the lender makes the most money.
6. Avoid the special
services and programs credit card lenders offer to bill to your card.
You are likely to get
many mail offers and telemarketer calls from your credit card lender about
special services such as credit card fraud protection plans, credit report
protection, travel clubs, life and unemployment insurance, and other similar
offers. These products are generally overpriced. It is best
to throw out and refuse these offers, or at a minimum, treat them with
a high degree of caution. And avoid “free trial” offers as you will
be billed automatically if you forget to cancel the service.
7. If you can afford
to do so, always make your credit card payments on time.
Be careful to avoid
late payment charges and penalty rates if you can do so while still paying
higher priority debts. Bad problems get worse fast when you have
a new higher interest rate and late charge to pay during a time of financial
difficulty. Most lenders will waive a late charge or default interest
rate one time only. It is worth calling to ask for a waiver if you
make a late payment accidentally or with a good excuse.
8. Know exactly when
the grace period ends.
The grace period usually
ends on the payment “due date,” which may change every month. Many
lenders do not mail bills until late in the grace period, so your payment
may be due quite soon after you receive the bill. This also means
that the grace period may be less than a full month, usually about 20-25
days. Some lenders are slow in posting payments or have strange rules
about deadlines (like payments received after 10:00 a.m. on the due date
are considered late). Try to mail your payment well before the due
date so there will be no question it gets there on time. Paying credit
cards on time not only saves you interest and late fees but is a good way
to improve your credit rating after bankruptcy.
9. Beware of unsolicited
increases by a credit card lender to your credit card limit.
Some lenders increase
your credit limit even when you have not asked for more credit. Avoid
using the full credit line as your debt can easily spiral out of control.
And going over the credit limit even by a few dollars can be very costly
as you will likely be charged an over-the-limit fee and a higher penalty
interest rate.
10. If you do take
a credit card and discover terms you do not like: cancel!
You can always cancel
any credit card at any time. Although you will be responsible for
any balance due at the time of cancellation, you should not keep using
a card after you discover that its terms are unfavorable.
