What Happens in a Chapter 7 Bankruptcy?

In a Chapter 7 bankruptcy, credit cards and debt are discharged and the debts are, in a way, wiped clean. They remain on your credit report, but you do not owe the balances once the bankruptcy is discharged. Usually you are allowed to keep your car and any assets that are necessary to everyday living. You are also usually able to reaffirm debts such as a home loan, which may result in lower interest rates and lower monthly payments.

In order to determine whether you should file bankruptcy, you may want to compile a list of all of your living expenses first. Include food and rent and reasonable expenses that are necessary. The list will also serve as somewhat of an alert. Are there expenses on your list that can be lowered or taken out? Can you spend less in any area? Remember, that the money that goes to unnecessary expenses can be used to pay on bills with creditors. If you are able to find a number of areas you can cut back in, you may not need Chapter 7 or debt consolidation and can budget your finances in a way that fixes your financial situation on your own.

After you have your list of living expenses, calculate the payments of your current debts. If you cannot pay these off in the next 3 years, even after cutting down on living expenses, you may want to consider filing bankruptcy. First, however, contact the creditors and see if they can work with you on either the interest rates or payments. Sometimes, you may be able to qualify for a hardship program which can cut your monthly credit card payments drastically.

Debt Consolidation

Debt consolidation companies are able to get your payments and interest rates lowered and then consolidate all of the payments into one payment per month. Debt consolidation does not typically affect your credit score, but if you settle and instead agree to a lower payoff through debt settlement, you could see a drop in your credit score. If you are in a debt consolidation program, a comment may appear on your report until it is paid off, but does not affect your credit score, at least not in the way that a bankruptcy affects it.

In order for debt consolidation to be effective, you have to be able to pay the monthly payment. Otherwise, you may end up paying for a service that gets you even further in debt. You could essentially consolidate your debt yourself without paying or going through a debt consolidation agency, by transferring balances to lower interest credit cards and paying off high interest cards if you have the funds.

Although debt consolidation does not slam your credit rating as hard as bankruptcy, you are also not exactly debt free. A number of problems can occur through debt consolidation when you do not budget your money and make your payments on time or as agreed upon. This is one of the main reasons that bankruptcy and debt consolidation fail for consumers, because the fix or solution won’t matter if you don’t change any bad spending habits you may have that caused the problem. In this respect, debt consolidation can end up being a waste of money and you still have the debts. At least with bankruptcy, your debts are completely discharged and then it is up to you to take advantage of the fresh start.

Another thing to consider is whether your debts are keeping you from being able to pay for necessities like food. If you find yourself cutting out the things you need for normal everyday living in order to make your credit card payments, bankruptcy is probably the way you should go. Although we all want to be able to pay our debts, it isn’t quite worth it to me if I am not able to feed my child. If you are able to make a monthly payment that covers your debt through a debt consolidation agency, weigh the fees for their services and how long the payments will have to be made.

Make sure when considering bankruptcy or debt consolidation that you look at all angles before making a decision. It is not a decision that should be taken lightly or made willy-nilly as it could potentially change your life for the next 10 years.

Miss Bankrupt,

I am expecting my discharge for Chapter 7 to be final in 2 or 3 weeks. Which step should I take 1st to start rebuilding credit? I was thinking about getting a credit card but would a car loan be better? I just don’t want to make mistakes here and want to rebuild my credit so I will be able to buy a house. Joe

Joe:

I would not expect credit repair to occur quickly; it can sometimes take a couple years to rebuild credit to a point where you could get a halfway decent interest rate on a home mortgage. Otherwise, you run the risk of paying too much in interest and not being able to make your payments.

To start the process, you should probably monitor your credit scores so you have an idea of what you’re working with. You will want to wait at least 60 days after your bankruptcy is discharged before checking your credit reports or creditscores as it can take 60-90 days for any change to appear in your credit report.

In the past I have used FreeCreditScore.com (Which is a monthly service, and is not free – but it is cheap.) As I worked to raise my credit score. I do recommend it, but only once you can afford it, and once you do the other steps that I’ve highlighted below.

You will want to request credit reports from all three credit bureaus at some point to make sure that the accounts included in the bankruptcy are reflected as “Included in Bankruptcy”. You can do that for free once a year via AnnualCreditReport.com. Your credit report should reflect that you no longer owe a balance, and the accounts should not say that the account is still in collections. There should be no past due amounts after the bankruptcy; there should not be any accounts that are labeled “charged off” unless they were charged off before the bankruptcy.

Any inconsistencies need to be disputed and cleared up before you can start repairing and rebuilding your credit. If you dispute any of your accounts, the creditor investigates and should make the necessary corrections within 30 days. This is actually the fastest way to raise your credit score right after a bankruptcy. If you’re monitoring, you will likely see a jump in your score as some of the negatives are corrected or fall off.

Once your credit report is corrected, the credit bureau must also provide you with a corrected copy of your credit report.

How Is Your Credit Score Calculated?

According to My Fico , your credit score is calculated as 35% on payment history, 30% is amounts owed, 15% is length of credit history, 10% is new credit, and 10% of your credit score is determined by the types of credit you have.

Regarding your question of whether you should go credit card or car loan, this means that 10% of the score is based on a mixture of credit cards, installment loans and mortgage type accounts. You can and will be able to get a car loan after bankruptcy, but you will need a large down payment and will probably receive an extremely high APR. If you can, try to avoid lenders that provide car loans “regardless of credit”, because although it may seem like a miracle, the loan may end up costing you a lot more than if you waited and worked on rebuilding your credit before you try to get the loan.

After filing bankruptcy, the best and most inexpensive way to start repairing your credit is to acquire a secured credit card that reports to the credit bureaus. If you wait at least two years, you may also be able to acquire an unsecured credit card that has fairly reasonable terms.

But if you want to start out right away with a secured credit card, you will want to consider the following things before selecting:

• Make sure the creditor reports your account activity to the credit bureaus. If they do not, as some prepaid credit cards don’t (which are different from secured cards) you are basically doing nothing in repairing your credit.

• What are the fees that are involved? Consider all fees and add them up before deciding on a secured card. There are cards with application fees, annual fees, monthly fees, set up fees and a number of other fees just to carry it. Shop around and of course try to find the one with the least.

• Try to go with a reputable or well-known financial institution such as HSBC. Steer clear of companies that you’ve never heard of. It also doesn’t hurt to do a quick search on Google if you aren’t quite familiar with the creditor you are considering. You may even want to check with the bank that you bank with as many offer secured credit cards.

• How much is the deposit? Secured credit cards require a deposit that is held in case you default on the card. The credit limit that is available is usually the amount of the security deposit, although some credit card companies will add a bonus onto your limit. The more you can afford to put down for your initial deposit, the better, as it effects the amount of future credit you may be offered.

Finally, once you decide on a decent card all you need to do to begin repairing your credit is follow the guidelines and make your payments on time. Read and understand the credit card agreement, and as long as you don’t default- miss payments, go over the limit, etc. you’ll be well on your way to repairing your credit score and before you know it you’ll be house shopping.

Good luck!

What is a 341 Meeting or First Meeting of Creditors?

The First Meeting of Creditors is a meeting in which you (the bankruptcy petitioner), your attorney, and a bankruptcy trustee will essentially meet to go over the facts of the bankruptcy filing. It is usually scheduled 30 – 40 days after the bankruptcy petition is filed and anyone filing a Chapter 13 or Chapter 7 will need to attend one of these meetings. This is an opportunity for any creditors to appear that choose to do so, and either ask questions or challenge any part of the bankruptcy. Sounds scary, but creditors rarely show up and rarely challenge the bankruptcy.

What happens at the Bankruptcy Meeting?

You will be sworn in and asked a series of questions that range from your name to whether the information you have provided is correct. The meeting will also be recorded by court reporter or tape recorded. Questions you may be asked include the following:

• Did you read the schedules before signing?
• Did you list all of your assets?
• Did you list all of your debts
• Have you lived in this state for the past two years?
• Are your cars insured?

This meeting is usually brief, and sometimes more than one is scheduled, so you may be waiting in line with your attorney with a bunch of other bankruptcy filers and their attorneys.

Tips for Surviving the Bankruptcy Meeting

It is important that you do not panic and freak out and just answer the questions. The 341 Meeting is not a test that you pass or fail, and no one is trying to trick you or catch you in a lie to throw you in the hoosegow. This meeting is simply to gather facts. In the unlikely event that a creditor does appear, they usually just want to make sure they have their facts correct as well and your attorney will be able to handle any challenges that may arise.

The creditors and trustee have 60 days after the 341 Meeting to challenge the discharge and if there are no issues, you’ll receive the discharge shortly after that. As long as you’ve been honest and haven’t tried to file bankruptcy fraudulently, both the 341 Meeting and bankruptcy procedure are fairly brief and painless. Before you know it, you’ll be in the process of repairing your credit.

Because, I don’t know about you. But, I was broker after bankruptcy.

So from what I can gather, here are some of the details, which pretty much boil down to the fact that he filed bankruptcy on his businesses. Not personally. Which means any assets he owned personally were virtually untouched. And in Trump’s case, his casinos may have gone bankrupt, but he still made a 2 million dollar paycheck. Not a bad deal, I’d say.

Chapter 11

When Donald Trump’s casinos fell into a billion dollars of debt, they filed Chapter 11. Chapter 11 is a plan for reorganization and is often used by large businesses and corporations to restructure the debt. It is similar to a Chapter 13 in that it allows the debtor to keep assets while operating the business under the supervision of the court. In a Chapter 11 bankruptcy, if the debtor is dishonest or ineffective, a trustee may be appointed.

Otherwise, a trustees committee which is made up of the 20 largest unsecured creditors, is appointed by the U.S. Trustee. This committee represents all of the creditors and votes whether or not a Chapter 11 plan is confirmed.

Benefits of Filing Chapter 11

Chapter 11 allows for a couple of benefits.

1. The debtor can acquire financing and loans in which the new lenders gain priority to earnings.

2. The debtor may be able to cancel contracts.

3. The automatic stay applies to Chapter 11 bankruptcies. This means that debtors receive protection from litigation.

The Really Downside of Chapter 11

While the Chapter 11 is generally considered more flexible, it can cost the debtor more money and has an extremely low rate of success. Running the company while waiting for a plan to be approved can end up costing a lot of money with the possibility of having nothing and can result in having to file Chapter 7 and liquidating non-exempt property. Additionally, If the debt ends up being more than the assets in a Chapter 11, the owners have nothing and the newly reorganized company is handed over to the company’s creditors.

Basically, Donald Trump still has his money, regardless of how many of his businesses file bankruptcy. His bankruptcies probably have nothing to do with whether he is qualified to become President or not, although I wonder how a casino could possibly lose money when they’re obviously designed specifically to make money. One thing I do know is that while Mr. Trump can still brag about being a billionaire after filing bankruptcy four times, bankruptcy was never that good to the rest of us.

The good thing about this online calculator is that you can enter your zip code and everything is calculated according to where you actually live. Since the first part of the Means Test is based on a comparison of your household income with the average household income, it’s necessary of course to use the information according to the particular area of the country that you live in. If your household income is below the median income,  you qualify for filing a Chapter 7 according to the Means Test. If it is above, you need to fill out the second part of the test.

I chose a random zip code which ended up being McBee, South Carolina. For a household of 2, this is the comparison of household incomes:

So if I lived in McBee, South Carolina and made less than $25,250 in 6 months, I would qualify for Chapter 7. If I earned more, I could still possibly qualify by taking the second part of the Means Test. (Note: If I lived in McBee, South Carolina I would definitely qualify.)

The second part of the Means Test is based on disposable income that you have available to pay your creditors. For example, from the Nolo website:

If you can pay at least $11,725 ($195.42 per month), you can’t file for Chapter 7.

If you can pay at least $7,025 ( about $117 per month) and that is at least 25% of what you currently owe your unsecured creditors, you can’t file for Chapter 7.

If your disposable income is less than $117 per month, you can file for Chapter 7.

This is all calculated for you when you enter your expenses and required information and will give you an idea if you’ll qualify for either a Chapter 7 or Chapter 13.

So if you’re considering filing bankruptcy or are just interested in taking the Means Test, hop over to the site and try it out. I did find it to be an extremely interesting calculator, even though I don’t plan on filing bankruptcy ever again. Keep in mind that an online calculator cannot read your mind and it’s still best to consult with an attorney if you are seriously considering bankruptcy.

We are also aware of all of the crappy credit cards that are out there specifically for people with bad credit and those that have filed bankruptcy.  Fortunately, there is an area between crappy credit cards and credit cards that hate us. In my opinion, these cards are reputable credit card companies or banks, with somewhat higher APRs (which we understand), credit limits that are large enough to allow us to build and repair our credit but small enough to keep us from getting into mischief, and very minimal fees if any.

The most forgiving credit cards for me, have been the following:

Hooters MasterCard- this card has a high interest rate but no annual fee or other fees. It also has a rewards program, which is not typical of cards that are offered to post bankruptcy filers. As I have mentioned before, Hooters (Merrick Bank) is known for giving consumers that have filed bankruptcy higher than normal credit limits. I was approved for this card a year after discharge with a credit limit of $3250.00.

Household Bank and HSBC- I was approved for a Household Bank credit card a year after bankruptcy as well as the Best Buy Rewards Zone MasterCard by HSBC. HSBC is also the provider of the Orchard Bank credit cards, which are specifically for people with bad or no credit. The good thing about HSBC is that when you apply, you will go through a pre qualification process that does not pull your credit report, but will give you an idea of the card(s) you may qualify for in advance.

Capital One- I received a Platinum card from Capital One with a 0% balance transfer for a year. I did transfer a balance from a higher interest card, but was also approved for an Orbitz card by Capital One which allows me to earn rewards. I was approved for both of these cards 2 or more years after my bankruptcy was discharged. Capital One also has a pre qualification process that allows you to decide in advance if you are interested in the card(s) you may be offered.

It is important to know ahead of time which ones you may have a shot at before you go applying around as each inquiry will stay on your report for 2 years. If you rack up a bunch of inquiries, whether you were approved for the cards or not, it could appear as though you are credit shopping (ie in a pinch so trying to get a ton of credit fast) and could hurt your credit score. I should add that I had nothing on my credit report when I applied for this cards except for the accounts that were included in the bankruptcy (which were noted as such on the report). If you are a year or two out from your discharge and have managed to keep it clean otherwise, these cards are worth trying for.

One problem is usually that the account is sold and resold over and over to different collection agencies and so the one that gets the notification of the bankruptcy filing may not be the one that actually has the account anymore. Oftentimes you can dispute these online and then the account will be corrected. Otherwise, you can send a letter with copies of the Schedules of the Bankruptcy Petition showing that the account was included in the bankruptcy. Mail it return receipt requested and keep copies of everything that  you send.

So how exactly should the account be reflected on your credit report?

When your bankruptcy is discharged, the creditors that were included should show up on your credit report with a zero balance and a zero amount due. There should be no past due amounts after the date of the bankruptcy and the account should be reported as “Included in Bankruptcy”. This is basically it. You cannot have late payments on an account that was included in bankruptcy after you’ve filed the bankruptcy. If any of your accounts are being reportedly incorrectly you will need to dispute them with the credit bureau and have them corrected ASAP.

Additionally, the debt should not be reported as a charge off, unless it was a charge off before the bankruptcy. If it shows as a charge off after the bankruptcy, you should dispute this also.

Occasionally, the credit bureau will come back with a status of “verified” meaning they checked on it and the creditor says it’s being reported accurately. Then, you will need to send a letter to the creditor referencing your bankruptcy filing. Include the account number that is being reported inaccurately, and why it is inaccurate, and ask that it be removed or reported correctly immediately.  It is helpful to mention that it is illegal to report information incorrectly to the credit bureau. Again, send everything return receipt requested and this should take care of it for you.

Here is a sample letter from FTC.gov (of course insert your own information)

I should mention that I have never had to send a letter for any of my disputes. Disputing online has always cleared up any inaccuracies that have appeared on my credit report.

If you’re in the process of repairing your credit, it is absolutely crucial that you check your credit reports at least yearly, through annualcreditreport.com. Because of the selling and reselling of accounts, bankruptcy filers especially need to keep up with what is going on with their credit reports. It is not surprising for an old account to suddenly pop up and the sooner you dispute the account and take care of it, the less harm that can be done to your credit score because of it. Plus, it helps you keep track of where you’re going.

Good luck!

For example, the cards I have that currently have the highest APR’s are Orbitz (23.9%), Hooters (21.45%), Target (25.24%) and Best Buy (22.99%).

First of all, I have to admit that I wasn’t completely aware that these particular cards had such outlandish interest rates. Which is a grave mistake to make if you’re trying to clean up your credit. You have to know what you’re paying. I knew that Hooters was pretty high and Target, just because it’s Target. I did not really know Orbitz and Best Buy were though, which is another reason to keep a spreadsheet of your credit cards.

The good news is that the Target card and Best Buy card have the two lowest balances, so essentially the Snowball Method would work. I could pay those off and then “snowball” those monthly payments onto the next lowest balance. BUT, the next lowest balances, are the lowest APR’s on my list of credit cards which are Capital One Platinum (13.99%) and Juniper (15.99%). So paying in order by highest APR is not always going to work with the Snowball Method.

I think instead, I’ll go to the next credit card with the highest APR as these are not only ridiculous but a large chunk of money. The two very lowest APRs are the Chase cards that I’m on the Hardship Program with. Part of the agreement with them is that my APR would be lowered to 6.00%, but the cards are closed. I’m not even fiddling with those at the moment because the payments are taken directly from my bank account and aren’t costing me as much in interest as a couple of the other cards. I also have to keep in mind that my debt to credit ratio has to lower to increase my credit score, which means I need to pay down the cards with the high balances.

Something else I’ve realized is that after bankruptcy, you may be stuck with some pretty crappy cards that require a lot of fees and are at the bottom of the credit card food chain. Even though I waited and avoided those cards, I still ended up with a lot of cards that are not much better than the bottom ones. Yes, they’re unsecured and no they don’t have additional fees or annual fees, but all in all, they’re still pretty crappy credit card deals. I would advise bankruptcy filers to hold out for the best cards with low APRs, which you can get…it  just takes a little time and patience. Once I get these paid down, I may try for some better credit cards but as far as bad deals and extreme interest rates go, I’m pretty much done with them.

To address my two ridiculous reasons for renting instead of working toward buying I will say that buying a house is similar to deciding to have children. No one ever thinks it’s the “right” time. As far as #2 is concerned, I have decided to look harder. In my particular corner of the world, the housing arrangements vary from either really cheap and crappy to really nice and way too expensive. Yet, I know there has to be something in the middle that I will be happy raising my daughter in. Everyone knows that renting is throwing away money and I will not feel the least bit satisfied until I have some place of my own.

Still, there are things I need to get in order and here are the things I’ve come up with so far:

1) Pay down credit. I need to make a huge dent in what I owe in order to raise my credit score. This will help a great deal in getting a decent mortgage that I can pay and keep up with (which is my main concern).

2) Save a large down payment. I would like to have a large enough down payment saved up to help get a house with payments I can afford. I will need to be able to make the mortgage plus pay property taxes and insurance, which I am factoring into a monthly payment regardless of how it has to be paid. This means that I need to start saving more than the $100 I’m putting into my ING savings account.

3) Figure out my banking situation. This one is tough because I recently found out that one of the main banks that provides mortgages in my area is the small town bank that told me I would never make it as a single woman that has filed bankruptcy. I don’t wish to be prideful, but when I left that office in tears, I decided I would not ask them again for anything. Unfortunately, my parents’ realtor said that the Credit Union I adore won’t be able to provide any of the government programs for me. So either I need to start looking at other banks or I need to suck it up and eventually go back to little bank that I hate.

My bankruptcy is old enough that when combined with a clean credit report, it should be less of a problem when mortgage hunting. I am in no way delusional and know that in order to counter a bankruptcy from almost 7 years ago, I need to have perfect credit.  I really just need to save a lot more and pay down my credit cards a lot more, which seems daunting, but at one time, even acquiring credit seemed hopeless.

The biggest problem that weighs heavily on my mind is dealing with small town bank. What do you think? Suck it up…or find a lender somewhere else?

I know it’s easy to think that your credit sucks so badly that you don’t have a choice. In order to rebuild you have to start somewhere and any kind of denial can fool us into thinking that we have no choice. You do have a choice though. If for some reason you think your credit is the worst of the worst, I’d suggest just waiting it out a little while. It generally takes a year or two after filing to get any half way decent credit cards.

Anyway, here are some cards that I think are just downright horrid and should not be considered under any circumstance.

1.  Merchandise Only Cards

These cards are advertised as 100% guaranteed with no credit check and sometimes no application necessary. That alone should tell you something wonky is going on. You have to at least fill out an application and provide some personal information for any decent credit card. These cards usually offer an extremely high line of credit. Like $10,000.00. Like an amount you know yourself no legitimate bank is going to approve you for. Here’s the catch: you can only use these cards on merchandise that the card sells. A special “store” of sorts. You can’t use them anywhere else, for anything else. They also usually carry extremely ridiculous interest rates and furthermore, do not report your payment history to credit bureaus. Thus, a waste of your time and money.

Okay, so Horizon Gold says $500 (nothing outlandish), no APR and reports to “a major credit bureau”. It does, however state that it can only be used at the website. Still, in my opinion not a good deal. You can get a secured card with almost any bank that can at least be used at the grocery store if you need it.

2.  Fee Heavy Prepaid Cards

These are the cards that most post bankruptcy filers decide to give a whirl. The problem is that sometimes prepaid cards include obnoxious fees, such as an application fee, a processing fee, a monthly fee and a yearly fee. If it’s a prepaid card, you’re loading it with your own money in the first place. Add on all of the fees and you’re also paying to use your own money. These cards sometimes do not report to the credit bureaus either.

3.  Unsecured Cards with A Lot of Fees and Available Limit

Sure it’s unsecured, but again, the fees can add up to almost the entire limit that you are allowed. Here is an example from Applied Bank:

This card says “credit bureau reporting” which is probably better than none at all, although I’m not quite sure what it means. There are also no application or processing fees and cardholders receive a $500 credit limit. If you notice from the chart above, though, there is a monthly fee of $15.00 which starts the second year, plus the annual fee of $125 that you pay the first year. The APR is 29.99% and there is no grace period.

This seems to be a step up from a regular secured card, except with a secured card of course you have to pay a deposit which is held in case you default.

The Best of the Bad Credit-Credit Cards

This is why Orchard Bank is one of the better cards for those with bad credit. The fees are lower, but you also have a card that can be used anywhere as well as a payment history to help rebuild or build your credit. You can also answer a few short questions to see which card you will qualify for, and more than one bad credit applicant has been pleasantly surprised when they find out they’re approved for a better card than they thought.

Otherwise, like I said, wait a little bit. Here is the list of credit cards I was approved for just over a year after I filed Chapter 7.  Your credit is probably not as bad as you think, so don’t let that feeling of desperation cost you more money then it needs to.

Good luck!