Americans currently owe an average of $16,000 per household in credit card debt. Or, if you look at it on a national scale that equates to US$1 trillion in debt. This enormous figure represents 20% of the total national debt, a situation which has worsened dramatically since the financial crisis of 2008.
Credit card debt is often the primary cause of bankruptcy cases, overshadowed only by mortgage debt. Secured credit cards can be used to rebuild your credit score, which is especially useful if you’ve just come out of the bankruptcy process.
What is a secured credit card?
These are credit cards with a fixed spending limit which is backed up by a set amount of cash you’ve deposited with your bank. So, if you’re given a secured credit card with a $250 spending limit you’ll be expected to deposit $250 in your bank account. You can never spend more than the $250 limit, which helps eliminate uncontrolled spending habits, and you also can’t use the deposited $250 to repay your credit card spending. Why? Because it protects the lender if you prove yourself incapable of managing your new credit card.
So, how do you actually use a secured credit card to rebuild your FICO score?
Does It Count?
Not every secured credit card company will report back to credit bureaus such as Equifax or Experian. The card you choose must provide these credit bureaus with information on your spending, or you have no hope of improving your credit score. Basically you need to shop around and find a card that suits your purpose, and not just the first company that signs you up.
You might not be familiar with the term “foreclosure complaint” this happens when you’ve fallen into arrears on your mortgage, and your lender is taking their first steps towards repossessing your home.
There are an unfortunate number of myths circulating both online and offline about how to deal with a foreclosure complaint, many of which could result in even more damage to your finances. Let’s take a look at the most common ones.
#1 Just Ignore It
This is probably what got you into financial hot water in the first place, and we can assure you that ignoring a foreclosure complaint is the worst possible way to deal with it. You’re given 35 days to respond to this legal document, but failing that your lender is within their rights to proceed with the foreclosure process.
#2 Representing Yourself
Some people decide that they’ll represent themselves on the day of their foreclosure hearing, play to the judge’s sympathies with a sob story, and then walk away with a reprieve for several months. This is a bad idea because no matter where you live in the United States any court you attend will have heard every sob story imaginable. If you’ve already chosen to ignore the foreclosure complaint, in the hope that you can throw yourself at the mercy of the court, then you’re in for a rude awakening.
Being in debt is a source of almost constant stress for people who feel they have no means of dealing with it. If you then add in the prospect of having to file for bankruptcy, it’s simply too much for the average individual to deal with. It’s difficult to understand what it feels like to be staring at a mountain of unmanageable debt unless you’ve experienced it. In most cases people become paralyzed by fear instead of taking action to resolve the problem they’re facing.
In addition to this, being in serious debt has a certain stigma attached to it, and most people would rather face homelessness than admit they’re not in control of their own finances. The odd thing is that more affluent people are more likely to bury their heads in the sand about their debt than people who have been living on the breadline their entire lives.
The good news is that there’s a lot of professional help available to you, from financial counseling all the way through to bankruptcy attorneys like me. A bankruptcy attorney can help ensure you get the best possible deal from the court system.
Why then do a surprising number of people avoid speaking to a bankruptcy attorney?
#1 Ruined Credit Score
One of the most commonly believed myths is that filing for bankruptcy will destroy their credit score. This isn’t true because if you’re considering filing for bankruptcy then your FICO score has already bottomed out. It’s also worth mentioning that engaging the services of a bankruptcy attorney won’t extend the duration of the damage to your credit history – this is decided by the courts and is always within fixed limits.
A loan modification is the permanent restructuring of a specific debt, typically a personal loan or mortgage. The process is the exact same regardless of what type of loan you’re having modified, but we’ll only refer to mortgages for the purpose of clarity and brevity.
So, why would anyone need a loan modified? The primary reason people ask for this is because they can’t afford their current repayment schedule, and the mortgage is now running the risk of becoming delinquent, and then entering the foreclosure process.
In terms of what your lender can do to offer you a loan modification, this can take the form of a reduced interest rate on your mortgage, converting it from a variable rate mortgage to a fixed rate, or even extend the term of the loan, which results in lower monthly repayments but a higher overall amount repaid. Another option is to have your mortgage arrears added to the capital of the loan itself, with new repayment terms set, often marginally higher than your previous monthly payment.
How do you go about being granted a loan modification by your lender? You need to prove that you’re currently experiencing provable financial hardship, to the extent that you’re unable to meet your current mortgage repayments, or maintain a reasonable standard of living. Your lender will not take your word for this, so expect to be asked to furnish them with documents such as:
- Bank statements
- Proof of earnings/wage slips
- Utility bills
- Credit card statements
- Copies of finance agreements
It might come as a surprise to some, but errors on credit reports are remarkably common. In fact, it’s estimated that at least 10% of all credit reports contain errors of one kind or another, with the potential side effect of having a demonstrable impact on your financial standing through your FICO score.
Here are some of the more typical problems you might find on your credit report
If you have a common name (e.g. Jim Brown), you might find your name has been misspelled. Your telephone number, address or social security number might also be incorrect. More troubling are errors where you might be named as the sole owner of a particular account/debt, when you’re actually just an authorized user or co-signer of that debt. These are all errors you need to remedy as soon as possible.
Other People’s Debts
Identity theft is a growing problem in the United States and elsewhere in the world. It involves somebody stealing some of your personal information to create a fake identity with. They then use this alternate identity to run up debt in your name, often to the tune of tens of thousands of dollars. Resolving this type of error will require the help of law enforcement, and the credit reporting bureaus too.
Because we live in a society where being burdened with debt is considered to be the norm, it’s quite possible that you have a debt listed on your credit report in the name of an ex-spouse or partner. You might have co-signed for this debt in the past, but you need to make sure your ex is still paying their part of it, otherwise your FICO score will suffer.
A Preferred Creditor lawsuit is the very last thing most businesses want, but they’re also not something you can predict. They’re bad news for a couple of reasons, but the main one being that one of your debtors has just filed for bankruptcy, which means you’ll need to find a way to offset that bad debt.
Preference claims are a legal way of ensuring that no one creditor is given preferred treatment over another during any bankruptcy filing. There is the potential for all payments made to your business by a specific debtor to be reimbursed to them, becoming part of their bankruptcy estate in the process.
There are two timeframes to consider here. If a debtor paid money to what is termed an insider (family, friend or associates), payments over the period of the 12 months prior to them filing for bankruptcy can be recalled into the bankruptcy estate. An outside (business the debtor purchased from) must adhere to a preference period of 90 days before their debtor became insolvent.
The court-appointed trustee can, and will, request that money paid to your business is returned to the debtor. The logic behind this is that this money can then be used to pay all creditors an equal amount of money, instead of one single creditor having their entire bill paid, hence the term ‘Preference Claims’.
Defense Against Such Claims
You have a number of defense options, thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act, 2005, to defend your business revenue from a lawsuit of this type.
The court system of the United States provides more than adequate protection for people or businesses who find themselves in financial distress. Fortunately as a creditor you also have rights when it comes to claiming money owed to you. In even better news the process for actually reclaiming what’s owed to you is remarkably straightforward, and all thanks to sections 501 and 502 of the U.S. Bankruptcy Code.
There are a number of considerations to take into account first, and these are in relation to the type of debt owed to you. Firstly if it’s a secured debt then you generally will not have to pursue your debtor by filing a ‘Proof of Claim’. If, however, the debt is unsecured then it makes sense to file a ‘Proof of Claim’ at your earliest possible opportunity. You should file a claim of this type if there’s any doubt in your mind as so whether or not the debt owed to you is secured or unsecured.
Another important point to note is whether or not you can reclaim any money or assets even if you do file a ‘Proof of Claim’. If your client is filing for Chapter 7 then there’s a very good chance they’ll have most, if not all, of their debt discharged. It will be difficult for you to benefit from a Chapter 7 filing. However, a Chapter 13 filing by your debtor leaves you with an opportunity to recoup at least some of your losses.
In a clear-cut personal injury case you are able to clearly identify that a business was responsible for your injury e.g. a slip and fall accident, or a car accident. There are a number of situations where you might not be able to clearly prove that the other party was negligent, so you may be wondering if you have any legal recourse in a situation like this.
There are, in fact, two different ways of pursuing a personal injury claim even if you can’t prove negligence. The first of these is called ‘Strict Liability’ and the second is referred to as ‘Intentional Wrongs’, or an ‘Intentional Tort’.
If we take the example of a person who is injured during an automobile accident, but cannot prove that the other person was negligent because the owner of the car wasn’t driving at the time of the accident. In this situation strict liability will be with the defendant because they allowed another person to drive their car, with the implicit understanding that they would avoid causing an accident.
This type of liability also applies when you have suffered an injury by using a faulty product. Although you would ideally be able to prove that the manufacturer was negligent, strict liability means you can pursue a claim because the product or service was supplied in such a way that it could potentially cause risk or harm to a plaintiff.
There are two basic choices available to a business if and when it decides to declare bankruptcy. Chapter 7 and 11 are when a business has hit a financial wall, and can no longer stay operational. In filings of this type there is no exit process because the company will cease trading immediately, and investors stand very little chance of recovering their money.
Chapter 11 filing provides a business with an opportunity to restructure itself once it has reorganized its debts, and other aspects of its operation. A Chapter 11 bankruptcy petition also allows the business to continue trading, so that it can generate enough revenue to repay its creditors, and investors.
During the initial stages of a Chapter 11 bankruptcy investors, and other interested parties, should expect the stock value to drop to junk levels for a prolonged period of time. The reason for this is that most investors will bail out, so that creates a run on the company’s stock i.e. the more investors that dump stock, the more this encourages other investors to take the same steps. The difference here is that because the stock would be delisted as part of the Chapter 11 filing, so the only people trading in these stocks would be doing so “over the counter”.
Chapter 11 bankruptcy filings are complex, and take a significant amount of work to process successfully, resulting in many businesses avoiding them unless they have no other choice. Only companies that have a real interest in staying afloat would even consider this type of bankruptcy petition.
There’s a lot of stress involved in the decision to declare bankruptcy. In fact, it may have taken you several weeks, or months, to arrive at the decision to petition the courts for bankruptcy case, so you won’t have focused too much on what comes afterwards.
It is, however, very important to understand a basic timetable for what takes place after you’ve submitted your filing.
The court assigns a unique number to your bankruptcy case, which can be quoted to creditors if they’re looking for payment. This is a clear indication for them that you are petitioning to have your debts discharged.
A court-appointed trustee will then be assigned to your case. The trustee’s job is to ask you questions about your existing debts, ensuring that you’re being honest with the courts. Any garnishing of your wages will stop once your attorney sends copies of your filings to the relevant parties. All lawsuits against you will also stop at this point – part of the automatic stay on proceedings that your filing entitles you to.
Somewhere between 4 and 6 weeks after your filing, you will be invited to appear at a court meeting with your creditors. This is often referred to as a ‘341 meeting’, and might seem a bit daunting. But the truth is that very few creditors actually attend these meetings.