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Bankruptcy, Foreclosure, No Problem!
"The Truth About Credit After Bankruptcy"
Have you heard the advertisements?
“With the current economy downturn and the rising of oil and food prices, many people are finding it harder to make ends meet. Debt, be it mortgage, credit card, car loan etc. are very hard to be paid in time. Filing for bankruptcy is an option to escape paying those debts. CALL NOW”
It is now prime time for Law Firms that are “helping” people all over the world file bankruptcy. But is bankruptcy really a good thing to do?
Bankruptcy and Foreclosure can hurt your financial future and should be a Last Option to get out of a bad debt situation. The steps to avoiding bankruptcy usually come down to a change in spending habits. This is why it is always good to get your personal finances in order.
But even though bankruptcy can be a humiliating thing and can hinder you for years to come… it’s not the end of the world. You may be able to recover a lot faster than you think! Consider the following article about credit after bankruptcy and/or foreclosure by Caroline Fouts from the Debt Free Bible (http://www.debtfreebible.com).
Why Bankruptcy and Foreclosure Affect Your Credit Score LESS Than You Think
by Caroline Fouts
Bankruptcy Filings are on the Rise
In first half of this year, bankruptcy filings in the US rose 48 percent over the same period for the previous year, with 391,105 households with consumer debt filing for bankruptcy. (Source: American Bankruptcy Institute)
Samuel J Gerdano, the Executive Director of the American Bankruptcy Institute reported that "The new upward trend in bankruptcies reflects the economic reality of households under increasing financial stress. [...] We expect bankruptcy filings to continue to rise for the balance of the year."
The Foreclosure Epidemic
The sub-prime mortgage meltdown and the resulting spike in foreclosures have contributed to some consumers' need to file bankruptcy. In October 224,451 foreclosures were filed nationwide, up 94% from October according to RealtyTrac.
According to Daren Blomquist, a spokesman for RealtyTrac, foreclosures could hit homeowners even harder in the year ahead. As the interest rates on many adjustable-rate mortgages reset, mortgage payments could rise beyond some borrowers' ability to pay.
"The other side of the vise pressing on these people is that it's harder to refinance because lenders' standards are tighter," Blomquist said.
The drastic change in the housing market has even caught some real estate professionals off guard. A couple of years ago, Rob Rozzen, a real-estate agent in Las Vegas, bought 16 homes at the height of the boom. He hoped that the appreciation in his investment properties would provide a comfortable retirement.
When he was no longer able to keep up with the monthly mortgage payments that totaled $45,000, he stopped making payments. The lenders foreclosed on all of his investment properties, which he says caused his credit score to drop from 730 to the high 400s.
Now Mr. Rozzen says he is considering filing bankruptcy. He says he had no other option but to walk away from his investment properties, "You get to a point where your hands are tied."
Credit CAN be Restored After Bankruptcy
If you've got financial troubles, it's cold comfort to know that you're not alone. But there is some good news. You can rebuild a good credit rating after bankruptcy, and it can be faster than you might expect.
Anita Burleson filed for bankruptcy a couple of years ago and has had difficulty reestablishing credit. But she knows that some other debtors have successfully borrowed after their bankruptcies.
"When I was in bankruptcy court, there was a couple that had filed for bankruptcy twice prior to this one," Burleson said. "How could they get enough credit to get them into this much debt (three times)?"
Just about anyone can get credit soon after a bankruptcy, if they know how.
What Effect Does Bankruptcy have on your Credit Rating?
Of course, filing a bankruptcy has a negative effect on your credit rating. A Chapter 7 bankruptcy can stay on your credit report for 10 years, as can a Chapter 13 filing (although 7 years is typical). Plus, debts that are discharged through bankruptcy are not automatically removed from your credit report, and may continue to show as derogatory items unless steps are taken to clean up your credit report.
Lenders are primarily interested in the last 12 to 24 months of a borrower's credit history. The challenge for the post-bankruptcy borrower is convince lenders that he or she has turned a new leaf... that the bankruptcy is old information, and the borrower now has his or her finances well under control.
Naturally, it is vital that no new late payments appear on your credit report. A consumer wants to distance him or herself from the bankruptcy. To convince lenders that your financial picture has changed since the bankruptcy, you have to show a new, clean credit history. Even one new report of a late payment may cause lenders to believe the potential borrower is still suffering financial difficulties.
From a creditor's perspective, there are some advantages to lending to someone who has recently filed bankruptcy. The fact that the bankruptcy has discharged old, pre-existing debts makes it easier for many borrowers to repay new debts. Out from under the obligation to repay the old debt, these borrowers are also now free from the threat of potential judgments, wage garnishments or other collection efforts that might limit the borrower's available funds to repay the new debts.
In addition, federal law prohibits debtors who have had debts discharged by a previous bankruptcy from having new debts discharged for as long as 8 years after the original bankruptcy filing. See 11 U.S.C.A. Section 727(a)(8) and 11 U.S.C. Section 1328(f).) So a lender can be assured that any borrower who has recently discharged debts in bankruptcy won't be able to discharge any new loan for years.
Rebuild Credit with a Secured Loan
It's always safer for a lender to make a loan that is secured by some form of property rather than an unsecured loan. After all, if the borrower should default, the lender can recover the amount they lent from the security property, whether it's a car, home, or funds on deposit in a bank account.
The safety of having a backup source for repayment makes lenders more likely to offer secured loans to consumers reestablishing credit after a bankruptcy.
Expect to Pay More—but Not For Long
Offering the bank collateral may get you a loan, but it won't get you a low interest rate—at least initially. Immediately after a bankruptcy, you should expect to pay a higher interest rate on just about any kind of loan.
Steve Rhode, president of Myvesta.org, says families with a good credit history pay an average of $1,100 each month for mortgage and auto loans. But, due to higher interest rates, after a bankruptcy, a family pays almost $1,900 for the same items—an increase of approximately $800 per month.
But the high interest rates don't have to last forever. Once a consumer has started to re-establish their post-bankruptcy credit, he or she can refinance their loans at lower rates. And it can happen pretty quickly.
"My first vehicle out of bankruptcy (had an interest rate of) 21%," said Chance Nelson, an Indianapolis man who applied for and got a car loan just a few months after bankruptcy discharged his debts. "After paying this for about two years, I went and traded it in and purchased another (at) 13.99%." Through a series of re-finances, within 5 years of filing bankruptcy, the interest rate on Nelson's auto loan was down to just 6%.
Of course, if you plan to refinance any loan, be sure it doesn't have a pre-payment penalty. As your credit rating improves and lower interest rates become available to you, refinancing becomes an increasingly attractive option.
Subprime Merchandise Cards at www.CSBCards.com
One type of loan that is available to virtually all post-bankruptcy borrowers is a subprime merchandise card. This is a credit card that is easy to obtain but can only be used for online merchandise. It is NOT a visa or mastercard but reports to the credit bureau like one. This allows you to add new positive credit on your report quickly since virtually everyone is approved.
A subprime merchandise card works by reporting $5,000 in credit on your report and thereby increasing your high credit limit while at the same time lowering your debt to credit ratio. The end result is a significant improvement in your overall credit profile. Again, while it is not a visa or mastercard it does give you the credit benefits of one.
In spite of these limitations, for a post-bankruptcy borrower who needs to establish new credit, a subprime merchandise card is the best option. Many of these cards can be found at the website: www.CSBCards.com
Bankruptcy is Serious, but Doesn't Last Forever
The decision to file for bankruptcy is very serious and has far-reaching consequences. It should never be entered into lightly. If you are thinking about filing bankruptcy, discuss your legal rights with an attorney.
Credit ratings can plummet as a result of a bankruptcy filing. It usually takes some planning, patience, and the willingness to pay high interest rates for a while to reestablish a good credit rating.
To rebuild good credit, you will have to maintain a history of timely payments, get a couple of new loans, and avoid over using your new lines of credit. But since lenders focus primarily on the last 12 to 24 months of a borrower's credit history, it doesn't have to take long to restore your credit and have access to loans at conventional interest rates. Currently, subprime merchandise cards seem to be the credit challenged consumers secret weapon. To find out more about them just visit the website: www.CSBCards.com
So until next time,
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