Deciding Whether to File for Bankruptcy: Consumer Debt Advice from NCLC
by John Rao, National Consumer Law Center


Thirteenth in a series from NCLC to help families in financial difficulty. Click here for a list linking to all the articles in this series.

Federal law provides the right to file bankruptcy for people with debt problems.
[Note: Bankruptcy is as old as our Government -- Bankruptcy is in the Constitution.]

This article explains

-- how bankruptcy can help you and when it may be the wrong solution for you.

-- the difference between chapter 7 and 13 bankruptcies,

-- how you know the best time to file for bankruptcy, and

-- what a bankruptcy will cost.

Importantly, the article corrects common misconceptions about bankruptcy.

While you should consider other options first, do not wait until the last minute to think about bankruptcy.
Important rights may be lost by delay.

What Bankruptcy Can and Cannot Do

Bankruptcy may make it possible for you to:

• 
  
• • Eliminate your responsibility for many of your debts and get a fresh start. When a debt is discharged at the close of a successful bankruptcy, you have no further legal obligation to pay that debt.
  
• 
  
• • Stop foreclosure on your house or manufactured home and allow you an opportunity to catch up on missed payments.
  
• 
  
• • Prevent repossession of your car or other property, or force the creditor to return property even after it has been repossessed.
  
• 
  
• • Stop wage garnishment, debt collection harassment, and other similar collection activities to give you some breathing room.
  
• 
  
• • Prevent termination of utility service or restore service if it has already been terminated.
  
• 
  
• • Lower the monthly payments on some debts, including car loans.
  
• 
  
• • Allow you an opportunity to challenge the claims of creditors who seek to collect more than they are legally entitled.
  

Bankruptcy, however, cannot cure every financial problem, nor is it an appropriate step for every individual.

In bankruptcy, it is usually not possible to:

• 
  
• • Eliminate certain rights of “secured” creditors. A “secured” creditor has taken some form of lien on your property as collateral for a debt. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process, but you generally cannot keep the collateral unless you continue to pay the debt.
  
• 
  
• • Discharge certain types of special debts, such as child support, alimony, most student loans, court restitution orders, criminal fines, and some taxes.
  
• 
  
• • Protect all cosigners on their debts. When a relative or friend has cosigned a loan and you discharge the loan in bankruptcy, the cosigner may still have an obligation to repay all or part of the loan.
  
• 
  
• • Discharge debts that are incurred after bankruptcy has been filed.
  

Understanding the Difference Between a Chapter 7 and a Chapter 13 Bankruptcy

Your rights are very different depending on whether you file a chapter 7 or a chapter 13 bankruptcy.

In a chapter 7 bankruptcy (called a “liquidation”), you eliminate most of your debts, but may lose your property other than “exempt” property—that is property the law says creditors cannot reach unless they take that property as collateral. For many families most of their property is exempt. In a chapter 13 case (called a “reorganization”), you keep all your property, and pay a portion or all of your debts in installments over a period of three to five years.


How a Bankruptcy Can Help You

An Immediate Stop of Foreclosures, Evictions, Repossessions, Utility Shut-Offs, Garnishments, and Other Creditor Actions.

Your bankruptcy filing will automatically and immediately, without any further legal proceedings, stop most creditor actions against you and your property, at least temporarily.


Your request for bankruptcy protection creates an “automatic stay,” which stops the continuation of or the start of repossessions, garnishments, attachments, utility shut-offs, foreclosures, evictions, and debt collection harassment. The automatic stay provides you time to sort things out and address your financial problems. A creditor cannot take action against you or your property without bankruptcy court permission. Some creditors seek such permission immediately; others never seek permission.


Permission to continue collection activity is rarely granted to unsecured creditors. Secured creditors can get “relief from the stay” in a chapter 7 case to continue foreclosure or repossession of their collateral. But an automatic stay will almost always continue to be in effect to protect you in a chapter 13 bankruptcy case as long as you are making payments on the secured debt.


If the creditor takes action against you despite the automatic stay, the creditor may have to pay you damages and attorney fees and the creditor’s actions against you can be reversed. For example, a foreclosure sale which is held in violation of the automatic stay can be set aside.


Discharge of Most Debts.

When you successfully complete a bankruptcy, there is a “discharge” (that is, a cancellation) of many of your unsecured debts, such as medical bills and credit card obligations, which eliminates all debt collection and other actions concerning those debts. Certain debts may not be discharged, such as most taxes, liens associated with many secured debts, alimony, child support, and debts you incurred after the bankruptcy case was started. After bankruptcy, you will continue to owe those debts. Student loans can be discharged only if you can prove that repayment will be an undue hardship on you and your family.


Bankruptcy cannot prevent creditors from taking your home or car unless you make sufficient payments on your mortgage or car loan. The bankruptcy though prevents these creditors from seeking additional cash from you after they take the collateral. For example, if you do not pay a car loan, the creditor can seize and sell your car, but the bankruptcy prevents the creditor from seeking additional payment from you if the car’s sale price does not cover the full amount of the debt.


Protection Against Wage Garnishment, Bank Seizures, and Enforcement of Judgment Liens.

After you file bankruptcy, creditors are prohibited from garnishing your wages or other income or your bank account. Bankruptcy even stops government agencies from recovering Social Security or other public benefit overpayments, so long as your receipt of the overpayment was not based on fraud.


Bankruptcy also is an effective tool to deal with some types of court judgments against you. If a court judgment for money does not create a lien against your property, that judgment debt can be discharged in bankruptcy. If the judgment does create a lien on your property, you may ask the bankruptcy court to remove the lien if it affects “exempt property,” and then the creditor can never touch that property.


Protection of Your Household Goods from Seizure.

Most families’ household goods are exempt from seizure—you keep them even in bankruptcy. This is the case even when a creditor has taken household goods as security for a loan, as long as that loan was not used to purchase those goods. If those household goods were taken as security to purchase those goods (such as when you purchase furniture on credit and the store takes the furniture as collateral for the loan), then see the next paragraphs on “secured creditors” where your rights are explained.


Added Flexibility in Dealing with Auto Loans, Mortgages, and Other Secured Creditors.

Bankruptcy can help deal with creditors who take your property as collateral for their loans, such as car loans and mortgage loans. You still have to make payments on these loans if you want to keep the collateral. However, bankruptcy does provide added flexibility in dealing with these debts.


A chapter 7 bankruptcy lets you keep your car by paying the creditor the lesser of what you owe on the loan or the car’s value. If your car is worth $1,000, and the remaining amount on your car loan is $3,000, you can keep the car by paying the creditor only the $1,000. The $1,000 payment usually must be made in a lump sum before the chapter 7 bankruptcy ends (usually after three to five months). Some creditors instead let you pay that amount in installments over a number of months even after the bankruptcy ends, but that is up to the creditor.


A chapter 13 bankruptcy gives you greater flexibility to keep your property. For example, if you are six months delinquent on a mortgage, filing a chapter 13 bankruptcy stops a threatened foreclosure and allows you to gradually catch up on the back-payments, over as many as three to five years. In some cases a chapter 13 filing also allows you to make lower monthly payments by extending the repayment period or lowering the loan’s interest rate. But you have to keep making payments until the loan is paid off.


Utility Terminations.

A bankruptcy filing stops a threatened utility termination and restores terminated service, at least for twenty days. To keep utility service beyond twenty days after the bankruptcy filing, you provide a security deposit (usually equal to approximately twice the average monthly bill) and keep current on new utility charges, but you need not pay the past-due charges incurred before the bankruptcy was filed. Often you can take sixty days to pay the deposit and some utilities may not require a deposit.


Driver Licenses.

If your driver’s license was or will be taken away because you have not paid a court judgment, such as one arising from an automobile accident, bankruptcy normally can discharge the obligation to pay the court judgment, and you then have a right to regain or retain the driver’s license.


The Best Time to File for Bankruptcy

It is often stated that bankruptcy is a “last resort” for financially troubled consumers. This is not really true.

In some cases, legal rights can be lost by delaying a bankruptcy. Be especially careful to get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.


For example, bankruptcy may not help you after your home is sold at a foreclosure sale or money in your bank account is seized. Bankruptcy can stop an eviction proceeding, but you have fewer rights in bankruptcy after a court has ordered you to be evicted. Act quickly to consider your bankruptcy rights.


While not ideal, all is not lost if you wait to the last minute before a foreclosure, repossession, or garnishment. Bankruptcies in an emergency can be filed with little preparation by filing only a brief petition, a statement of your Social Security number, and a list containing the names and addresses of your creditors. Additional forms must be completed and filed shortly thereafter.


But you must still complete an approved budget and credit counseling briefing before filing your bankruptcy. The counseling usually takes less than an hour, and can be done over the phone or over the internet.


On the other hand, if you are not facing immediate loss of property, but in the future you will incur new debts that you will not be able to pay, a bankruptcy filing should be delayed until you incur those new debts. New debts incurred after the bankruptcy filing are not discharged in that bankruptcy case—you will still be obligated to repay those new debts. If you file too soon and incur a lot of debt after the filing, you may be back to where you started from or even worse.


If you file a first bankruptcy too soon, you will find it more difficult to file a second bankruptcy to discharge the new debts incurred after you file the first bankruptcy. After you first file a chapter 7 bankruptcy, you have to wait eight years to file another chapter 7 case. There is more flexibility to file a chapter 13 case after first filing a chapter 7 bankruptcy. Thus it is a good idea to wait to file for bankruptcy until your debts have peaked.


If you decide to wait to file bankruptcy, avoid the temptation to go on expensive vacations or credit card shopping sprees that you do not intend to repay. In a chapter 7 bankruptcy, debts incurred in this way can be declared non-dischargeable. On the other hand, pre-bankruptcy expenses for medical care and other essentials are rarely challenged. Similarly, it may make sense before filing bankruptcy to purchase in installments needed medical or automobile insurance.


The Cost of Filing Bankruptcy

Unfortunately, it is expensive to file bankruptcy. Bankruptcy is a legal proceeding with complicated rules and paperwork. You may want to get professional legal help, especially if you hope to use bankruptcy to prevent foreclosure or repossession. Most bankruptcy attorneys provide a free consultation to help you decide whether bankruptcy is the right choice. If the attorney takes the case, the attorney will expect to be paid, unless he or she works for a nonprofit legal services office or is doing the bankruptcy pro-bono.


You also have to pay the court a bankruptcy filing fee—$310 for chapter 13 or $335 for chapter 7. The fee can be paid in four installments over 120 days (or 180 days with court permission). You can also ask the court to waive the filing fee in a chapter 7 case if your household income is less than 150% of the official poverty guidelines (for 2018, $24,690 for a family of two or $37,650 for a family of four). No waiver is allowed in a chapter 13 case.


In a chapter 13 case, you pay your debts over time, and you usually have to pay the trustee handling your payments a 10% commission on each payment. While this can add up, you will be paying far lower interest on your debts in a chapter 13 plan than if you had not filed bankruptcy. Even more significantly in a chapter 13 plan, you may only have to repay a small percentage of what you owe on most of your unsecured debts.


Common Misconceptions About Bankruptcy

When You File Bankruptcy Typically You Will Lose Little or None of Your Property.

People are wrong who believe that a bankruptcy filing results in the loss of most of their property. Everyone who files bankruptcy gets to keep some of their possessions, and most people get to keep all of them.


No matter the type of bankruptcy you file, unless property is collateral for a loan, you get to keep all your property that is protected by “exemption” laws. Exemption laws typically protect clothes, appliances, furniture, jewelry, and often even your car and home.


An exemption law may state that you get to keep property that is worth less than a certain amount. What that property is worth is based not on how much the property cost, but rather on your “equity” in the property: the amount that the property is worth in its present condition minus how much you owe on a loan for that property.


For example, if an exemption law protects a $2,000 motor vehicle, this dollar amount applies to $2,000 of your equity in the car, not to the total value of the car. If your car has a total value of $7,000 today with a $5,000 car loan balance, you have $2,000 in equity in the car. In this scenario, you can fully protect a $7,000 car with the $2,000 exemption. You will still have to repay the $5,000 car loan in the bankruptcy or the auto lender will take the car, but you won’t lose the car to pay your other creditors.


What property and the amount of that property that is exempt varies widely from state to state and the application of exemptions in bankruptcy can be complex, particularly if you have moved within the last two years to a different state or bought a home within the last 40 months. You should discuss what property is exempt with a bankruptcy attorney, but the general rule of thumb is that, for most consumers filing bankruptcy, much of their property is exempt.


What property you keep also depends on the type of bankruptcy you choose—a chapter 7 or a chapter 13. In a chapter 7 case, you keep your exempt possessions, but other property may be sold, with the money distributed to pay your creditors. In a chapter 13 case, you keep all your property by paying their nonexempt value over time from future income under a plan approved by the bankruptcy court. If you have very valuable property, it might be sold in a chapter 7 bankruptcy, but you keep it if you pay its value to your creditors over a number of years in a chapter 13 plan.


The Effect of Bankruptcy on Your Credit Report.

The effect of a bankruptcy on your credit report is of understandable concern. Most often, you should not worry about bankruptcy making it harder for you to obtain credit. If you are delinquent on a number of debts, this already appears on your credit record. A bankruptcy is unlikely to make your credit rating any worse, but instead may make it easier for you to obtain future credit.


New creditors will see that old obligations have been discharged in the bankruptcy and that you have fewer other creditors competing with them for payment. Creditors also recognize that you cannot receive a second chapter 7 bankruptcy discharge for another eight years.


After bankruptcy, your credit file will also list the outstanding balance as zero dollars for each of your debts. The credit file will list the fact that you filed bankruptcy and that certain debts at one time were delinquent, but creditors are most interested in what you owe now on each debt. That your credit report shows that you owe nothing on a debt improves your credit standing.


After your bankruptcy is complete, check your credit report to make sure all the debts you discharged in bankruptcy are listed as now owing zero dollars. File a dispute with the credit bureaus if your discharged debts continue to be listed as having a balance owed.


Bankruptcy also often will enhance the stability of your employment and income. Wage garnishments, continuous collection calls, car repossessions, telephone disconnections, and other consequences of an unaffordable debt burden are eliminated, and this should help you find and hold steady employment. Steady income is key to creditworthiness.


Bankruptcy will make it more difficult for you to obtain a new conventional mortgage to purchase a home. Even then, most lenders will not hold the bankruptcy against you if you re-establish a good credit reputation for two to four years after your bankruptcy.


After bankruptcy, some new lenders may demand collateral as security, ask for a cosigner, or want to know why bankruptcy was filed. Other creditors, such as some local retailers, may not even check your credit report.


Bankruptcies stay on your credit record for ten years from the bankruptcy filing, while your debts are usually only reported for seven years from their delinquency. If delinquencies on your debts are five or six years old, bankruptcy will not help your credit record. The debts will be deleted from your credit report within a year or two, while the bankruptcy will stay on your record for ten years.


If you file bankruptcy, you usually do not need to go to court, unless something out of the ordinary occurs.

You will have to attend one meeting with the bankruptcy trustee (not with a judge). Creditors are invited to that meeting but rarely attend. In the rare case that you do receive a notice to go to court, it is important that you go and also check with your attorney if you have one. Before your case is closed, you must also take a course in personal finances, which will last for approximately two hours.


The Effect of Bankruptcy on Your Reputation in the Community.

Most people find their reputations do not suffer from filing bankruptcy. Bankruptcies are not generally announced publicly, although they are a matter of public record. It is unlikely that your friends and neighbors will know that you filed bankruptcy unless you tell them.


However, especially in a small town, where debts are owed to local people, reputational issues connected with filing bankruptcy may arise. In such a situation, weigh possible embarrassment and damage to reputation against bankruptcy’s potential advantages. If you believe that your reputation in a small town is a concern, you may choose to voluntarily pay selected debts after bankruptcy, but you cannot leave selected creditors out of the bankruptcy process entirely.


Feelings of Moral Obligation.

Most people want to pay their debts and make every effort to do so if payment is possible. If bankruptcy is the right solution to your financial problems, you should balance these feelings of obligation with the importance of protecting your family.


Bankruptcy is a legal right. A provision concerning bankruptcy is even contained in the United States Constitution. Big corporations like Kmart, American Airlines, Chrysler, and Macy’s, and famous people like Toni Braxton, Tammy Wynette, Larry King, Mickey Rooney, Henry Ford, and Walt Disney have all chosen to file bankruptcy.

The book of Deuteronomy states: At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord’s release hath been proclaimed. (Deut. 15:1–2.)
Most importantly, during hard times, bankruptcy may be the only way to provide your family with food, clothing, and shelter. This book explores alternatives to bankruptcy, and these should be considered carefully. But it may be that bankruptcy is your best or only realistic alternative.


Potential Discrimination After Bankruptcy. The federal bankruptcy law offers you protection against being discriminated against because you have filed for bankruptcy. Government agencies, such as housing authorities and licensing departments, cannot deny you benefits because of a previous bankruptcy, including debts discharged in bankruptcy that were owed to those agencies. Government agencies and private entities involved in student loan programs also cannot discriminate against you based upon a bankruptcy filing.


Employers are not permitted to discriminate against you for filing bankruptcy. However, for some sensitive jobs which involve money or security, your bankruptcy may be considered evidence of financial problems which could be detrimental to your work. Bankruptcy law does not prevent discrimination by others, including private creditors, deciding whether to grant you any new loans.


When Bankruptcy May Be the Wrong Solution

There are at least seven situations in which bankruptcy may not be the right option for you:

1. 1) If all your assets and income are exempt, then you are “collection-proof.”
   (See a previous article in this series: Wage Garnishments and Bank Account Seizures for more information about what it means to be “collection-proof.”) In that case, most creditors can do virtually nothing to harm you even if you don’t filing bankruptcy. At which point, there may not be a compelling reason to file for bankruptcy. Waiting until you are no longer collection-proof is generally more prudent than filing right away, unless you are concerned with a home mortgage, car loan, or other secured loan.
   
2. 
   
3. 2) The debts at issue are secured by your property—such as home mortgages or car loans—and you do not have sufficient income to keep up payments while also catching up on past-due amounts. Bankruptcy may not help you when the long-term expense of keeping your home or car exceeds your long-term income.
   
4. 
   
5. 3) You have valuable assets that are not exempt in the bankruptcy process and you do not want to lose these assets. A chapter 13 filing may still help if you can afford the necessary payments.
   
6. 
   
7. 4) Your main reason for filing bankruptcy is to discharge a student loan, alimony or child support obligations, court restitution orders, criminal fines, or some taxes. These obligations are difficult if not impossible to discharge in bankruptcy.
   
8. 
   
9. 5) You have only a few debts and strong defenses for each. Instead of filing for bankruptcy, you can raise these defenses aggressively. Usually the disputes can be settled out of court in an acceptable way. If they are not settled, you can use bankruptcy later.
   
10. 
    
11. 6) Because of a prior bankruptcy, you cannot receive a discharge in a chapter 7 bankruptcy. However, in most cases, a chapter 13 petition can still be filed.
    
12. 
    
13. 7) You can afford to pay all of your current debts without hardship.
    

Essentials About Credit Reporting: Consumer Debt Advice from National Consumer Law Center (NCLC)
by Chi Chi Wu of NCLC

This is the twelfth article in an NCLC series to give advice for families in financial difficulty. Other articles address such topics as debt collection harassment, medical debt, reverse mortgages, foreclosures and loan modifications, car repossessions, and wage and bank account garnishment. Click here for a list linking to all the articles in this series.

Understanding how a credit report works and how it affects a family is critical in allowing families to make the right choices in dealing with their debts and other obligations.

This article

-- sets out what families in financial difficulty should know about credit reporting and their credit score.
-- explains what is a credit report and a credit score
-- when non-payments affect a credit score
--  who sees your credit report and who does not
-- how to review your own credit report
-- ways to cope with a blemished credit report, and
-- how to rebuild your credit.


What Is a Credit Report and a Credit Score?Your credit report is a record of how you have borrowed and repaid debts. Almost every adult American has a credit file with each of the three major national credit bureaus: Experian, Equifax, and TransUnion. Many but not all creditors report each month electronically to one or more of the credit bureaus the status of each of their accounts.

Your credit report is a record of the history and description of the status of many of your credit accounts. It has basic personal information about you—Social Security number, birth date, current and former addresses, and employers. For many of your debts, the report will list the date you opened the account, the type of account (such as real estate, credit card, or installment), whether the account is currently open or has been closed, the monthly payment, the maximum credit limit, the latest activity on the account, the current balance, and any amounts that are past due.


Each account includes a code that explains whether the account is current, thirty days past due, sixty days past due, or ninety days past due, or if the account involves a repossession, charge off, turned over to a collection agency, or other collection activity. The report will also list under “inquiries” the names of creditors, employers, or insurers who have requested a copy of your credit report during the past year or two. It also includes creditors who have looked at your account to decide whether to send you an offer of new credit, but other creditors do not see this last item.


Many creditors will not even review all of this individual information in your account, but will only look at your credit score, which is a number that summarizes all the individual items in your credit report. There is no one scoring system that all credit bureaus and creditors use, but about 90% of the credit scores used by creditors are issued by FICO. A FICO credit score ranges from 350 to 900. FICO considers the following as detracting from your credit score:

• • History of missed payments (about 35% of the score).
• • High debt in comparison to your credit limits (about 30% of the score).
• • Small number of years of credit history (about 15% of the score).
• • Opening too many new accounts (about 10% of the score).
• • All credit of the same type (about 10% of the score).

How Does Continued Non-Payment Affect Your Credit Score?Consumers are rightfully concerned about their credit score, but you should not respond to debt collector pressures by paying overdue low priority debts ahead of high priority ones just because of these concerns. An overdue bill may damage your credit score but very often the damage has already happened by the time a debt collector is threatening you.


For credit card debt and other debt payable on a monthly basis, the creditor will report the status of the debt to credit bureaus every month. The biggest impact on your credit score will be when the debt is reported as 30 or 60 days overdue. Once that happens, your score will not take that much more of a hit if you are 90, 120, or 150 days overdue.
When your account is referred to a collection agency, and the collection agency reports the debt to a credit bureau, your credit score will take another big hit. Continued non-payment after that will not change your score nearly as much. By the time you are being contacted by a debt collector, it is too late to do much about your credit score—rushing to pay the debt won’t really help your score.


As a result, worry about your credit score should not be a reason to pay a late bill. Responding to the collector’s pressure may not help your credit score, but it will put at risk payments on higher priority debts, whose non-payment will have far more serious consequences. Also, if you pay off a debt that was already reported by a collector, the collection item will show in your report as “paid,” but your credit report will still show that the debt was in collection. If you want that information removed, you must get the collector’s written agreement to delete it and not all collectors will agree to do so.


Typically, hospitals, doctors, and other medical providers will not report your debt to a credit reporting agency. It is only if and when a medical debt is turned over to a collection agency that many—but not all—collection agencies will report the overdue debt to a credit bureau. In addition, the three major credit bureaus have agreed not to include any report on medical debt if that debt has been outstanding for less than six months. Reporting of a medical debt over six months will hurt your credit score. But after that first report, continued non-payment to the collection agency will not affect your score much.


Most utilities will not report your delinquencies to a credit bureau until they say the bill is uncollectible. Until then there may be no adverse impact on your credit score to be late in paying gas, electric, landline telephone, or water bills.


Landlords are unlikely to report overdue rent to a credit bureau, but particularly larger landlords are likely to report problems with tenants to special tenant screening companies that landlords use to evaluate applicants. Thus your rent payments are less likely to affect your credit score than your ability to find another apartment.


In a significant development, the Big Three credit bureaus are not reporting the vast majority of public records, such as collection lawsuits, court judgments against you, and tax liens. Of course, the creditor or collector seeking payment may already have reported the overdue debt to the credit bureau, even if a public record about that debt (e.g., judgment or lien) is not reported by the credit bureau.


Most negative information stays on your credit report for seven years, and then the credit bureau must remove it from your report. Bankruptcies stay on your report for ten years from the date of filing.


Who Sees Your Credit Report and Who Does Not

While your credit report will affect you in a surprising number of situations, it will not affect many other aspects of your life. You can expect that your report will be viewed by the following:

• • Creditors when you apply for credit. A low score can mean you will be denied credit or pay a higher interest rate.
• • Employers in most states to evaluate you for hiring, promotions, and other employment purposes. This is somewhat limited in a number of states and cities, such as California, Colorado, Connecticut, the District of Columbia, Hawaii, Illinois, Maryland, Nevada, New York City, Oregon, Vermont, and Washington.
• • Government agencies trying to collect child support and when considering your eligibility for public assistance.
• • Insurance companies using special credit scores for homeowners and auto insurance.
• • Landlords when deciding whether to rent an apartment to you.
• • Utilities are more commonly reviewing your credit score to determine whether to charge you a security deposit—not as to whether to provide you service.

Your credit report should not be a problem in the following situations:

• • Your application for federal student loans and grants. Except for parents, graduate students, and professional school students applying for PLUS loans or anyone applying for a private student loan.
• • Your credit report will not damage your friends or relations, and need not even affect your spouse. For example, a creditor is not allowed to look at your credit record if your spouse, child, or parent applies for credit and they are not relying on your income or assets.
• • Your reputation in the community. No one can obtain your credit record for curiosity, gossip, or to determine your reputation. Your credit record is just between you and creditors—your neighbors and friends should never see it.
• • Divorce, child custody, immigration, and other legal proceedings. Your credit report shouldn’t be used in proceedings such as applications for citizenship or to register to vote.

How to Review Your Credit Report

The first step in learning about your credit report is to order copies from the three major credit bureaus and read these reports carefully. Because there can be differences between the three major national credit bureaus, you should order your report from all three. You are entitled to one free copy of your report every year from each of the three major bureaus, but you must order from the centralized request service, and not from the individual credit bureaus:

• • Call 877-322-8228;
• • Go to www.annualcreditreport.com and click on “request your report through the mail,” print out and complete the Annual Credit Report Request Form and mail it to
  
• 
  
• Annual Credit Report Request Service
  
• P.O. Box 105281
  
• Atlanta, GA 30348-5281
  
• or
  
• • Order online at www.annualcreditreport.com.

The ordering process may be more difficult online because you will be asked security questions based on information in your report, which some people find hard to answer.


For your free report from each credit bureau, you can order all three at the same time, or stagger the three throughout the year. You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address.


The credit bureaus are also required to give you an additional free copy of your report if:

• • You have been denied credit within the past sixty days;
• • You are unemployed and will be applying for a job within the next sixty days;
• • You are receiving public assistance;
• • You have reason to believe that the file at the credit bureau contains inaccurate information due to fraud; or
• • You have requested a fraud alert.

For free reports based on these reasons, contact the credit bureau directly: Equifax at 800-685-1111, www.equifax.com; Experian at 888-397-3742, www.experian.com; Trans Union at 888-916-8800, www.transunion.com.


You can also purchase a credit report. Federal law limits this to $12 per report, and in some states the maximum is even less. Colorado, Georgia, Maryland, Massachusetts, New Jersey, and Vermont resident can get an additional free report.


Getting Your Credit Score.

Your free credit report will not come with your credit score. You have to specifically request your score, you may need to pay for it, and it may not even be based on the same scoring system as the score that your creditors use. But if a creditor rejects you or charges you a higher price for credit based on a credit score, it must give you a copy of that score and related information. Mortgage lenders are also required to give you information about your credit score for free. When you get your score, you will be sent the top four factors that most affect the score.

Beware Credit Monitoring and Other Subscription Products.

Avoid monthly or annual subscription packages sold by the credit bureaus for credit monitoring or identity theft protection. They provide limited value, are not as effective as security freezes at preventing identity theft, and are expensive and over-priced. You can sometimes find credit monitoring and other services available for free. Sometimes expensive subscription plans are advertised as being initially free, so be careful what you sign up for!

Coping with a Bad Credit Report

1) Avoid Credit Repair Agencies, also called credit services, credit clinics, or similar names.

Signing up with these agencies is almost always a really bad choice. They charge a hefty fee and usually cannot deliver what they promise. You generally can do a better job cleaning up your credit record at no cost, these agencies may even make matters worse for you or cause you legal problems.

2) Correct Errors in Your Report.

When you have unpaid bills damaging your credit score, the last thing you want is inaccurate information in your credit file making matters worse. It is amazingly common to find incorrect information in your credit file, and you can take steps to correct this information.

After reviewing the report you received from each of the three major credit bureaus, send a written dispute to each credit bureau that has reported incorrect information. The credit bureau by law must investigate the entry and correct the mistakes. You can also dispute the error with the creditor that supplied the incorrect information to the credit bureau, but you should always make sure you dispute it also with the credit bureau in order to preserve your legal rights. Even if the credit bureau told you they are making the correction, after a period of time obtain another credit report to see if the correction was actually made or whether it has popped up again. Also send the first bureau’s statement of correction to the other two bureaus to ensure it is corrected there too.


You can also send a statement to the credit bureau explaining damaging items. Credit bureaus are required to accept these statements if they relate to why information in the report is inaccurate. They cannot charge to include this statement in your report.


3) Clean Up Your File with the Help of the Creditor.

If the creditor insists information is accurate, the credit bureau is unlikely to change it in its files despite your written dispute. To prevail, you will have to convince the creditor supplying the information. Give the creditor whatever proof you have.

If your debt is in fact delinquent, you can try to improve your credit report by entering into an agreement with the creditor to pay all or some of the debt, up front or in installments. But you should get the creditor’s written agreement to inform the credit bureau to delete any reference to the debt ever being delinquent—otherwise the fact that you were previously delinquent will stay on your report. Another option is for the creditor to agree not to affirm the debt after you dispute it with the credit bureau. The bureau must remove the information if the creditor who supplied it does not affirm it is correct.


4) Prevent Identity Theft.

Just as you do not want inaccurate information on your report, you do not want negative information caused by an identity thief using your Social Security number and credit history to open new credit, cell phone, or other accounts, and then default on those accounts. Below are listed three ways to protect your credit report from identity theft.

The first way is to place a “security freeze” on your credit history, that prevents your credit history from being shared with potential creditors. If your credit files are frozen, a thief will probably not be able to get credit in your name. A new federal law makes security freezes free of charge. If you need to apply for credit, you can ask that the freeze be temporarily lifted.


A second way is to place a fraud alert on your credit report. A fraud alert is a statement added to your report asking creditors to check with you before issuing credit. It requires creditors to take steps to verify the applicant’s identity. This is a less effective than a security freeze in preventing identity theft.


When a credit bureau receives your fraud alert request, it notifies the other major credit bureaus to also initiate a fraud alert. An initial fraud alert lasts one year. An extended alert lasts seven years and requires you to provide additional information, including an identity theft report from an appropriate law enforcement agency.


A third approach is to place a credit “lock” on your report. A credit “lock” is a product that prevents creditors from accessing your credit report, similar to a security freeze. However, it is a voluntary product not governed by federal or state law, so you have fewer legal rights if something goes wrong with the lock.


5) Shop Around for the Best Credit Offer.

Predatory lenders look for consumers with blemished credit records to take unfair advantage with extraordinarily bad credit terms. Do not fall victim, but shop around. You will be surprised at how much better terms you may find even with your blemished credit record. The same credit score may be treated very differently by different creditors.

Don’t be afraid to shop for the best credit because you are worried that too many inquiries will lower your credit score. For some types of credit, such as mortgages or car loans, the credit scoring systems count multiple inquiries during a certain time period, such as 14 or 30 days, as only one inquiry because the system assumes you are shopping around. Even when a credit scoring system counts a large number of inquiries against you, it will have only a small impact on your score. Getting affordable credit and paying it off each month will outweigh any harm caused by too many inquiries.


6) Explain the Reason for a Low Credit Score.

When applying for a credit card for example, you will not have an opportunity to explain why your credit score is not representative of your creditworthiness. But other situations will allow you to do so, for example when applying for employment, for rental housing, for insurance, or for a mortgage. For example, you can explain that loss of a job due to an illness caused an old default, but you are healthy now and re-employed. Some businesses will listen to your explanations while others will not. Keep trying until you find someone who will accept your explanation.

7) Rely on Someone Else’s Credit Score.

If a husband and wife are seeking credit, and only one spouse has a bad credit record, you can apply in the name of the other spouse, relying exclusively on that spouse’s income and assets. Then the creditor is not allowed to look at the other spouse’s bad credit record. Another option is to apply for credit with a co-signer with a better credit score, but remember that the co-signer will be liable on the debt if you do not pay.

Rebuilding Your Credit

Do Not Rush Into New Credit Just to Build Your Credit Score.

It is tempting to rebuild credit by getting new credit and making timely payments. You should not start trying to get new credit during times of financial difficulty simply to improve your credit report. This is likely to take your attention away from paying high-priority debts first. Definitely do not obtain credit from a creditor advertising “easy credit” or “no credit history required.” Many of these offers are rip-offs from lenders preying on consumers who fear that they cannot get traditional forms of credit. One of the most important steps you can take to cope with a bad credit history is to avoid getting deeper in debt during the bad times.

Stabilize Your Situation.

In the long run, the most important thing for you to do to reestablish a good credit rating is stabilize your employment, income, and debts. This will prevent new delinquencies from being reported. While your past delinquencies can stay on your record as long as seven years, creditors are likely to ignore older debt problems if your situation becomes stable and if you start paying your present obligations.

Once you get back on track, each year your older debt problems will have less of an impact on your ability to obtain credit. Seven years will come around sooner than you might think, and then there will be no record of those past problems at all. If your financial problems are behind you, your credit record problems will not go away immediately. Be patient. Your credit profile will improve over time.


Establish New Credit Accounts (with Caution).

You can improve your credit by getting new credit and paying it back on time. But be careful. Avoid causing yourself more problems by getting unaffordable high-rate credit. One way to avoid this trap is to wait until you are offered a credit card with reasonable terms. You may get credit card offers even though you have a negative credit history, but these offers may be for expensive subprime cards that offer little credit and charge high fees.

Another approach is to get a secured credit card, offered by some banks and other creditors. These cards require that you keep a cash balance with the card issuer and draw down on this amount. You need to be very careful in selecting a secured card because some offers are bad deals.


Finally, if you decide to get new credit, be sure that the creditor you use actually reports account information to a credit bureau. If not, your hard work to pay back the credit will not be reflected in your report.

From http://ctblueblog.com/

Pam Martens covers all things Wall Street, and if you want to stay in a permanent state of despair about the country generally, and economic fairness specifically, you should read it religiously. She has been covering the Senate hearings on the foreclosure “settlement” and you won’t believe this:

http://is.gd/ilvmwP

Not to put too fine a point on it, it appears that the banks engineered a deal where they get to decide who they scammed, and then they get to call one dollar 500 dollars. (I wonder if I can repay my own mortgage using that kind of accounting?) For that matter, if they can find a million dollar mortgage out there they can convert a dollar into a thousand dollars. Plus, and why is this no surprise, they can get this rosy outcome by comforting the most comfortable among those they scammed (or decide that they scammed, and they are incentivized to decide they scammed the rich) while ignoring the most strained. What a great country.

Letter: Cellphones don't always signal prosperity

So commentary columnist Elizabeth Hovde thinks that we should stop giving food stamps to the not so needy, whom we can all recognize because they have both cellphones and SNAP cards ("Stop feeding the not so needy," Sept. 8)? Whenever the well-off write about how the not-really-needy folks are sponging off public benefits for their lavish cellphone-using lifestyle, I know that these writers have never been in the death grip of a boa constrictor service contract.

Boa constrictor contracts work like this: The company advertises a great monthly rate that you can easily afford when things are going OK for you financially. That's the rate that is splashed all over the flyers and posters and TV and radio ads. That rate is just sucker bait.

Then something happens: You're laid off, your hours cut or your partner's are, you come down with a bad case of the doctor copays or car repairs, your bus system quits running on weekends. It doesn't matter why you can no longer afford the service that you could once handle. Because no matter why, you are going to be told that you can only cancel or switch to a cheaper plan by paying several hundred dollars first. And if you just cancel the traditional way, by not paying, you are going to find yourself hounded by collection agencies for the monthly charges, plus the penalties, and then sued for them, plus court costs and attorney fees, and you'll have your wages garnished and your credit ruined. All because you couldn't afford to pay a penalty to stop a service contract you could no longer handle.

We need to do two things: Force companies to fully disclose how much their service contracts really cost, and let struggling folks cancel without getting hammered with penalties.

On the first, our motto should be "Service Contracts Oughta Reveal Everything," which spells SCORE.

SCORE would mean that anything that comes with an early-cancel penalty -- cellphone, Internet, satellite TV, gym membership, alarm system -- the company would have to tell you, in big bold type, at signup time, the true total of all the payments you must make to get past any penalties. That's first.

Second, we should require that contracts with early-cancel penalties must have waivers so that any customer on public benefits (such as SNAP, Medicaid, public housing) can cancel a contracted service without penalty.

Until we do a much better job of making sure that everyone knows what they're getting into with service contracts (with SCORE disclosures) and until we prevent early-cancel penalties from putting the squeeze on the poor, I suggest that Hovde just be thankful for the privilege that allows her to casually equate having a cellphone with being "not so needy." I see plenty of consumers who are being squeezed to death by contracts that they would love to escape, if it didn't cost more to cancel the contracts than to keep paying.

JOHN GEAR  

Gear is a Salem attorney.

Another Oregon attorney writes:

Nice letter.

Apparently, Ms. Hovde must not realize that the people who qualify for food assistance generally have the least expensive and crappiest version of everything that she and her family rely on for their daily life, like:

* generic unhealthy processed food;
* clothing from thrift stores or Wal-Mart;
* cars with duct tape—if at all;
* unattractive and often unsafe housing;
* cheap and sometimes dangerous toys with little educational value for their children;
* less responsive medical care;
* less responsive public safety providers;
* crappier schools;
* crappier neighborhood infrastructure;
* three-year-old game systems because it’s cheaper to entertain three kids with a game system then taking them to the moves once a month; etc.
 
She also apparently doesn’t understand life changes.  I often see my clients qualifying for food assistance post-divorce when they already have nice cars (with zero value), good clothes (that won’t be replaced), smart phones on a family plan (that now isn’t being paid by the ex), three children and a spouse who is reluctant to provide adequate support.

I also bet Ms. Hovde has never seen the 10 page application for state assistance asking for the income information for everyone in the applicant’s household, and asking for the value of the persons vehicle, and other worldly possessions….

I’ve seen some real cases of benefits fraud in my work—eg. a trust-funder collecting TANF, OHP, SNAP who then faked earning $15K per year to claim an Earned Income Credit on his federal returns— so I know they exist, but anything that makes it harder for poor people to get help is a really bad idea.