It is an unavoidable truth that a bankruptcy will remain on your credit-report for up to 10 years, of course. The bankruptcy itself will be an obvious detriment for several years, but, eventually, it will be a detriment for future credit lenders examining your report to take into the context of, first, your report as a whole and, additionally, your baseline FICO score. In other words,  the bankruptcy can balanced out somewhat by the steps you take in the first few years immediately following your bankruptcy discharge to rebuild your credit.

These steps will be obvious once your discharge is received in that, at least assuming our current credit-crunch magically eases at some point, credit-card issuers and other credit-lenders now, in the wake of the deregulation of the banking industries in the Clinton and Bush years, actually target post-discharge bankruptcy filers as what they believe to be a viable market-segment for their business. After your discharge, you will receive credit card and other solicitations fairly shortly. Most of these will be high-interest offers that you should avoid like the plague, generally, but, at some point, an offer will be made that will not look too badly that you may consider accepting in order to begin rebuilding your credit. Naturally, you’ll not want to end up in the same situation again and will want to be sure to pay off any new balances each month, but the opportunity will be there to begin rebuilding your credit the old-fashioned way: through the use of credit. Additionally, for FICO purposes, the bankruptcy discharge itself, which liquidates most of your actual debt, improves your income-to-debt ratio instantly.

Again, since you won’t be able to file for bankruptcy again for a number of years, you’ll need to be extremely careful accepting new sources of credit so that you don’t fall into the same personal crunch that led you to file bankruptcy in the first place. But, unlike in previous decades, when a bankruptcy discharge really did drop a nuclear bomb in the middle of your financial existence for many years, it is now possible to genuinely view a bankruptcy as a fresh start, if you handle it properly and don’t fall back into old habits.

If you have questions about the impact of bankruptcy on your future ability to borrow, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

What it depends upon is, first, your current credit standing. A bankruptcy will always be detrimental to your credit-score and will remain on your credit-report for 10 years. However, there comes a point for consumers who have suffered financial set-backs where the impact of a bankruptcy upon their credit-score is not as harmful as lingering in a state of financial decline. This occurs when they have already missed multiple payments, are in arrears on home or auto payments, or possibly have been foreclosed upon or had a vehicle repossessed. At this point, the bankruptcy filing is actually, effectively, an improvement. That is, when you file for bankruptcy and your debt is discharged, you are at least in a state of rebuilding your financial well-being and credit-score rather than treading water in a state of steady decline and suffering incessant collection attempts and late-fee charge application.

Even more to the point, whether debt consolidation is a good option, depends greatly upon the means by which you are consolidating your debt. For the most part, however, debt consolidation is not a good deal for the consumer in need.

There are legitimate credit counseling agencies who provide the pre-bankruptcy petition credit counseling that is required by bankruptcy law. These agencies sometimes recommend a debt management plan, which, for some debtors, may provide a non-bankruptcy solution to their debt management problems. Often, however, such plans are not a good idea as they usually do not reduce the principal owed by the debtor and don’t help with secured debt, such as home mortgages or auto loans.

Worse, there the other “debt consolidators” that debtors considering bankruptcy tend to run into. These are for-profit companies that claim to be able to negotiate with a debtor’s creditors. These companies do not have any legal means of convincing a credit card issuer or other creditor to reduce a debtor’s debt, and, often, they simply take the debtor’s money in the form of a monthly “lump” payment and hold onto it. Very few debtors end up completing the “consolidation” programs offered by these companies, and, in my experience, they often end up being just another creditor listed in the bankruptcy petition when the debtor ends up filing for bankruptcy anyway.

In short, be very careful of which company is offering you a “debt consolidation” plan. For the most part, it is not a good deal and may even be harmful to many consumers, regardless of whether they go on to consider filing for bankruptcy as an option. If you have any questions about which option is the right one for you, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

‘Tis the Season,

As far as the Bankruptcy Code is concerned, there is gift-giving and then there is gift-giving. That is, there is gifting between individuals on a simply personal level—between spouses, family-members, friends—and, then, there is gifting for religious, charitable purposes. The first sort of gifting is problematic. This is the “bad news” of giving. Conveyances or transfers between a debtor considering bankruptcy and another individual he or she is personally acquainted with can appear fraudulent to the bankruptcy trustee, judge, or creditors who, after a bankruptcy petition is filed, may not be receiving the full amount that they believe they are owed.

Specifically, if a transfer or conveyance of property is made within two years of the filing of a Chapter 7 bankruptcy petition by an insolvent debtor, a creditor or trustee may object to a discharge. The trustee may also attempt to recover the transferred property, which means that he or she may take the property from the party is has been transferred to. For any of these things to occur, the objecting creditor or trustee must prove that the transfer was made with the intent to “hinder, delay or defraud creditors.” An honest gift within two years of the filing of a petition, when events which can force a person into considering bankruptcy can and do happen so much faster than that, may not have been accompanied by any intent to defraud and may not, logically, look like it was, but, nevertheless, if the possibility exists that an objection may be raised which could endanger the entire petition, it may be best to wait until the year has passed to file the petition. This is the sort of “pre-petition planning,” however, that it is best to discuss with an experienced bankruptcy attorney.

Additionally, especially in a Chapter 13 bankruptcy, some creditors are “priority” creditors who are entitled to be paid first and foremost. These “priority” creditors include those owed child support or other domestic obligations, the trustee who requires a 10% or so fee from a Chapter 13 plan, and others. Transfers and conveyances can raise questions with regard to the “preferences” owed certain creditors, which, in addition to “priority” creditors, also includes the preferential status of secured creditors such as a home loan mortgagor over unsecured creditors such as credit-card issuers. A transfer of property worth more than $600 within 90 days of the filing of a petition from a debtor that allows a creditor (which could include a family-member or friend owed money to) to receive more than they would have received in a Chapter 7 liquidation may be set aside by the trustee. Again, these sorts of considerations prior to filing a bankruptcy petition are best discussed with an attorney.

On the “good news” side of gift-giving, there is an exception in place for certain charitable contributions. The Religious Liberty and Charitable Donation Protection Act of 1998 amended the Bankruptcy Code to protect contributions made to protected organizations. They must not have exceeded 15% of the debtor’s gross income  the year they were made, and, if they were, must have been consistent with the debtor’s history of such giving. The 15% limit applies to each individual transfer, also, not the entire year’s worth of charitable contribution, even if it exceeds 15% in total (courts have ruled that no part is protected, however, if a total15% is exceeded without any past giving history). The specifics of the unavoidable nature of such gifts and whether a receiving organization is a protected organization are complicated and should be discussed with a bankruptcy attorney.

Additionally, there are similar considerations to post-petition transfers and conveyances.

If you have any questions about transfers or conveyances of cash or property you have made while considering filing for bankruptcy, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.