Bankruptcy Articles San Diego

If you are considering a bankruptcy due to non-payment on debts, this is probably a moot point. In most cases people considering bankruptcy already have poor credit and bankruptcy will actually help improve your credit.

To begin with, you must understand what your credit score is and why you need it. In reality your credit rating is used for three things – to buy a house, to buy a car, and to get more credit.

Sometimes used for your job or a character assessment, the main purpose of credit is to predict how likely/able you are to pay your debts. A credit score is primarily based on a statistical analysis of your credit report, typically from the three major credit bureaus: Equifax, Experian, and TransUnion.

The Fair Isaac Corporation, known as FICO, created the first credit scoring system, and continues to be the standard for credit scoring today.

So what helps and hurts your credit?

Buying things with credit cards or loans and paying them timely builds credit worthiness. However, once you start paying late, have too high a debt to income ratio, have too many open accounts, or stop paying entirely, these all become negative events that are reported to the three credit bureaus and bring your credit score down.
 

Why does low credit matter?

Because once your credit card companies see these negative reports (whether for a card you hold with them or with someone else) they see you as being a risk. Once you have become a risk you potentially violate the terms of your contract and they can cut your spending limit, suspend your account, or increase your interest rate, even if you are current and in good standing with them.

Will bankruptcy make my credit score go down?

What you really need to know is yes bankruptcy will cause your credit score to go down, possibly as much as 200 points. Yes bankruptcy stays on your credit report for 10 years when other reported events stay on for 7 years. However, once you file bankruptcy and there is no longer any negative reporting (late payments, charge-offs, open and unpaid accounts) you can immediately start rebuilding your credit.

This means if you still have a mortgage, pay it on time. If you have car payments pay them in full on time. Your post-filing credit behavior will do more to help or harm your credit than filing the bankruptcy will.

For example, if you file bankruptcy and are still unable to pay monthly bills, car loans, or house payments on time, the negative reporting will just continue and your credit score will stay low. However, if you make these remaining payments timely you will see your score increase, in some cases dramatically. For those with bad credit at the time of filing, increases of as much as 100 to 120 points in a year.

Most importantly, you will get credit again. You may be able to get a home loan again in 3 to 4 years and a car loan even sooner. The reality is, right after your discharge you are a better credit risk than before filing because you have no unsecured debt and can’t file again for 8 years and the creditors know it. It is common for debtors to receive credit card applications within weeks after receiving their discharge. Of course these will have a low limit, high interest rate, and it’s a bad idea to start bad credit card habits all over again.
 

A recap of resourceful links:

• For more on FICO visit:
  • FICO
  • myFICO
• For more information on the three major credit reporting bureaus:
  
  • Experian
  • TransUnion
  • Equifax
• For information on how to protect your credit or report stolen identity visit:
  • The Federal Trade Commission's website

Homeowners who are losing sleep under the crushing weight of a delinquent or unaffordable mortgage are often faced with the quandary of how to get out from under the mortgage.

Should they try to keep it? Walk away? And if they walk away, what’s the best means of doing so? Let it go to foreclosure? Surrender it in a bankruptcy? Will they ever be able to buy a home again?

Lenders may or may not modify, but even when they do it takes many months and by the time the modification is approved the delinquencies are so overwhelming that accepting the modification only makes the homeowner more upside down in their loan. A foreclosure is a viable option, particularly if there is only one mortgage. However, if there are equity lines or other junior liens, the lender may have the right to sue the homeowner for a deficiency judgment to collect on the unpaid portion of the debt. Also, a foreclosure wreaks havoc on your credit score and will prevent you from qualifying to buy another home for at least 4 years. Filing a bankruptcy to surrender the home is a good option, especially if there is more than one lien, because it protects the homeowner from any future collection efforts on junior liens (with a few exceptions). However, a foreclosure proceeding typically still takes place, so the debtor has both a bankruptcy and a foreclosure on their credit report. Then there is the short-sale.
 

What is a short-sale?

To begin with, a short-sale is when you sell the property for less than what is owed on it. I typically tell my clients whether or not they attempt to short sell the property is a matter of their own personal priorities.

To figure out whether or not to short sell your property ask yourself:

• Are you most concerned with minimizing damage to your credit?
• Do you have overwhelming unsecured debt that will likely force you into bankruptcy anyway?
• Do you wish to remain in the house for as long as possible?
• Do you just want to walk away and get rid of all your debt as soon as possible so your phone will stop ringing and you can get on with the business of rebuilding your life?
• Can you endure six months to a year of submitting financial data and purchase offers over and over again?
• Are there junior mortgages

What is the benefit of a short-sale?

The benefit of the short sale is that you will not have a foreclosure on your credit and you will qualify for a new loan in about two years (assuming financial stability and income). Also, because it does take so long for lenders to review and approve short sales you could remain in the home without paying your mortgage for many more months. If the house is your only debt and you have time and patience a short sale is likely your best option.

For more details on short-sales, see the after the jump.

We hear this question a lot from clients who live in condominiums or communities that require the homeowner to be a part of a home owners association (HOA) to share communal maintenance fees. And if they don’t ask we let them know anyway.

Unfortunately, the answer is yes.

HOA fees are fees that arise from a contract between the homeowner and the HOA. Under the bankruptcy code HOA fees that accrue after you file for bankruptcy are the responsibility of the homeowner.

As came to head through Huntley v. Snyder (.PDF), the code [11 USC 523(a)16] excepts from discharge:

Any debt for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot.
 

What this means for you?

You will be responsible for HOA fees from the time between filing your discharge and when your lender actually forecloses on your home, as you remain the legal owner until foreclosure or some other transfer of title occurs (i.e. short sale or deed in lieu).

You are probably now wondering, well, how long will that take?

Sadly, only your lender knows for sure. Depending on how far into the foreclosure process you are when you file and when the lender can get around to setting a foreclosure date it can be a matter of weeks, months, or even a year. I have had more than one client whose home did not sell at foreclosure until a year after the bankruptcy was filed.

 
Anything else?

The good news is you can remain in your home without having to pay a mortgage until the foreclosure takes place, so HOA fees are a relatively small price to pay. Additionally, HOAs are sometimes willing to negotiate a settlement of the amount of fees due, however that is more likely when you actually move out of the home.
 

So, what are some solutions to dealing with these post-filing HOA fees?

1. File the bankruptcy after foreclosure takes place
2. Pay the HOA fees as they come due
3. Try to negotiate a short-sale or deed-in-lieu with your lender before foreclosure takes place as the HOA fees will have to be taken care of as part of the negotiation
4. Save up money to the best of your ability, and be prepared to pay the fees if/when the HOA attempts to collect.