topic Re: Bankruptcy & Credit Scores in Bankruptcy

Bankruptcy & Credit Scores

Brett838 — Mon, 27 Feb 2012 14:46:55 GMT

Morning --

I'm curious if anyone knows what a bankruptcy does to a good credit score.

I am considering filing and the only debt on my Credit Report that would be dismissed would be a rental house mort. of 90K. I do have a private promissory note that would also be dismissed.

My credit score is 782 right now... would I drop 100 ? or more? And how long/hard is it to recover?

Just some HUGE questions weighing on my mind.

Thanks for any help.

Brett

Re: Bankruptcy & Credit Scores

StartingOver10 — Mon, 27 Feb 2012 16:23:13 GMT

Brett838 wrote:
Morning --

I'm curious if anyone knows what a bankruptcy does to a good credit score.

I am considering filing and the only debt on my Credit Report that would be dismissed would be a rental house mort. of 90K. I do have a private promissory note that would also be dismissed.

My credit score is 782 right now... would I drop 100 ? or more? And how long/hard is it to recover?

Just some HUGE questions weighing on my mind.

Thanks for any help.
Brett

Well, if you choose to file bankruptcy, what you want to happen is a discharge, not a dismissal. Getting a discharge of the debt is the goal, a dismissal is a failed (dismissed) bankruptcy.

When you say that you have a mortgage and a private loan you are planning to discharge; does that mean that is the only debt you have? Or do you have other debt for a vehicle and/or credit card debt? Have you checked your states' exemptions to see what you are allowed to keep in a BK? If not, here is a link to www.legalconsumer.com to get a brief idea of your exemptions. Naturally you will want to speak to several BK attorney's about your specific situation.,

When you file BK (assuming Ch 7 here), you have to file with all of your debt and list all of your income and your assets too. You can not pick and choose which debt to list. On the other hand, if you want to reaffirm some of the debt you can, but it is not generally advisable. In a Ch 13, you still have to list all your debt, income and assets, but you enter into a repayment plan designed by you, your attorney and the Trustee. Remember the Trustee represents the creditors, so the plan may end up being a larger payment than your original request. This is why you see so many Ch 13 dismissals and not a successful discharge, the plan payment is larger than the debtor can afford.

Since you have high scores, any BK filing you do will hit your score initially very hard. I don't know the exact points, but you can try the simulator here on myFICO to get an idea of what would happen to your score by filing. Based on my experience with BK your score would drop in excess of 200 pts.

It doesn't matter how large or small the debt you discharge. It is the act of filing that drops your score. The recovery period is in excess of 2 yrs minimum and can take substantially longer depending upon the steps you take to begin the recovery period. In a successful Ch 13, the recovery should actually take a shorter time once you are discharged.

Re: Bankruptcy & Credit Scores

SoulMaster — Mon, 27 Feb 2012 18:17:22 GMT

StartingOver10 wrote:
Brett838 wrote:
Morning --

I'm curious if anyone knows what a bankruptcy does to a good credit score.

I am considering filing and the only debt on my Credit Report that would be dismissed would be a rental house mort. of 90K. I do have a private promissory note that would also be dismissed.

My credit score is 782 right now... would I drop 100 ? or more? And how long/hard is it to recover?

Just some HUGE questions weighing on my mind.

Thanks for any help.
Brett
Well, if you choose to file bankruptcy, what you want to happen is a discharge, not a dismissal. Getting a discharge of the debt is the goal, a dismissal is a failed (dismissed) bankruptcy.

When you say that you have a mortgage and a private loan you are planning to discharge; does that mean that is the only debt you have? Or do you have other debt for a vehicle and/or credit card debt? Have you checked your states' exemptions to see what you are allowed to keep in a BK? If not, here is a link to www.legalconsumer.com to get a brief idea of your exemptions. Naturally you will want to speak to several BK attorney's about your specific situation.,

When you file BK (assuming Ch 7 here), you have to file with all of your debt and list all of your income and your assets too. You can not pick and choose which debt to list. On the other hand, if you want to reaffirm some of the debt you can, but it is not generally advisable. In a Ch 13, you still have to list all your debt, income and assets, but you enter into a repayment plan designed by you, your attorney and the Trustee. Remember the Trustee represents the creditors, so the plan may end up being a larger payment than your original request. This is why you see so many Ch 13 dismissals and not a successful discharge, the plan payment is larger than the debtor can afford.

Since you have high scores, any BK filing you do will hit your score initially very hard. I don't know the exact points, but you can try the simulator here on myFICO to get an idea of what would happen to your score by filing. Based on my experience with BK your score would drop in excess of 200 pts.
It doesn't matter how large or small the debt you discharge. It is the act of filing that drops your score. The recovery period is in excess of 2 yrs minimum and can take substantially longer depending upon the steps you take to begin the recovery period. In a successful Ch 13, the recovery should actually take a shorter time once you are discharged.

+1 on everything StartingOver10 said. Nailed it.

The only thing I want to add is that BK should be your absolute last-resort option. Have you considered selling / short selling the rental? If you wipe the debt in a BK you're going to lose the property anyway, so why not see if you can't get a full deficiency-wiaver instead? That would leave you with the Personal Note. You could settle it and/or just pay it off in full.

Both of those things are going to ding your credit, too. However, the effect isn't NEARLY as bad as a BK.

Also, if you're single, and make more than ~$47K/year (this # varies from state to state), you may not qualify for a CH7 discharge. Which means you'd be in a 13 plan for 3-5 years and possibly pay back every penny of your debts. Check with a local attorney or two to see if you Q for 7 and/or what your plan payment would be in a 13... these should be part of a free consult.

Good luck,

-S

Re: Bankruptcy & Credit Scores

beamMEup — Mon, 27 Feb 2012 18:17:58 GMT

Hi Brett838,

Welcome to the forums!!!

This article might help a little - it shows a comparison of the impact that credit problems can have on different FICO scores.

Re: Bankruptcy & Credit Scores

Brett838 — Mon, 27 Feb 2012 18:45:42 GMT

Thank you all for your advice!

I have a much better idea of how it could go.

To answer a few q's: I lost my job last year... I do qualify for BK. The rental house was an attempted short sale... Bank of America said they'd take Net 29K... had it on the market 120 days and only got one cash offer of 25K. Too low. I really don't have any CC debt... Like $ 300 to menards right now.

I feel like I could recover from a 550 Score... The next time I really would need my credit is about 3 years from now for a new house (School District) with my Wife as the primary borrower though.

Thanks again for your help.

Re: Bankruptcy & Credit Scores

SoulMaster — Mon, 27 Feb 2012 22:04:32 GMT

Try forcing B of A into a Deed in Lieu, or get a different attorney to do the SS (if you have a realtor, get an attorney instead*). 4 grand isn't that much of a difference, in fact you might just want to come out of pocket the 4K to make the SS go through. If you don't have CC debt to go along with it, then I'd REALLY do everything possible to avoid the BK.

-SM

*Realtors are great at buying/selling houses, but I've found they're fairly lousy at legal/contract negotiations. This isn't true of all realtors, just most of them. In fact, if you look at the last page of the standard Short Sale listing agreement, they recommend you hire an attorney to review the docs/protect your rights.

Re: Bankruptcy & Credit Scores

StartingOver10 — Mon, 27 Feb 2012 23:14:02 GMT

Actually, most of us (Realtors) that do short sales regularly and as a large part of our business have attorney's that do the negotiations with the bank directly. So you end up hiring a team, the Realtor and the attorney. I agree with SoulMaster that having the Realtor do the actual negotiations with the bank is not effective for the Seller or the Realtor. The fee is deducted from the proceeds of the house sale so you are not out of pocket. Neither the Realtor nor the attorney can charge a fee up front for this service. If an attorney wants a fee/retainer upfront, run away.

I also agree that given your specific situation, it is a better idea to short sale the property or have a DIL. Most of the time, the bank won't accept a DIL unless it has been on the market for 90 to 120 days anyway. There is nothing wrong with filing BK when you need to, but don't file if you can achieve a better solution without it. JMO.

Re: Bankruptcy & Credit Scores

SoulMaster — Tue, 28 Feb 2012 00:24:51 GMT

StartingOver10 wrote:
Actually, most of us (Realtors) that do short sales regularly and as a large part of our business have attorney's that do the negotiations with the bank directly. So you end up hiring a team, the Realtor and the attorney. I agree with SoulMaster that having the Realtor do the actual negotiations with the bank is not effective for the Seller or the Realtor. The fee is deducted from the proceeds of the house sale so you are not out of pocket. Neither the Realtor nor the attorney can charge a fee up front for this service. If an attorney wants a fee/retainer upfront, run away.

I also agree that given your specific situation, it is a better idea to short sale the property or have a DIL. Most of the time, the bank won't accept a DIL unless it has been on the market for 90 to 120 days anyway. There is nothing wrong with filing BK when you need to, but don't file if you can achieve a better solution without it. JMO.

If an attorney wants a retainer upfront, it's probably because the house is worth less than $250K, in which case they won't let us include Attorney fees in the HUD1. (At least here in NV). No need to run.

Sounds like StartingOver10's realty company is set up properly. Here in Vegas, they aren't. We're getting liability notices after short sales all the time. If you can find a realtor who's set up like SO10's, that's awesome! Make sure you meet the attorney and that he/she is representing YOUR best interests, and not those of the Real Estate Agent/Office.

In alot of cases, if you're not the one who retained the attorney (with a fee/consideration) the attorney isn't working for you and there isn't any "attorney client priveledge". If the REO is doing it right, you'll sign a listing agreement and a retainer at the same time.

Again, the above is Vegas, I'm sure it's different in alot of states. For example, in Nevada, the "can" in the highlighted statement above is 100% incorrect. If attorneys don't charge retainer ("exchange consideration"), they aren't retained, and they aren't your attorney (they are someone else's) and don't have to represent your interests (because you aren't their client). To know if an atty is legit, check their bar records / complaints and google them. (To sum up that drivel, Realtors CAN'T, attorneys MUST).

-SM

Re: Bankruptcy & Credit Scores

Brett838 — Thu, 01 Mar 2012 02:39:00 GMT

Looking back I realize I forgot to mention my personal promissory note for $ 41K.

I worry this person will call the note when due in full next April and then file Judgement Liens against my property since I'll have no way to come up with this cash.

I know I don't have CC Debt... but this Note seems much worse.

Re: Bankruptcy & Credit Scores

StartingOver10 — Thu, 01 Mar 2012 04:10:21 GMT

I am assuming that the $41k note is unsecured, right?

Do you think its possible to renegotiate the note?

Do you have both a primary residence you own and a rental property? Or just the one mortgage?

Re: Bankruptcy & Credit Scores

Brett838 — Thu, 01 Mar 2012 20:47:32 GMT

I'll recap my situation.

Primary Mortgage - $ 88K - Joint with Wife. - safe in BK due to value and exemptions in MI.
Rental Mortgage - $ 90K - In MY Name alone. House worth About $ 30K. Tried Short sale. Now heading towards DIL.
Promissory Note - $ 41K - 5 Years Up April 2013 - 8% Interest on Bad Schedule with Unethical Man. - He may renegotiate or just call it and look for Judgment Liens.
Menards Card - $ 300.00
That's all my debt.
Currently No Income for me.
Credit Score Currently 782
Wife will NOT be filing. Her score is 700.
I realize a BK would place me at a score of about 550.
I would just want to be up above 650 in 3 years to be a co-signer on a new house if we chose to move school districts.

I just don't want to be upset with my decision in 3 years... And stuck with a BK for 7 more !

But a BK would clean up this $ 130K mess I'm in.

Hmmmmm.... What to do.

Re: Bankruptcy & Credit Scores

beamMEup — Thu, 01 Mar 2012 21:24:16 GMT

Brett838,

Quick question - Am I understanding correctly that your primary mortgage will not be IIB?

Re: Bankruptcy & Credit Scores

SoulMaster — Fri, 02 Mar 2012 03:32:09 GMT

If he is that unethical, he can file a peition with the court to get his note exempted from the BK. It won't necessarily go through, but it will be a PITA for you to deal with.

Talk to a REALLY good BK lawyer about a MONTH before you make your final decision. Get the real facts. BK sucks, trust me. If there is anyway to avoid it (like, even by slinging pizzas/papers) friggin' do it. Also, what's your wife's income? Don't forget that you're married and that all income is your combined income. If it's not (or you keep it seperate), divorce her (on paper), file your BK. Wait 3 years. If your credit's better, get remarried (on paper) and joint-buy the house. Else, let her buy it.

-SM

Again though, see a good attorney... talk to 3 or 4.

Re: Bankruptcy & Credit Scores

Brett838 — Fri, 02 Mar 2012 13:36:17 GMT

My Primary Mort. is $ 88K -- The house vaule is about $ 100K. Since this is a joint Mort., I'm being told that only 6K of equity is actually mine. Therefore, the Trustee will not want the asset and the debt will not be discharged. I didn't even plan to list the debt, only exempt the asset. I may be wrong in this thinking, but I thought I'd remain on the loan and therefore would be making payments right through and after the BK... This would help my Credit I'm guessing.

The only debt on my Credit Report that will show Discharged in BK would be a BofA Mort on the rental home... 90K.

My wife's income is not high enough to effect the BK... We show no disposable income with after expenses.

I imagine that the Promissory Note Fella will dispute the BK... but an attorney has explained that he really can only do so if I obtained the debt by fraud... and I did not.

Still thinking about it...

Hey Soul Master -- You speak really badly about BK.. but it looks like your credit is recovering nicely. What problems have you encountered that make it so horrible?

I guess I am also seeing it as a team effort with my wife.... we never finance things.... she would be a partner in this and her credit will help us for the years that mine is not.

Re: Bankruptcy & Credit Scores

SoulMaster — Fri, 02 Mar 2012 19:44:03 GMT

Brett838 wrote:

Hey Soul Master -- You speak really badly about BK.. but it looks like your credit is recovering nicely. What problems have you encountered that make it so horrible?

Brett -

First off, scores aren't everything. While the majority of my BK was to dump nearly 70K of unsecured debt, I timed it right to stop the sale of my house (just to buy me more time in it, I don't want it now that its ~400K-plus underwater). I'm 1.5 years post-filing now and could buy another house (financially), but I can't. The BK is there and to top it off, BofA has sort of forgotten about me. Now, it's nice that I'm still living rent-free, but until they take the damn thing the 3 year buy-again clock doesn't start ticking. In a small way, it's miffing me off.

Second, that BK is currently preventing me from getting enough credit to rent a car when I travel overseas (most countries require a $2K security hold on a CC). So it's limited my pleasure travel immensely.

Thirdly, I had about $70K in debt that didn't get discharged. A lot of that is tax debt I'm still working through. In fact, the primary reason I filed was to dump the unsecured debt so I could pay my taxes and not go to jail. <-- This is why I don't regret what I did.

Finally, and I really don't mean to put myself on a pedestal, it has taken a serious amount of effort to get where I've gotten. Most people don't have that kind of determination/restraint. My BK is not the only one I've seen the aftermath of, however, as I work for a debt-relief lawfirm... We give everyone of our clients post-BK rebuilding advice, and a good majority of them don't follow it. Whereas I have a thorough understanding of life after BK, they don't, despite our best efforts to make sure they do. This can lead to enormous trouble down the road. (For example, if you have even a single "late" report after the BK, you're doomed forever).

Now, those are all my personal reasons why I rail against BK, but here is the most important one (that doesn't apply to me)... Because you can only file BK(7) every 8 years, if you burn it to get out of debt when there is no pressing emergency, you're completely screwed if there is an emergency down the road. We have a handful of clients who've filed BK and wound up in the hospital within 2 or 3 years, racking up hundreds-of-thousands in medical bills, or other random lawsuits (personal injury, liability, etc).

In one instance, our client had rebuilt enough post-bk (filed pro-se, not ny us) that she and her husband decided they were stable enough to have a baby: It was born preemie. The bills to keep the kid alive were nearly $500K. Now, of course they can't afford to pay that. But guess what? The hospital sent it to collections, the collectors sued and now 1/3 of their net paychecks are being garnished every month and their bank accounts were drained. If they hadn't used the BK to eliminate about $40K of debt, they'd be in a position to do it now and wipe all that nonsense out. We tried our best to fight it, but there was nothing we could do. The hospital knew they had them dead-to-rights and pulled the trigger very quickly to recoup as much as they can before our client can BK again (they are about 15 months from being able to do a CH13, which is ~4 years after BK). You want to talk pain?

Now, I realize that this case is fringe (as are some of the others), and it won't happen to everyone but our general policy is to not file BK unless it's to stop a lawsuit, stop a foreclosure, stop you from going to Jail (IRS, my case), or remove a stack of garnishments from judgments-past that can't otherwise be negotiated away. Basically, because you never know what might happen in the future.

Hope that helps!

-SM

Re: Bankruptcy & Credit Scores

aussiesareforever — Sat, 03 Mar 2012 17:50:26 GMT

That is really helpful SoulMaster. I've never thought of it that way at all. I pray I never have to file BK again!

Re: Bankruptcy & Credit Scores

Repo-ed — Fri, 16 Mar 2012 01:53:41 GMT

This is some intense info. Man, I never want to be in that situation. Nuts