Money Sense Tips

Bankruptcy

Have you read the latest news about amusement park operator Six Flags filed for bankruptcy? This is unbelievable. Is it really necessary?

For those who feel that they are in serious financial distress, bankruptcy may have crossed their minds. Bankruptcy is not something to be taken lightly. While your debt may be wiped clean, there are far-reaching consequences for that “new freedom”.

When a person’s debt has risen to a level that they can’t hope to get under control, they may consider filing for bankruptcy. For a consumer there are two bankruptcy choices: Chapter 7 and Chapter 13. Chapter 7 bankruptcies involve wiping out the debts in part or in their entirety and liquidating assets to do it. Chapter 13 bankruptcies are more of a debt restructuring plan that gives you more time and a plan to pay back a portion of the debt that is owed to creditors.

Bankruptcy damages a person’s credit. A bankruptcy judgment stays on credit reports for as long as ten years. During that time, any credit that is applied for will disclose the bankruptcy to the creditor. If filing Chapter 13, you still have to pay back part of your debt and the judgment stays on your credit report for ten years.

In the past, people have taken advantage of the bankruptcy laws. For instance, people have been able to file more than once for Chapter 7 bankruptcy. They have used it as their own personal “debt eliminator”.

Each state decides on what assets they will exempt from being seized during a bankruptcy hearing. Knowing that, some may use available cash to purchase those items (homes, cars, etc.) in an effort to avoid payment and still retain the stuff they purchased. In this instance, creditors receive little or nothing from the bankruptcy settlement.

The new laws concerning bankruptcy have changed this. Whereas courts used to have the leeway of deciding who could file for Chapter 7 bankruptcy, there are now criteria that must be met first. In order to file for Chapter 7 bankruptcy, a person has to have an income that is below the median income for the state where they live. Their income must be put through a calculation that determines if they have enough disposable income to pay twenty-five percent of their outstanding debt.

More people that file bankruptcy will have to file under Chapter 13. The courts decide what a person could pay from the information provided to them. There is an allowance made for rent/mortgage, food, and other pertinent bills. With the new bankruptcy law, standards set by the IRS determine allowable values for each of these bills. A certain amount is exempted, and the payments are determined from the rest.

Because there are more hoops to jump through, bankruptcy lawyers are charging more for their services. The whole process of bankruptcy will cost the filer more than before, which will make them think twice about the process. Credit counseling sessions are also required as a precursor to filing for bankruptcy. A credit counselor may determine that they can help you and thus eliminate the need for bankruptcy proceedings.

Bankruptcy should always be a last resort. While it will give you a clean slate, it comes at a price.

Our credit scores play a big role in determining the results when we apply for a credit card or loan. A good credit score can help us get the credit we need at the best possible rate. A poor credit score could result in a higher interest rate or denial of credit. It is in our best interest to make sure our credit scores are as high as possible.

The credit bureaus keep the exact method for figuring credit scores a mystery. But there are a number of factors that are known to impact our credit scores. Here are five things you can do to improve yours:

1. Keep an eye on the information contained in your credit report. Sometimes the bureaus make mistakes, and identity theft can also wreak havoc on one’s credit report and score. Federal law requires each credit bureau to provide one free report per year to any consumer who requests it online, by phone or in writing, and we are also entitled to a free report if we are denied credit. So check your report regularly, and if you find any inaccuracies, dispute them in writing.

2. Always pay your bills on time. Even if you’ve made payments late in the past, keeping current bills paid on schedule will help raise your credit score. The longer your history of keeping payments current, the more it will improve your credit score.

3. Keep credit card balances low. Just because you have a $10,000 credit limit, that doesn’t mean you should use it all. A good rule of thumb is to keep each credit card balance at or below 25 percent of the limit. Even if you have a perfect payment history, carrying too large of a balance can adversely affect your credit score.

4. Avoid opening too many accounts in a short time frame. This is especially important if you have a short credit history, but it also applies if you have well-established credit. Opening lots of accounts in rapid succession raises concerns that you could get in over your head, hence lowering your credit score.

5. If you pay off an account, keep it open. This will help by lengthening your credit history. It can also reduce your balance to credit limit ratio, unless you transferred the balance to another card.

Improving your credit score is not as difficult as you might think. A few simple adjustments can really make a difference, but it does take some time. If you are planning to apply for credit, start working on your credit score a few months ahead of time. This will increase your chances of getting the loan or credit card, and it could save you lots of money on interest.