It’s true bankruptcy offers reprieve from financial burden. But the hit your credit score takes following Chapter 7 or Chapter 13 can be just as stressful. Do not despair; you can repair your damaged credit.

We’ve aimed the following steps at helping you create better spending habits and be mindful of your current debt. If you also stick to a timely payment schedule and verify the accuracy of your credit report, you’ll be on the right track to a better score.

Credit Factors

First, you should note what factors determine your credit score. In order of importance, these factors are:

  • Payment history—how well you’ve handled your debt, or how often you make payments
  • Percentage of credit used—how much debt your have versus how much credit is available
  • Length of credit history—how long your accounts have been open and how long it’s been since you used them
  • Types of credit used—what kind of loans you have, such as auto loans, student loans, or a home mortgage
  • New credit—how many accounts you’ve opened in the past 6 to 12 months and the number of credit inquiries
  • Once you understand where your credit score comes from, you can start to bring it up.

Step 1: Get a copy of your credit report and fix any errors

Did you know federal law authorizes you to receive one free credit report from all 3 bureaus—Equifax, Experian, and TransUnion—every 12 months? Get online and request copies of your report so you can review it in detail. You’d be surprised how often errors occur.

Check it for any inconsistencies. Make sure the reports do not list any debts that you’ve already paid. Analyze current balances and confirm the debts belong to you. If you find any errors, contact the reporting agency to file a dispute.

Step 2: Catch up on missed payments

It’s becoming quite common for businesses to send unpaid accounts to a collection agency. Any delinquencies sent to debt collectors show up on your credit report. Therefore, you need to get caught up on any past-due bills as quickly as possible.

Step 3: Pay everything on time

Some types of debt follow you through life. For example, bankruptcy typically doesn’t discharge student loans. But retaining these debts can work in your favor if you pay them on time.

A great way to pay your loans on time is to set up automatic payments. This system will withdraw payments directly from your bank account. You’ll never have to worry about missing or making a late payment again.

Payment history has a significant impact on your credit score. It shows lenders how likely you are to repay your loans and marks your reliability. Pay on time, and you appear as less of a risk to potential lenders.

Step 4: Apply for a credit card

It may seem counterintuitive to get a credit card fresh out of bankruptcy. But using your credit card wisely illustrates your stability as a borrower. You can do this by:

  • Using up to only 30% of your total limit
  • Paying off your balance in full every month
  • Making more than the minimum monthly payment if you can’t pay the entire balance
  • Only buying things you can afford

Avoid Subprime Lenders and Prepaid Cards

Many creditors offer low-limit credit cards, but be cautious. Beware of subprime lenders who prey on individuals with bad credit. These cards have high interest rates and loads of fees.

You may also be tempted to get a prepaid credit card. Don’t. Since anyone can get a prepaid credit card regardless of credit history, they’re usually accompanied by steep fees, too. Furthermore, these cards don’t report to credit bureaus, so they do nothing to boost your credit score.

Secured Credit Cards

Unaffordable credit will land you right back in the hole. Instead, opt for a secured credit card. Unfortunately, these cards still carry high interest rates. But they’re backed by a money deposit you make to a special savings account.

The amount of the deposit is usually equal to the credit limit. That way, if you ever miss a payment, the company will automatically deduct the amount from your account.

Be Patient and Diligent

Rebuilding your credit doesn’t happen overnight. It takes time to develop responsible spending habits. And some things—like fixing credit report errors—may just need additional time to process.

But sticking to a budget and staying conscientious of credit limits and payments will definitely lead you to your goal. Talk with your bankruptcy attorney for extra support and resources.

When a business or an individual faces overwhelming debt, it can seem like there is no way out. For those who find themselves in this position, they can file bankruptcy and get a “fresh start.” Within the Federal Bankruptcy Code, there are several different ways for individuals and businesses to file bankruptcy. Learn the difference between Chapter 11 and Chapter 7 bankruptcy filings to understand which option may be best for you.

What is a “chapter”?

In the Federal Bankruptcy Code, there are six ways to file for bankruptcy. Some are for cities and towns, some are for businesses and individuals. Each type of bankruptcy filing is called a “chapter.” Chapter 7 and Chapter 11 bankruptcy filings are the most common options for businesses and individuals.

What is the difference between a Chapter 11 and Chapter 7 filing?

The main difference between a Chapter 11 and Chapter 7 bankruptcy filing is in the process by which debtors reconcile their debts with their creditors. In a Chapter 11 filing, the debtor and creditor work together to restructure the loan terms. In a Chapter 7 filing, the debtor liquidates his or her assets to pay off debts.

While businesses and individuals can apply for either type, Chapter 11 is most often used for businesses and corporations. Chapter 7 is often used for individuals and couples.

How does a Chapter 11 bankruptcy work?

The goal of Chapter 11 bankruptcy is to avoid liquidation by restructuring the debts. Restructuring (or reorganizing) loan terms makes repayment more manageable. It also allows businesses to continue in operation while paying off debts.

To reorganize loans, the court appoints a trustee to oversee the management of the debtor’s assets and debts. The debtor then negotiates repayment plans with the creditors. In reorganizing the loans, the creditor and debtor may adjust certain loan terms to make repayment of debts achievable. During this process, someone might adjust their interest rate or payment schedule.

If the debtor continues to fail in repaying their debts, they then might file a Chapter 7 bankruptcy.

How does a Chapter 7 bankruptcy work?

Chapter 7 filings are also called liquidation bankruptcies or “straight bankruptcy.” These are the most common kind of bankruptcy filing. They are for entities whose debts are past the point of reorganization.

In Chapter 7 bankruptcy, the court chooses a trustee to handle the selling of assets and the paying of creditors. The debtor sells his or her personal assets to pay creditors. Certain assets may be exempt, like retirement accounts and tools needed for the debtor’s profession. Clothing and appliances are also generally exempt. The debtor uses the money from the liquidation of personal assets to pay creditors.

A debtor pays secured loans first. These are debts in which the creditor is able to claim collateral in case of default, like mortgages and car loans. Then, the debtor pays unsecured debt with the remaining funds. Unsecured loans are loans in which the creditor has no claim on the debtor’s collateral, should the debtor fail to pay debts. Some examples of unsecured loans are medical bills, utility payments, and credit card payments.

Sometimes the money made from liquidation cannot pay for all debts. In Chapter 7 bankruptcies, outstanding unsecured loans are discharged, or forgiven. Certain debts are not discharged, though, like student loans, child support, and tax debts. Once liquidation has occurred and as many debts as possible have been repaid, creditors can no longer contact the debtor about outstanding debts.

Whether you own a business, have a family, or live independently, you need not live with insurmountable debt. Filing bankruptcy may be the best option for helping you get back on your feet again. Speak with a bankruptcy lawyer to determine which kind of filing would be best for you.

When you’ve reached your financial limit and don’t know how you can possibly pay all your debts, bankruptcy may well be your best option. Bankruptcy can provide a fresh start and big weight off your shoulders. Take a look at some of the advantages and disadvantages of bankruptcy.

Benefits of Filing for Bankruptcy

When you decide to file for bankruptcy, you have three major advantages over your current situation.

No More Calls from Creditors

When you owe a company money, they often make themselves as annoying as possible until they get the money back from you. You may receive calls from creditors several times a week, if not several times a day, and you can only avoid the telephone for so long.

When you successfully declare bankruptcy, your creditors get an immediate order to stop contacting you and demanding payment. Your phone will stop ringing and you can breathe easier.

Elimination of Many of Your Debts

After your successful bankruptcy case, the court will discharge some, if not all, of your debt. You never have to worry about paying back those debts. Those sums are off your record, and you can stop negotiating payment plans, fighting interest rates, and trying to scrape funds together every month. Not all debt goes away. In most circumstances you will not be able to eliminate student loans, child support, spousal maintenance and taxes (taxes can be eliminated if old enough).

New Start for Your Finances

With the weight of those debts off your shoulders, you can start fresh with your finances. Now that you don’t have to worry about payments, you can build up your savings, achieve a better quality of life, and provide more for your family.

Drawbacks of Filing for Bankruptcy

Effect to Your Credit

Credit agencies are required to list bankruptcy on your credit report. That notice will remain visible for up to 10 years depending on the type of bankruptcy you file for. However you will get offers to buy cars a soon as you file bankruptcy. You will likely receive credit card offers within about 6 months of the completion of your case if not sooner which if used properly can help you reestablish your credit. You may be able to purchase a home through FHA a year after your bankruptcy is done if you have reestablished your credit and are employed. In Chapter 13 Bankruptcy you may be able to purchase a home while your case is still active.

Protection of your Assets

Each state either has its own list of assets that are protected or uses the Federal Government list of protected assets. You will need to contact your attorney to see which assets are protected and which are not.

When to File for Bankruptcy

If you have decided that bankruptcy is an option then you need to consult with a bankruptcy attorney to determine whether you should file a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy and when would be the best time for you to file.

Many people who file chapter 7 or chapter 13 bankruptcy and owe income taxes for prior years believe that the income tax obligations will not be eliminated or discharged. However, Bankruptcy Law provides that income taxes can be discharged in certain circumstances.

In a Chapter 7 Bankruptcy where you are wiping out most of your debt, Bankruptcy Law allows you to get rid of income taxes under the following circumstances:

  • At least 3 years have passed from your tax returns due date of April 15.
  • Your tax return was filed at least two years ago.
  • If taxes were assessed after filing, at least 240 days have passed since the assessment.
  • If you have not requested an offer-in-compromise which can extend time frames for discharging your income taxes.
  • No issues of fraud, tax evasion etc. exist.

In addition to these requirements, recent case rulings have made discharging taxes more complicated by requiring that the tax return be filed on or before April 15th or the return will never be considered as having been filed for purposes of filing Bankruptcy. It is unclear how this affects taxes filed after requesting an extension. This is a very harsh position taken by some courts and is currently being appealed. It will likely end up in the United States Supreme Court.

Avoid this problem by filing simply filing your taxes on or before April 15th of each year.

In a Chapter 13 Bankruptcy, where you are repaying a portion of your debt over time, the taxes may be discharged or paid over time. In a Chapter 13 Bankruptcy the income taxes may be broken out into two categories.

Priority taxes are taxes that are not dischargeable and must be paid through your Chapter 13 Plan. Non-priority taxes are taxes that meet all of the above listed requirement and may be treated just like an unsecured creditor such as a credit card or medical bill.

So, for example if you Chapter 13 Plan says that you are going to pay back ten percent on the dollar to your unsecured creditors then the IRS and State taxes owed will only be paid at ten cents on the dollar. The balance owed will go away upon successful completion of the bankruptcy.

You also need to be aware that whether you a filing a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy, if the IRS or state tax authority has filed a “Tax Lien” either in the county that you live in of with the Secretary of State of your state, that Tax Lien will not go away just because you file bankruptcy. So even though the obligation to pay the taxes may be eliminated, the lien against your assets may not go away. The most likely effect would be when you try to sell your home, the IRS or state will need to be paid off.

It is important that you discuss with your bankruptcy attorney which income taxes are dischargeable and which are not. This may require the engagement of a tax professional to determine what is and is not dischargeable based on when you filed, if you were assessed taxes years later or if you sought and offer-in- compromise which can extend time frame of the IRS to collect taxes.

You will also want to discuss with your attorney whether an income tax return should be filed before or after your case is filed. Generally, a tax refund other than earned income credit and the additional child tax credit may be collected by the Bankruptcy Trustee and used to pay your creditors. Many Chapter 7 Trustees can intercept your refund directly from the IRS.

It is not enough to just file your income tax return before you file your bankruptcy. The refunds need to be properly accounted for prior to filing. Many people make the mistake of paying family members or paying too much to creditors or comingling the refunds. This gets more complicated when one spouse is filing bankruptcy and one spouse is not filing.

While this information may answer some of your questions, it should also be clear that this is a very complicated matter which can have a profound impact on getting a fresh start through bankruptcy. Consulting with your bankruptcy attorney is the best way to understand what you need to do.

You have plenty to worry about when someone in your family is diagnosed with a serious medical condition. You don’t need to worry about treatment costs too.

Unfortunately, medical debt becomes a contributing factor to bankruptcies for millions of Americans every year. Let’s explore the reasons that medical expenses and bankruptcy often go hand in hand.

1. Medical expenses arise unexpectedly.

You can anticipate some medical bills, such as pregnancy and birth of a new baby, but others arise without warning. Many huge healthcare expenses result from emergencies or the sudden diagnosis of a rare condition. One day you were putting away for your child’s college fund and your retirement. The next you find those savings accounts wiped out, and you still have unpaid hospital bills.

2. You have little control over the cost of medical care.

Sometimes bankruptcy becomes the only option for people who overextended themselves financially. They got loans for cars or houses they can no longer afford, or they accumulated thousands of dollars in credit card debt. In some cases, these debts were avoidable.

But that doesn’t hold true for medical debts. You can’t compare prices on a life-saving medical treatment the same way you do on winter coats or Chinese take-out. Your healthcare provider tells you the cost, and you have to pay it. Your life matters more than your credit score.

3. Medical expenses accumulate from many sources.

Serious or chronic health conditions usually result in medical bills from multiple sources. Those sources include:

  • Health insurance premiums. You pay these to ensure that your insurance provider covers at least some of your medical expenses. This bill never goes away, even if your health improves.
  • Doctor visits. You pay whenever you see a doctor about a diagnosis, follow-up treatment, or regular checkup.
  • Tests and scans. Doctors need information in order to monitor health conditions and treat them effectively. They get that information by ordering blood work, X-rays, CT scans, and other tests.
  • Surgery. Many conditions require patients to go under the knife, which represents a significant but necessary medical expense.
  • Medications. Prescriptions help cure or manage medical conditions, so they’re as vital as doctor visits, tests, and surgeries.
  • Hospitalization. Doctors need to monitor some patients after emergencies or surgeries to ensure they avoid dangerous complications.
    This list should clarify why medical bills pile up so fast. When these outstanding bills get too high, bankruptcy seems like the only option.

4. Health insurance doesn’t cover everything.

It’s easy to assume that bankruptcy influenced by medical bills happens only to people without health insurance. Once you meet your deductible, your health insurance pays for everything else, right?

Unfortunately, no. A Harvard University study found that up to 78% of medical-related bankruptcies happen to people with health insurance. Another study, done by price comparison website NerdWallet Health, found that around 10 million Americans with insurance don’t pay off all their medical expenses by year end.

Part of the problem comes from high out-of-pocket costs associated with many health insurance plans. For some people, medical and prescription deductibles easily represent 10 to 20 percent of their annual income. Other factors include out-of-network healthcare costs and experimental treatments, which insurance companies may not pay for.

5. Many health conditions require long-term care.

Even if you manage your large medical expenses well right after the diagnosis, you could pay to treat the condition for years. Your other expenses don’t vanish when your healthcare costs rise suddenly. Many people don’t have the option of adjusting their monthly budget because of other debts. Eventually, their total bills become too much to handle, which leads them to seek bankruptcy.

If you have large outstanding medical bills, bankruptcy may be the best option for you. Consult a bankruptcy lawyer to discuss your situation.

On July 1, 2015 the Colorado asset protection statute will change thanks to the hard work of several of my fellow Colorado Bankruptcy Attorneys. This law will affect every Bankruptcy filed in Colorado on or after July 1, 2015. This is part 1 of a series on the changes to the law.

HOW THIS CHANGE WILL AFFECT BANKRUPTCY?

If you are considering filing a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in the State of Colorado you may want to wait until July 1, 2015. On July 1, 2015 the exemption or protection for assets of Colorado residents will significantly increase in several asset protection categories. This means that when a Chapter 7 Bankruptcy Trustee, who is the person representing your creditors in a Bankruptcy, looks over your Bankruptcy Petition to see if there are assets that can be collected from you and sold to pay creditors, that it will be less likely you will lose any assets.

In a Chapter 13 Bankruptcy, it means that you may end up paying less back to your creditors than you would have before July 1, 2015 because a Chapter 13 Plan contains a reconciliation section that essentially requires you to show that your creditors do at least as well in a Chapter 13 as in a Chapter 7.

WHAT IS CHANGING?

Many parts of the law are changing but, for most people filing bankruptcy, the two most important changes are an increase in the Colorado homestead exemption and automobile exemption.

HOMESTEAD EXEMPTION

The homestead exemption protects the equity in your home which is the difference between what your house is worth, how much you owe against its current market value. The homestead exemption will increase from $60,000 to $75,000 for people under 60 years of age. For people 60 years of age or older, the homestead exemption will increase for $90,000 to $115,000. The exemption is not per debtor, it is per the home. So you get one homestead exemption and not one for each debtor. Generally speaking you or your family need to be living in the home to claim the exemption. So, you could not claim an exemption on a rental home that you do not live in.

MOTOR VEHICLE EXEMPTION

Prior to July 1, 2015 you can use the exemption to protect as many motor vehicles or bicycles as you wanted. So if you had 10 cars each worth $500 you could protect them because the exemption limit per debtor was $5000. After July 1, 2015 you will only be able to protect two vehicles and presumably two bicycles per debtor but, the protection will increase from $5000 to $7,500 for people 59 or younger. The exemption will increase from $10,000 to $12,500 for people 60 years of age or older or someone who has been determined to be disabled such as by receiving social security disability or private disability. The law was clarified so that there is no automobile exemption for snowmobiles, all-terrain vehicles, golf carts, boats or other watercraft, travel trailers, tent trailers or motor homes.

If you are considering filing a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy in Colorado you should contact a Bankruptcy Attorney to see how the new law will effect a bankruptcy filing. Depending on your circumstances, you may want to file before or after to July 1, 2015. By law, only an attorney can provide legal advice.

In my previous blog post I described the changes to the Colorado Exemption Law effective July 1, 2015 and how it will affect the Homestead Exemption and Motor Vehicle Exemption. Some of the other exemptions that will be affected and how they affect your ability to file Chapter or Chapter 13 Bankruptcy are described below.

WHOLE LIFE INSURANCE EXEMPTION

Prior to July 1, 2015 if you had a Whole (sometimes called Variable) Life insurance policy that accumulated a cash value, you could not protect any increase in value do to payments made in the 4 years prior to filing. This caused a lot problems as many people looked at it as a savings or retirement plan. It was also very confusing and difficult to calculate the increase because you had to get a breakdown of how the insurance company allocated premium payments between the life insurance and the investment portion. As of July 1, 2015 the law has changed so that the “Cash surrender value of policies or certificates of life insurance that have been owned by a debtor for a continuous, unexpired period of forty-eight months or more, to the extent of one hundred thousand dollars…” is exempt. However, this bankruptcy exemption does not apply for “extraordinary money” contributed to a policy or certificate of life insurance during the forty-eight months prior to the filing of the Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. In other words, “contributing monetary contributions or loan payments in excess of those contractually required under the policy or certificate of insurance” .The idea appears to be to prevent people from dumping extra money into the policy, or using extra money to pay down loans against the cash value of the policy in the 48 months prior to filing in an effort to protect funds that might not otherwise be protected.

DISABILITY BENEFITS

The amendments to the exemption statute has increased the protection for both public and private disability benefits due, or any proceeds thereof from three thousand dollars per month to four thousand dollars per month. Any claim or proceeds in excess of this amount is subject to garnishment. For purposes of Chapter 7 Bankruptcy or Chapter 13 Bankruptcy it is still considered income when determining whether you are above or below the median income and when preparing Schedules I and J (income and expenses) of the bankruptcy petition. It also appears that if you have accumulated disability benefits over time that exceed $4,000 that the amount that you have saved over the $4,000 may be subject garnishment because the statute specifically references “proceeds thereof”. You should always segregate disability benefits and for that matter social security benefits into an account separate from other sources of income so that there is no question regarding the source of the funds and the protection afforded the funds As with all changes to the law, we will need to see how the Courts interpret the law..

JEWELRY AND WATCHES

The Colorado Bankruptcy exemption for jewelry which includes articles of adornment and watches increased from $2,000 per debtor to $2,500 per debtor. This includes jewelry that you purchased or inherited. If you own the jewelry you must include it in the calculation. The value is what it would sell for at a second hand retailer because if the Chapter 7 Bankruptcy Trustee were to try to sell the property for the benefit of the creditors, the jewelry would likely be sold at auction. So the price at which a pawn shop might sell it for and not what they would give you for it if you were to pawn it or sell it to the pawn shop or a store that sells jewelry second hand.

CLOTHING

The Bankruptcy exemption for clothing increased from $1,500 per debtor to $2,000 per debtor. This includes clothing of your dependents. Used clothing generally does not have a great deal of value second hand. Think in terms of what it would sell for at a second hand clothing store, Good Will store, ARC Store or other second hand store. Clothing includes basic wearing apparel, coats shoes, etc. Expensive designer clothing or shoes may have significant value.

TOOLS OF THE TRADE

The Bankruptcy exemption for tools of the trade has changed in two ways. First, the exemption has been divided into two categories. The first category is tools of the trade kept and used by a debtor in his or her primary occupation. This exemption increased from $20,000 to $30,000. The new category is a lower exemption of $10,000 for tools of the trade kept and used by a debtor for other than his or her primary occupation. So for example, you have a part-time job doing lawn maintenance and have various lawn equipment used to do the job. The tools of the trade exemption for the part-time job would be limited to $10,000. Remember, the key is what would it sell for at a second hand retail store selling used equipment and not what it would cost to replace it new.