Fact Depending on what your present score is, bankruptcy may either increase your credit score, or decrease it, or have no effect on your score at all.
People with low credit scores (i.e., low 500’s) often experience an increase in their over all FICO credit score. That’s because a portion of what’s factored into your consumer credit score, is your consumer “debt-load” (i.e., how much debt you are actually carrying each month).
If you receive a successful discharge in bankruptcy, particularly with chapter 7, you may be relatively “debt-free.” The elimination of debt serves to increase your consumer credit score.
Fact Bankruptcy typically remains on your consumer credit report for ten years. However, this does not mean that you cannot obtain credit for ten years. Most lenders will want to see one to three years of good credit history as a significant factor in determining whether or not to extend credit to you. In this respect, you are only as good as your last one to three years, with the most recent year prior to the credit application being given the most weight.
Yet, we would be remiss not to comment on the current state of the financial/mortgage markets and the toll taken upon it as a result of the rapid decline in real estate prices, particularly plaguing the South Florida area. Most conventional lenders have heightened their requirements to extend loan commitments and will often decline to extend loans to individuals even with excellent credit, if such individuals are not in a position to document a steady stream of income. Those same conventional lenders as a matter of policy, might decline to extend credit to a bankrupt for a period in excess of three years, especially if the lender’s particular practice is to turn around and sell or assign the loan, rather than keep it on its books. It is important for you to realize that the landscape is constantly changing with respect to the practices and procedures of loan institutions. What holds true today, might not be true tomorrow. Banks are in business to lend money – not to manage real estate. At some point, banks will get back to their core business of lending money and at that point it should free up the credit markets. Working closely with an experienced mortgage broker with a good pulse on the various programs that are available and coming through the “pipeline” so to speak, will likely increase your ability to obtain mortgage financing in the future.
Likewise, in bankruptcy, you may well decide to retain your real property and continue to pay on the existing mortgage, even after you receive a bankruptcy discharge. Making timely payments on the mortgage account will help to significantly increase your credit score over several years. You may also assume car payments or lease payments that will survive your bankruptcy case, and timely payments on these obligations will also increase your credit score.
During the “boom” years of the credit industry, it was not uncommon for bankrupt debtors to be solicited for unsecured credit cards even before they were finished with their bankruptcy cases. Granted, in many instances, these pre-approved offers would contain a low credit limit and a high annual fee. Yet, when used selectively, these offers were an effective means to incur and timely repay modest debt, which in turn could be used increase consumer credit scoring.
Even with the present “tightening” of the financial markets, the mergers, buyouts and shakeouts of financial institutions, a bankrupt may still be able to obtain a “secured” credit card. These financial instruments require the debt to be secured, usually by a bank account that bears interest for the account holder, and otherwise, functions just like a regular credit card. It gives the card holder an ability to incur debt and make timely payments that would be reported out to the consumer credit bureaus, just like a conventional unsecured credit card, helping to increase a consumer’s FICO credit score.
Fact Bankruptcy chapter 7 is intended to give the consumer debtor a “fresh start”.
What kind of fresh start would the filer have, if (s)he was stripped of all of his or her possessions?
In fact, all filers are entitled to keep a modest amount of personal possessions and in certain circumstances, even real estate. The specifics of what kind of property you are entitled to keep in bankruptcy is generally referred to as “exempt” property” – meaning “exempt” from the claims of your creditors generally, and “exempt” from your bankruptcy estate, particularly.
Interestingly, the federal law of bankruptcy gave the individual states the election to “opt-out” of the federal listing of exempt property. You may live in a state that “opted-out.” If you do, the property you are entitled to keep in bankruptcy will be governed by your substantive state law exemptions – not the federal exemptions.
Fact In Florida, filers have the benefit of a generous homestead exemption. If you purchased your home more than 40 months ago, that homestead exemption can be unlimited. In theory, you could file bankruptcy with millions of dollars in equity and the home would be protected against the claims of your creditors (other than your mortgagees on the home). You would not have to surrender the home in bankruptcy. If you’ve sold a previous home to purchase your present home, so long as the equity is traceable to that transaction (or series of transactions) you will have the benefit of the full amount of time that you have been a home owner in order to take advantage of the unlimited homestead exemption. The new home merely must have been purchased within a reasonable period of time after the sale of the old home.
Even if you purchased your first home less than 40 months ago, you could still protect as much as $136,875.00 worth of equity in your homestead, while filing for bankruptcy in Florida.
You may very well be able to keep your home in bankruptcy under Chapter 7, if that’s what you want to do.
Fact There are many other “exemptions” that can be used to protect your property from the claims of creditors in bankruptcy. Florida has generous exemptions for retirement monies – IRA’s, 401k’s, pension and profit sharing, annuities and cash surrender value of life insurance policies (note: developing case law in Florida indicates that inherited IRA’s are NOT protected from your own creditors).
Fact Florida offers a $1,000.00 automobile exemption that can be used to protect equity in your car. You could be driving in a car that’s worth $20,000.00, but if you owe $19,000.00, your equity is only $1,000.00 and you can protect your vehicle from the claims of your creditors in bankruptcy using the automobile exemption.
Moreover, if you are “upside-down” on your vehicle(s) (or on any property that you own – even real estate) – meaning, you owe more money than the property is worth, you should be able to keep that property in bankruptcy (if that’s what you want to do). This is because the purpose of a chapter 7 bankruptcy is to liquidate valuable, unprotected assets for the benefit of your unsecured creditors.
In the case of the “upside-down” automobile, if you were forced to liquidate the car, all of the money would go to your secured lien-holder bank, and there would be no money available for general unsecured creditors. Thus, in such instance, you would be permitted to keep the vehicle (or second vehicle) even without a bankruptcy exemption to protect it from creditors. Of course, in chapter 7, if you are keeping your secured property, you are required to continue to make payments to your lien holder or secured lender.
Fact In Florida, “Head of Household” earnings are entirely protected from claims of creditors both in and outside of bankruptcy. Even if you are not head of household, a significant portion of your earnings may be protected both inside and outside of bankruptcy.
Even if you deposit your wages into a bank account, so long as those wages are traceable, you can protect up to six month’s worth of wages on deposit inside and outside of bankruptcy.
Fact In Florida, disability payments (both public and private) and unemployment benefits are entirely protected from the claims of your creditors both inside and outside of bankruptcy.
Fact In Florida, filers also are entitled to a $1,000.00 personal property exemption both inside and outside of bankruptcy, under the Florida Constitution. This exemption can be used to protect clothing, personal belongings, furniture, and even a modest tax refund, etc.
Moreover, if you are not using a homestead exemption in Florida (or deriving a benefit therefrom) you can utilize what we call a “wildcard” statutory exemption worth an additional $4,000.00. Cover excess equity in a vehicle that you wish to keep, use it to protect surplus funds on deposit in your bank account, or even some expensive jewelry – the choice is yours.
There is also some developing case law in Florida, that finds if you are “upside-down” on your homestead, you may be able to waive the homestead exemption (by not claiming it in your bankruptcy case) in order to avail of the “wild card” $4,000.00 exemption. This law is still unsettled at this time, but the trend may very well gain wide acceptance as the property values in Florida continue to plummet.
It isn’t how much property you own that determines whether or not you are permitted to keep your property in bankruptcy. Rather, it is the kind of property you own and the circumstances of your ownership that determine whether you will be able to keep your property.
Statistics show that most people that file under chapter 7 of the bankruptcy code, get to keep all of their property because the property is either specifically protected by exemption law, or of such inconsequential value that a liquidation (sale) would not generate any meaningful return for the unsecured creditors of the case.
Also note that joint cases (husband-wife joint filings) result in the “doubling” of exemptions. Meaning, instead of a $1,000.00 constitutional exemption as in an individual filing, the husband and wife joint filers may share a $2,000.00 exemption; instead of a statutory $4,000.00 exemption, the husband and wife joint filers may share an $8,000.00 statutory exemption, etc.
Fact Although bankruptcy is a public proceeding, so are most other court proceedings that are filed throughout the world. Unless you are famous, or unless your particular case is one that will take on special significance or importance in your community, usually the only people that find out about your bankruptcy will be your creditors. Family and friends typically do not have to find out about your bankruptcy, unless you’ve got a situation where you lent them money, borrowed money from them, or transferred any assets to or from them within the last several years.
Landlords typically do not have to find out about your bankruptcy, unless you owe them money or are in the middle of an eviction case.
Employers typically do not find out about your bankruptcy case, unless you owe your employer money, or unless you are being subjected to a wage garnishment that you need to stop. This is a rarity in Florida, because your wages cannot be garnished without your permission (with possible exceptions for child support/alimony payments).