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Chapter 13

Bankruptcy and Your Credit Score


What is a Credit Score

A credit score is a mathematical algorithm, typically updated monthly, used by lenders and service providers (i.e. utility companies) to determine your character, creditworthiness, and likelihood to make payments on time.

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Prior to the universal adoption of the FICO score in 1989, bankers would make a decision to lend money based on a “gut feeling”. Obtaining credit was all about who you knew. Many people were denied credit based on gender, race, nationality and marital status.

Conversely, the current credit score model allows any lender to obtain a picture of your current debts with outstanding balances, along with your repayment history.

Credit Bureaus and Credit Scores

While a credit score is a number, the data (your individual credit history) used to create is the score is provided to the bank or credit card company from a credit referencing agency, also known as a credit bureau.

Experian, Equifax, and TransUnion are the credit bureaus that compile your financial history and share this history with lenders by request.

Credit scores may vary slightly based on the credit bureau or lender that completed the calculation.

Improve your Credit Score

Lower credit scores can reduce your odds of being credit approved. A “good” credit score is typically over 700 (on a scale out of 850). If your credit score is not as high as you desire, follow these steps to increase your score:

  1. Dispute any incorrect findings
  2. Make all payments on time
  3. Pay off debt
    1. Keep credit card balances low
    2. Maintain a credit utilization of under 30%
  4. Credit utilization is your total debt divided by total available credit
  5. Assess unused credit card accounts
    1. Only close accounts if doing so will increase credit utilization %
    2. Fewer open accounts with the same overall debt may lower your score

Check Your Credit Report for Free

Visit Experian to check your credit report for free. Checking your own credit is a soft inquiry. Soft inquiries do NOT impact your credit score.

An updated free credit report can be accessed every 30 days. Outstanding balances on credit cards and loans will be reflected as well.

Monitoring your credit report allows you actively increase your score while becoming a more informed applicant.

Additionally, you can obtain a FREE credit score.

Bankruptcy and Your Credit Score

Chapter 7 and Chapter 13 can remain on your credit report 10 years. That being said, the three major credit reporting agencies voluntarily remove Chapter 13 bankruptcies after seven years. Chapter 7 bankruptcies remain on your credit report for the full ten years.

Read more on: the differences between Chapter 7 and Chapter 13

 

Filing for bankruptcy does not mean you are “doomed” for seven to ten years. A large majority of people notice an increase in the credit score within 12 months of filing for bankruptcy. This is a result of discharged debt and making payments on times.

Consult a Bankruptcy Attorney

The office of Cherney Law Firm LLC is committed to helping you get your finances and credit score back on track. Contact us at 770.485.4141 to schedule a free consultation to learn how bankruptcy can help you.

Tax Season: Bankruptcy and Income Tax Refunds

Tax season is upon us, and many people think about a fresh financial start this time of year

When it comes to filing yearly taxes, it is an opportunity to assess current goals and whether current financial strategies are working efficiently. If you have filed a Chapter 13 case and are having trouble making your current plan payments, you may want to consider a conversion from a Chapter 13 Bankruptcy to a Chapter 7 Bankruptcy.

The main benefit of converting from a Chapter 13 Bankruptcy to a Chapter 7 Bankruptcy is that you will no longer have a monthly trustee payment

You can use your income tax refund to bring any outstanding secured obligations current with the lender (e.g. vehicle, mortgage). You will only have one case filed with the same case number, even if you convert from a Chapter 13 to a Chapter 7. Only one bankruptcy filing will show on your credit, rather than having a dismissed Chapter 13 case and a later filed Chapter 7.

Another major benefit of converting your case from Chapter 13 to Chapter 7 is that you can add any debts incurred after you filed your Chapter 13 case. If you incurred new debt during your Chapter 13 that is making it difficult to make your Chapter 13 payments, then a conversion can help alleviate this problem. Some examples of new debt can include new medical bills, or an unexpected, costly home repair.

In order to convert your case from Chapter 13 to Chapter 7, a notice will need to be filed with the Court

There are certain conditions that need to be met. Your bankruptcy attorney will discuss these with you.

With a Chapter 7, there is no monthly payment plan like there is with a Chapter 13. You will still have the automatic stay in effect during the length of your case. However, the Trustee may sell any non-exempt assets that you have in order to pay your creditors. This is known as liquidation.

Once a Chapter 7 case is finished, you receive a discharge of all debts that were part of your case. This occurs in a much shorter time period than for a Chapter 13 case, since there is no repayment plan. In many instances, converting your case from a Chapter 13 to Chapter 7 may be less costly than filing for a Chapter 13 and then having to file a separate Chapter 7 if your Chapter 13 case was dismissed.

An experienced bankruptcy attorney will assess your case to make sure conversion makes sense for you. There can be major benefits to converting your case from a Chapter 13 to a Chapter 7, but it is critical to understand all the implications.

Wage Garnishments and Bankruptcy

If you are considering filing either a Chapter 7 or Chapter 13 Bankruptcy, it is important to understand what happens to any current wage garnishment that you may have. A wage garnishment is a court order that enables a creditor to take money out of your paycheck. Once a wage garnishment starts, it is difficult to stop. Bankruptcy is an effective method to stop a wage garnishment. For most types of debts, either a Chapter 7 or a Chapter 13 filing will immediately stop a wage garnishment. Many people consider filing bankruptcy solely because of a wage garnishment.

There are many different types of wage garnishments

Some of the most common types include: child support, alimony, income tax debt, student loan debt (federal and private) and judgment creditors (such as banks and credit card companies). Each type of wage garnishment has different rules that apply, and these rules are affected differently by a bankruptcy filing. Most of these rules are specific to your state of residency.
Each type of wage garnishment has different rules that apply, and these rules are affected differently by a bankruptcy filing. Most of these rules are specific to your state of residency.

A bankruptcy filing, whether a Chapter 7 or Chapter 13, puts an immediate stop to most wage garnishments

This is called the “automatic stay.” This stays in place for the duration of your bankruptcy case (or until further order of the bankruptcy court), which can last up to 5 years, depending on the type of bankruptcy that you file. A Chapter 7 will generally eliminate the debt completely.

A Chapter 13 may require you to pay the debt back, or a portion thereof, pursuant to a Chapter 13 plan. No matter the chapter of bankruptcy, once you receive a discharge, you will no longer have any of your wages garnished for that particular discharged debt.

Another thing to realize is that if you are unable to pay current debts and obligations, filing for bankruptcy may prevent a wage garnishment from ever starting in the first place. Meeting with a qualified Atlanta area bankruptcy and wage garnishment attorney can help you assess your situation to see if this would be a good idea for you. An attorney can help to determine the options that best suit your needs, and help guide you through the process for the best possible outcome.

The Bankruptcy Means Test

The Bankruptcy Means Test operates in two ways:

  1. It will determine if you qualify for Chapter 7 Bankruptcy; and/or
  2. If you do not qualify for Chapter 7 Bankruptcy, the means test establishes what you are required to pay your creditors in a Chapter 13 Bankruptcy.

What is the Means Test?

The means test is based on income and was established as part of the amendments to the Bankruptcy Code, and enacted by Congress in 2005 (BAPCPA). The means test takes into consideration the individual’s income for the six months preceding the month prior to filing.

If your income is less than the median income level, then you are presumptively eligible to file a Chapter 7 Bankruptcy

In Georgia, the current median income for a family size of 4 people is $85,763.00. For a family of 2, it is $63,850.00. If your income exceeds the median income level, you may likely be required to file a Chapter 13 Bankruptcy.

A majority of the deductions that are taken on the means test are standardized. Some of the actual deductions that can be taken are: income taxes, health insurance, mandatory retirement accounts, court-ordered domestic support and care for an elderly/ill/disabled household member.

Talk to a Bankruptcy Attorney

A qualified bankruptcy attorney will work with you to determine your eligibility for a Chapter 7 Bankruptcy, and will explain the pros and cons of Chapter 7 Bankruptcy versus other alternatives. Your attorney will help you complete and submit 2 forms: Chapter 7 Statement of Your Current Income and the Chapter 7 Means Test Calculation Form. Even if you do qualify for a Chapter 7 under the means test, there are additional considerations as to whether a Chapter 7 is the best choice for you, your family and your current financial situation.

Preparing for a 341 Meeting of Creditors


Upon filing a Chapter 13 Bankruptcy petition with the U.S. Federal Court, your case will be assigned by the Court to a specific Trustee that will oversee, and administer your case. Once a Trustee is assigned to your case, a Creditor Meeting under Section 341 of the Bankruptcy Code will be scheduled by the clerk of the court. The clerk will then send a notice of the time and place of this meeting to you and all your creditors.

You must appear at this meeting and answer questions from the Trustee about your petition.

Your creditors do not usually attend this meeting. The Trustee will ask you a series of questions related to your bankruptcy petition, schedules and relate documents that were filed with the court. This meeting is fairly quick. Your attorney will attend this meeting with you but cannot respond to the questions for you. You will answer these questions under oath, so it is imperative that you are honest.

Once the 341 Meeting is underway, some of the questions asked may include the following:

  1. Did you read and sign all the documents related to your case?
  2. Is all the information in these documents true and correct?
  3. Are all your creditors listed, including friends or relatives to whom you owe money?
  4. What is your reason for filing for bankruptcy?
  5. Are all your assets listed on your petition, including any and all bank accounts of any kind, real property in any country, and any and all personal property (jewelry, art, collectibles, vehicles, etc.)?
  6. Do you have any mortgages or other real estate interests?
  7. Have you ever filed Bankruptcy before?
  8. What is your job?
    1. Are you paid hourly or are you salaried, and what is this amount?
      b. How often are you paid?
    2. Do you have any alimony or child support obligations?
  9. Do you own any businesses?
  10. Are you the beneficiary of or the trustee of any trust?
  11. Are you going to receive any inheritance upon someone’s death?
  12. Are you entitled to the life insurance proceeds of anyone?
  13. Do you have any ongoing lawsuits against someone else?

The specific questions will generally vary by jurisdiction. Your attorney will go over all of the specifics with you prior to your hearing. When scheduled a 341 meeting, it is best to have an experienced bankruptcy attorney walk you through the process and represent you on the day of your meeting. Call attorney Matthew Cherney to schedule a consultation today.

How Bankruptcy Can Help With Back Taxes


If you owe back taxes (federal, state, or local), this can be a tremendous stress. Many people inquire as to whether filing bankruptcy can help deal with their tax debt. While every situation is different and needs to be assessed by a qualified bankruptcy attorney, there are ways in which a bankruptcy filing may help you with your back taxes.

If you owe money for back taxes, the IRS or State Revenue Department can garnish your wages or your bank account. Filing a bankruptcy will stop a tax garnishment. This is what is known as the automatic stay, which requires all creditors (including the taxing authorities) to immediately cease collection action. What happens to your taxes next depends on the chapter of bankruptcy you are filing.

Chapter 7 Bankruptcy

Certain taxes are dischargeable in a Chapter 7 bankruptcy. Here are the general rules regarding dischargeability of taxes in Chapter 7 Bankruptcy.

The Three-Year Rule

The tax return was due at least three years ago. Most returns are due on April 15 for the previous tax year. If the taxes were due from a return filed on April 15, 2017, they would be eligible for discharge (provided all other criteria are met) after April 15, 2020.  Do not forget to take extensions into consideration. This means that the three year rule applies to the extension date.

The Two-Year Rule

You must have filed the return at least two years before you filed your bankruptcy case. If you don’t file a return, sometimes the IRS will file one for you. Many bankruptcy courts do not consider that a return for purposes of fulfilling this rule.

The 240 Day Rule

The taxes must have been assessed at least 240 days prior to filing Chapter 7. When the taxing authority enters the liability on its records, they have “assessed” it. This doesn’t necessarily happen the minute you file your return. It could take weeks or months. In some cases, the taxing authority will audit your return and assess additional taxes years after the return is filed. This period could be tolled or extended if you filed an offer in compromise with the IRS or if you filed a bankruptcy case during that period that was discharged or dismissed.

Chapter 13 Bankruptcy

If you cannot discharge your income tax liability in Chapter 7, you can certainly treat the income tax liability in Chapter 13 Bankruptcy Plan of Reorganization. This means that you can propose to pay back the tax liability over a period of up to five years. The Chapter 13 will also stop future interest and penalties from accruing on the amount outstanding.

Your attorney will determine which taxes are and are not dischargeable in Chapter 7.