When someone meets with an Arizona bankruptcy lawyer for a free consultation, the first three questions are: (1) How much do you charge; (2) What Arizona property can I keep; and (3) how will bankruptcy affect my credit? My first response to the credit question is: “What is your credit like now?” If that person has been missing payments or had an Arizona foreclosure or repossession, chances are his or her credit score has already taken a hit. People need to think about their pocket book before worrying about their credit score. It is more important to put food on the table and buy clothes for your kids than worrying about whether you can get a car loan or another mortgage at preferred rates. If bankruptcy frees up money for you to do this, it is worth it for that reason alone.
In my opinion, an Arizona bankruptcy lawyer is generally not qualified to talk about credit issues. As I have stated before, even the CIA can’t figure out how these credit scores are computed. For all I know, the score changes day-to-day based on the alignment of the stars and the moon. That being said, I have read a few articles lately providing some insight about credit reports, how a score can be improved and what pitfalls to avoid.
(1) Get a free copy of your credit report and assess the damage. To get a complete picture of your credit report and assess the damage, you can get a free copy of your credit report once a year from all three credit bureaus if you go to www.annualcreditreport.com. Your credit report provides vast information about old and new debts, such as how many times you have been late with payments and your current balances.
(2) Call the credit card company, but get promises in writing! If you are unable to keep up with your credit card payments, you may want to try and call the credit card company, explain your hardship and try to negotiate payments you can afford. But beware! Credit card companies frequently try to make deals on the phone, such as deferring payments and reducing interest rates. If you don’t have something in writing, then you will be unable to enforce such promises. And it is very difficult to get anything in writing from any credit card company. People frequently make reduced payments for a period of time only to be surprised when the credit card company starts billing again for the full amount.
(3) Dispute inaccuracies in writing and provide written explanations. Let’s say you were late paying a bill from a company that no longer exists or merged with a larger bank. The credit bureaus are required to remove that “black mark” if they cannot verify the accuracy. Also, it is a good idea to send a written explanation to all three credit bureaus regarding reasons why a “black mark” exists, such as job loss. This can be done on the websites for each of the credit bureaus. Your credit score doesn’t improve because of this, but a reasonable explanation may sway a lender to take extenuating circumstances into account when deciding whether to grant a person future credit.
(4) Avoid credit repair scams. Some companies claim they can clean up your credit. They do this by sending correspondence to the bureaus disputing the validity of the accounts, even if they are valid. It is a very expensive service, and the credit bureaus still end up validating the account. Most importantly, you can dispute invalid accounts yourself without the need for paying a company to do it. That being said, there are legitimate credit repair companies that can help with such disputes.
(5) Don’t ignore collection letters! A collection reported to the bureaus is one of the most damaging factors to your credit score, even if it is for a lousy $300 unpaid medical bill. Under the Fair Credit Reporting Act, a collection company must send to you a letter and give you at least 30 days to pay the debt or dispute its validity before it can report it to the credit bureaus. At the very minimum, send something in writing to the collection company (via mail and fax so you can prove it was received) within this 30 day period asking for “debt verification”. If the collection company has improperly reported the collection without giving you the 30 days to pay or request debt verification, you can request that it be removed if you promptly pay the debt. Paying a debt that has already been reported as a collection does not necessarily improve your score if the collection company refuses to remove the collection item from your credit report.
(6) Watch out for “junk debt buyers” A “junk debt buyer” is basically a company that buys debts from credit card companies in bulk for pennies on the dollar. It has become huge business. Many people will look at their credit report and see that a credit card company has “charged off” the debt. That does not mean that it is no longer enforceable. It just means that the credit card company sold the debt to a junk debt buyer. The buyer then turns around and sues the debtor for all amounts due, including interest, late fees, and attorney fees. And believe me, they will sue. That is how the junk debt buyer makes money. Most debtors ignore the lawsuit. If this happens, the debt buyer is giddy because it obtains a judgment by default without doing much work.
(7) Can bankruptcy improve my credit score? Maybe! It is true that the “black mark” of bankruptcy will initially reduce your score. However, one thing that bankruptcy does do is wipe away a bunch of debt from your credit report. The end result is that your “debt to credit ratio” goes down. Debtors with good credit scores generally have taken out less than 7% of all their available credit.
I always say to my clients that “time heals everything”. The more time that passes after your bankruptcy filing, the more your credit score will improve if you stay relatively debt free after bankruptcy. For more information about credit and credit scores, visit www.myfico.com.