Brent’s Credit and Debt blog

OK, your bankruptcy has been filed.  You might have a discharge, or might be on a payment plan.  Either way, you need to start RIGHT NOW to build your credit back up. I personally made a mistake. 

After my bankruptcy, I waited 2 years to get started on rebuilding my credit.  I thought you HAD to wait, and that no one would give you a card, or a car loan, or any other kind of credit.  I was wrong. 

The truth is that there are 2 primary kinds of credit, and those exist in 2 brackets.  Let me explain this a bit. 

Loans come in 2 varieties.  You can have secured debt, like a car loan or a mortgage, or you can have unsecured debt, such as a credit card or signature loan.  When you buy a car, the bank holds the title to the vehicle.  If you default on the loan, they get the car back so they can sell it to someone else.  For a home mortgage, the mortgage company holds the deed to the property.  As long as you have a mortgage, you don’t own a home, you are buying one.   

Credit cards are different.  When you buy something with a credit card, it is yours.  Even if the credit card company tried to come after what you bought, you could have sold it, or thrown it away.  And since many people use credit cards for food and gas, it can be pretty hard for your credit card company to come after your digested food.  Although you may feel like giving it to them… 

But I digress.  The question at hand is how to get credit after bankruptcy.  We are going to get there in a minute, but first let’s look at how to keep credit during a bankruptcy. 

When you declare a bankruptcy, you do NOT have to include all of your debts as part of the filing.  You are including the debts you want to get rid of.  As an example, when I filed, I had a zero balance Kohl’s card that I didn’t even consider.  So, I kept it.  Kohl’s left my interest rate and credit limit alone, and I was able to use the card.  My Sears card, with a high balance, was closed by Sears.  I understand that.  They didn’t want someone that wouldn’t pay off their debt to be one of their customers. So, at the end of my bankruptcy, I had a Kohl’s card. 

If you have a very low balance card, or a zero balance card that you think you can keep, it would be a great idea to do so.  Even if you have a card with a higher balance, it make be a good idea to call the credit card company and see if they will work out a payment plan with you and let you keep the card.  They might be willing to do this if you explain the situation. 

Now, how about after bankruptcy?  Well, you have a couple of options.  First, if you have a credit union that you bank with, check there first.  They are often lenient and may give you a real credit card.  If they do give you one, make sure that they report to all 3 credit bureaus.  You want your on-time payments to show up on your credit report. 

If that doesn’t work, there are a couple of things to try.  First, go to Orchard Bank (http://www.orchardbank.com/) and Household Bank (http://www.householdbank.com/).  They deal in the sub-prime debt market, meaning they will take a chance on you.  If you have a reasonable income, they might be willing to do business with you.  They offer both secured and unsecured cards, so you can try for either.

Which brings us to secured credit.  There are really just a couple of kinds of secured credit that you should be interested in at this point.  The first is a secured credit card, and the second is a secured loan.  The idea behind these credit programs is simple:  you put up the money, and the bank takes no risk.  Let’s say, as an example, that you choose to open a secured loan.  You take $500.00 to the bank, and they open a new, special account for you just for this loan.  You deposit your $500.00 in the secured loan account.  The bank then ‘loans’ you $500.00!  You make regular payments of less than $50.00 per month for a year, and you have paid off your secured loan.  If for some reason you default, the bank still has your money.  What this does is give the bank a way to earn interest risk free.  But, it also allows you to establish credit. 

A secured credit card works in much the same way.  You deposit your $500.00 in your special account, and the bank gives you a $500.00 line of credit on a card.  Then, you can make purchases up to $500.00.  You make regular payments, and build your credit.  If you default, the bank already has their money, so again this is a no-risk deal for them. 

After a period of time, your scores will start to go up with regular payments.  But remember, just one negative will crush your score again, so don’t be late!

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

You have an account at collections. Face it, you have a problem to deal with. The stress is just about unbearable, and the fact is that you are legally responsible for the money. The fact is that your account has been sold, and you now have to deal with the repercussions of not paying for the debt on time.

When a collection agency receives your debt, they have a couple of courses of action that they can take. The first, as you know, is to start calling you and try to collect. That is the most common method of getting money from a debtor on a defaulted account. The collection agency has another option, though. They can choose to sue you for the money.

Why would they do this? Well, each collection agency is different, but the reason is that they think they can get more money out of you by suing you than by collecting the funds.

When evaluating a debtor for suit, a collection agency will check quite a bit of information about you. You see, when your account is first purchased, the collection agency spends money to find out about you (See my BLOG entry http://creditconundrum.wordpress.com/2008/03/02/cc4-how-the-debt-collector-finds-you/ for more information). Now that they have all that information, they spend some time evaluating your financial and personal wealth situation, and then make a determination on whether or not to sue.

There are many factors, but here are some of the high points:

1) Is the Statute of Limitations on your account nearing the end date? (see http://creditconundrum.wordpress.com/2008/03/11/cc11-what-is-the-statute-of-limitations-for-my-credit-card/ for information on the statute of limitations).

2) How high is the balance of your account? If it is so high that they feel you may not be able to make payments, they might look at you as a candidate for a lawsuit.

3) What are your demographics? Certain demographic groups are more likely to pay against a judgment that others.

4) Are you employed? It is easier to collect money from someone who is earning it. Go figure.

5) Do you have equity in a property or some other asset? If so, they may be able to get you to re-finance, or to sell and pay up.

Any of these factors may contribute to their decision, and there are many additional factors. Just understand that they make a decision based on their probability of success and the amount they think they can be awarded in the suit.

Now, there are problems for a collection agency when it tries to sue someone. First, the agency has to pay fees to file, and pay for an attorneys time both to prepare the case, and also to do the actual litigation. This can be quite expensive, so the return on investment has to be quite clear. They will look at the costs to file and go to trial, the amount they bought the debt for, and the collectible amount, and decide if the money is worth it.

The end game, though, is that if they win their case, you will probably end up paying what you owed, plus interest, penalties and fees. The collection agency can put a lien on your house, so that when you sell they get their money. They can order a garnishment against your pay check. And they can request assistance in getting their payments from the court.

A couple of things you should know before I close:

1) If you stop making payments on a payment plan you have established with a collection firm, it may be a trigger to get them to pursue you in court. The fact that you were paying probably means you can, so they might go after you.

2) Just because you haven’t seen a summons yet doesn’t mean you won’t if your Statute of Limitations runs out. As long as they filed before the end date of the SOL, you may still have your day in court.

Finally, I will tell you this: Most lawsuits filed against debtors are settled out of court. A smart debtor knows that they might lose the case, and will want to just get rid of the debt. So, if they sue, get a lawyer, and try to get it settled. You may end up saving a bunch of money, and you may be able to make the debt go away.

To get a copy of my FREE e-Book ‘The Top 10 Questions A Debt Collector Might Ask You’, just click the link. You will be taken to a page where you can get more information about downloading the e-book. This book tells you what you might hear during a call from a collector, how they use the information they get from you, and how you can protect yourself by not divulging too much.

So you are filing for bankruptcy.  You are taking the plunge.  A bit confusing, isn’t it?

Well, the process is pretty well laid out.  There are a few steps you will take, and then with luck, it will be over.  I’m going to give you a quick overview, but you really should ask your lawyer what to expect.

First, you have to file for bankruptcy.  While you can do this yourself, I would definitely recommend an attorney to help you out.  After all the paperwork is filled out, it is turned in to the bankruptcy court.  The court stamps the application with the date they receive it, and that becomes your filing date.

After filing, you get to wait for your hearing.  This hearing, known as the ‘341 Hearing’, named for the section of the US Bankruptcy Code that describes it, is a meeting between yourself, your attorney, your creditors, and the bankruptcy trustee assigned to your case.  It is unlikely that creditors will show up for this.  Most of us have very few assets if we are filing bankruptcy, and we really have very little to contribute to the repayment of debt.  Sears is not going to come after your washer and dryer, as they have no real value.  It is cheaper for them to take a charge-off against the loss and get a big tax break.  Your mortgage company, or car loan holder may have something to say about things, but in many cases they won’t show up either. 

The trustee gets paid by the case, so they want to keep things moving along.  Most meetings only take a half hour or less, and the trustee will see dozens in a day.  They really don’t care about your personal situation, so you won’t need to explain much.  All you really need to do is answer a few questions, and it is over.  The trustee has the right to take some property in a Chapter 7, but you will probably keep your house, a vehicle, and your furnishings.  They will take jewelry, cash, savings, and firearms that can be easily sold, along with other assets as they see fit, unless you are filing a Chapter 13..

If you are filing Chapter 7, that is usually it.  You probably won’t meet the judge, and probably will never have to look at the case again until you start to fix your credit.  You will wait for your discharge, which I will explain in a minute.

In a chapter 13, however, you will get to meet the judge.  Usually, this is an informal hearing to talk about the repayment plan that you come up with and present to the trustee.  If you file Chapter 7, but still have the ability to repay, the trustee will change it to a chapter 13 and help you set up a payment schedule.  This payment schedule will usually last from 3 to 5 years, and then the remaining debts will be discharged.  Usually, you get to keep all your stuff in a Chapter 13.

About 3 months after a Chapter 7 hearing, you will get a discharge.  This means you are free from the debts you had before the bankruptcy, unless you worked things out with your creditors to keep them.  That’s it.  It’s over.  You get to start rebuilding.  The date of the discharge is, kind of obviously, called the discharge date, and that is the date that things are final.

With a Chapter 13, you make all the payments on your schedule, and then you get the discharge.  You are free of the debts on your schedule, and get to keep your stuff.  Of course, anything you reaffirmed with your creditors may still require payments, like your house for instance.  Keeping your debts, such as a house or car, is known as a reaffirmation, and that means you are reaffirming that you will pay for the debt.

A couple of caveats here:  If the court decides that you aren’t worthy of bankruptcy, they may issue a dismissal, which says that the bankruptcy did not go through.  It still shows up on your credit report, but you don’t get the advantages of completing the process.  If that happens, there will be a dismissal date on your report.  You can always re-file to correct the problem, but if they had a reason to dismiss, you may be in trouble anyway.

Finally, if you want to quit your bankruptcy, you can do that any time prior to the discharge date, which means you are still liable for ALL of the original debt amounts.  This is called a cancellation, and you will see a cancelled date on your report.

Want all the ugly details?  You can find more information here:  http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

So, you’ve missed a payment or two.  You probably could have made them, but other things, like eating, got in the way.  Now your creditor is calling, writing, emailing, and generally acting like you are a bad person.  You don’t want this to go to collection, and you don’t want to lose the ability to use the card.  So, how long do you have before the creditor writes you off?

Every creditor will have its own policy.  Typically, they let you know they are unhappy at 30 days late, they get grumpy at 60 days late, and they decide you are never going to pay at 90 days late.  The credit bureaus report up to 150 days late.  Anything more than 150 days is lumped into the 150+ day bracket.

What do they use to decide when it is 90 days?  Well, you pay on your earliest payment first, so it works like this:

• You are supposed to make regular $200.00 payments to your bank for a loan. You make the payments for a while, and then run into a financial problem. You miss a payment. When the next billing cycle starts, you are 30 days behind.
• You miss another payment. Your bank calls you, and you make a payment. Since you missed a second payment, you are still 30 days behind.
• You miss another payment. You are 60 days behind. At this point, your creditor reports you, but probably for only being 30 days late.
• You make a payment, and the billing cycle starts again. Still 60 days behind. Another notation on your credit report.
• You miss another payment. The company declares the account in default status, and cancels your card. They report the loss as a charge-off, and note your credit as 90 days late, and as a charge off.

You have to understand a bit about the finances of debt collection to understand how creditors operate.  Let’s say you have a $1,000.00 credit card with a bank.  They are earning 14% interest from you.   So you end up making nice payments to them.  The earn money from this, and they are profitable.  You also cost quite a bit for them to acquire you as a customer.  So they hate to give you up.  See my entry http://creditconundrum.wordpress.com/2008/03/18/the-finances-of-debt-collection/ for more on this.

Your creditor is going to compare you to other people they have loaned money to.  Your income and payment history are key indicators of how well you may perform as a responsible debtor, and they take that into account when making decisions about you.  However, at some point they give up on you.  When that happens, they are going to do what they can to get some of their money back, and they know that by doing this they will lose you as a customer..  They are going to charge the $1,000.00 and the interest off as a bad debt, and reduce their tax burden.  They also get to try to recoup some of the money.

Now, the ‘industry standard’ (in quotes because this industry is a free-for-all) that most creditors follow is to try internal collections for 90 days, and then to go to an external vendor for collections.  This is the normal period for a charge off.  If you have been a good customer, they might wait a while longer, but if you don’t make payments, they will charge your debt off.

When that happens, they sell the debt to the highest bidder.  That bidder happens to be a collection agency.  And by the time it goes to collections, it is too late.  Your credit scores drop, you get hit with penalties, and you may have legal issues.

The best thing to do when you are behind?  Call your creditor.  They don’t want to lose you, or the money you owe, so they will be willing to work with you.  They may be grumpy, and it may take a while, but be persistent in asking for help.  It can really pay off in the end.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

You aren’t going to believe this, but it’s true.  Here is the secret behind debt collection:  creditors want their money!  OK, I am being kind of irritating there, but that is what drives debt collection.  How the process works, however, is pretty interesting.When you apply for debt, the creditor decides if you are credit worthy.  They do this based on your income, your past payment history, your line of credit to used credit ratio, and your credit scores.  It takes a computer about 1 second to make this decision.  If they, or it, decide you are worthy, then you will be issued credit.  This comes, however, with some protection for the creditor.In your credit agreement, you explicitly agree to pay the creditor back.  They are pretty determined that this will go in their favor, as this is how they make their money.  However, you may experience a period in your life where you don’t pay the debt back.When this happens, the creditor tries to get in touch with you.  They usually have an internal department call an Internal Recovery Unit (IRU) that is responsible for going after very collectible debt.  These are the phone calls that you get when you are 30 or 60 days past due.  You see, the creditors still consider this very collectible.  They usually don’t report a problem for 60 days to the credit bureaus, although individual firms have their own policies on this.  They just want to collect their money and keep you as a credit customer.With some debtors, a bank will be more lenient.  If you have an excellent payment history, and are suffering some temporary hardship like a job loss or medical problems, some banks will give you 150 days or more to start making payments again.  In these cases, they recognize your worth as a customer and want to keep you.  It is very expensive to acquire a new customer, often costing hundreds of dollars in advertising, promotions, list acquisition, and other fees just to land a single customer.  As long as the creditor is making money from you, they want to keep you around.In the case of the creditor wanting to keep you, they will have their IRU do the collections.  At some point, however, it becomes too costly to carry the debt, and they decide to sell It to a collections firm.Typically, debt is charged off after a 90 day delinquency.  This debt, between 90 and 120 days old, is called ‘fresh’ debt, and collectors love it.  They would much rather collect on this debt than on older, ‘stale’ debt.  Fresh debt can return 60% or more actual collection revenues.  This is a huge boon to the collection agency, as they buy the debt for less than that.Periodically, an IRU at a creditor will be overwhelmed, and the creditor will charge off the debt early, and pass that debt on to a collection firm.  This debt, known as IRU, is what collectors dream about.  It is very collectible, and has a high return rate on the dollar spent.So, why is a creditor so interested in keeping their debt and collecting it internally?  They lose a lot of money if they sell it off.  A typical ‘fresh’ debt portfolio, with debt ages of 90 to 120 days, sells for about 40 cents on the dollar.  So, they collector can make up to 150% profit, assuming they could collect all of the debt.  The debt collector also adds fees and interest to the collectible amount, so they are able to pad their profits nicely.Debt can also go out as ‘contingent’ debt to a collections firm.  In this case, the original creditor keeps the account, and they pay a commission to the collector for each dollar collected on the original amount.  The original creditor has the ability to recall that debt per the contract, and can reassign it to another collector, or to their internal collections, if they aren’t happy with the performance of the collection agency.If a creditor can collect on their own debt, they get more money back, and get to keep the customer.  They will also be charging a higher interest rate because of the increased risk, so they make money fairly quickly on collected debt.  It makes sense for the original creditor to try to keep collecting on their debt, but ast some point they decide you are not worthy of being their customer, and they accept a loss on your original credit in order to get some of their money back and continue their profitable business.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

The IRS, in their infinite wisdom, has given us an opportunity once again to pay even more taxes!  I know, your payroll tax, and the taxes you paid when you bought something on credit weren’t enough.  In fact, we should be grateful to pay more taxes, right?

Well, no.  I am not grateful that they find more creative ways to tax us, and this is a VERY creative way to do it.

Here is what happens:  For some reason, you don’t have to pay all of a debt.  This is called ‘forgiveness of debt’.  Yep, forgiveness.  Now the way I was raised, that means nothing else has to be done.  You say “I’m sorry”, and the person you are apologizing to says “I forgive you”, and it ends.  Well, not so with money.

Lets look at an example:  You have a $10,000.00 credit card that you have maxed out.  You stop paying, and the credit card company turns your account over to a collector.  All pretty normal stuff so far.  When the collector calls you, you say “I don’t have ten grand, will you setlle for 3 thousand dollars”.  The collector moans and complains, but since they bought it for a lot less, they agree to the deal.  You saved 7 thousand dollars!

Well, not exactly.  The collection agency is going to be sending you a Form 1099-C, which declares the difference, or our example of $7,000.00, as taxable income.  If you get a break of $600.00 or more in a settlement, it is taxable.  So, because it is taxable, the collector or creditor that forgives the debt has to tell the IRS.  There are a few exceptions to this, of course.  If you are insolvent when a debt is forgiven, meaning youhave more debt than assets, then the IRS won’t try to collect taxes on the forgiven amount, unless it is more than your debt – the forgiveness.  There is an IRS publication that explains all this here: http://www.irs.gov/pub/irs-pdf/p525.pdf.

In my opinion, this is just one more reason that settling debt is not a good idea.  It just causes problems for you down the road.

And by the way, when you default on a loan or credit card, if the creditor writes off the debt, that may be considered forgiveness as well.  So if you end up getting a 1099 in the mail, check your credit report to see what was written off or charged off, and be prepared to have it affect your taxable income.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

We can just go ahead and answer this now:  10 years.

However, what does that really mean?  10 years from when?  Well, the removal date of a bankruptcy is determined based on the filing date of the bankruptcy, NOT the discharge date.  Either chapter 7 or chapter 13 debts will fall off after those 10 years are up.  However, it is possible that the credit bureaus will remove them after 7 years, if you request it.  They may not remove the entry, but you can dispute it at that time and it may fall off.

But what about all the accounts included in bankruptcy?  Well, they will be on your report for 7 years.  Here is the trick, though.  The 7 years is calculated based on the first date of delinquency on your account.  In other words, the clock starts as soon as you miss your first payment resulting in default.  So, if you start missing payments in January, but don’t file bankruptcy until November, the clock starts for your 7 years in January.  You will need to check your reports for this, as each creditor will report the late payment differently.

Does it matter if you file Chapter 7 or Chapter 13?  Nope.  Not really.  On a Chapter 13 repayment plan, your discharge date won’t occur until the payment plan is satisfied, but the clock starts ticking with the filing.

So, what it boils down to is this:  You have 7 years to see the individual items fall off, and 10 for the bankruptcy itself.  Of course, by working diligently you can get all of them removed much quicker, but that does take work and a bit of knowledge.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

You have to be honest with yourself. If your financial life is bad enough that it is time to consider bankruptcy, or if you have already filed, you are putting the biggest black mark available on your credit report. This isn’t trivial. For the next 10 years, anyone who pulls your credit reports will see a public record entry that says “BANKRUPTCY”. It might as well be in neon blinking letters, because it is one of the first things a creditor looks for after your credit scores. You will affect every debt that was included in bankruptcy, and your credit vendors may decide to cancel the cards you didn’t include.

Let’s look at why it is so bad. When you file bankruptcy, you include a list of creditors, including the account number, for each account that you no longer want to be liable for. So, let’s say you have 5 credit cards, a mortgage, and a car loan. You would have 5 items on your list of creditors. When the court accepts the document that describes these debts, they will contact each of those creditors and let them know that you are including that account in bankruptcy. At that point, the creditor can no longer call you or try to collect their money. In fact, many larger firms won’t talk to you at all. AFNI collections forbids their collectors to take a call from a person who filed bankruptcy because they are worried about getting sued.

The creditors on your list are done with your debt. They are going to take a charge-off against their taxes for bad debt. When they do that, the also add a charge-off notation to your account. So, suddenly you have 7 charge-offs on your credit. Charge offs are bad things in the eyes of a creditor. Creditors don’t like to see an indication that you won’t pay them back.

When your bankruptcy is final, your creditors are notified that the bankruptcy has been dismissed. At that point, each of your debts included in the bankruptcy will get a notation saying something like “Included in Chapter 7 Bankruptcy” (if you filed chapter 7 of course). So, those 7 accounts just got worse. See, in the credit report, we can’t see how far apart events occurred. We can only see that a debt was charged off, and then was included in bankruptcy. This looks like 2 big black marks to a potential creditor, and your scores really suffer.

Here is what an account included in a bankruptcy looks like:

As you can see, there are 2 big hits here. The first is in the Pay Status field, where it shows Collection / Chargeoff. This indicates that the account was either sold to a collection firm (and probably charged off), or possibly just charged off. Either way, this is bad news for you. When a creditor finds this on your report, they know you didn’t pay. You may also have noted that on this particular account, Experian and Equifax are NOT showing the debt as included in bankruptcy. This error is your first real break in getting an account removed.

Also on there, in the bottom of the report entry, is a text area describing the actions taken by the creditor. Each credit bureau describes it differently (which is why I am showing all 3), but the end result is the same. You have a very bad thing, a bankruptcy, on your report.

The final bad item that goes on your credit report is the Public Information entry for your bankruptcy. Let’s take a look:

Bankruptcy

As you can see, this is a chapter 7. The ultimate black mark on your record. A bankruptcy. From a credit report standpoint, it can’t get worse than that. You may have heard that creditors love you after a bankruptcy because you can’t file again for 6 years. Well, that may have been true once. But you can still stop paying, and if you do that once, you are pretty likely statistically to do it again.

One thing to note: You can do what is called a ‘reaffirmation’ with a creditor to keep a debt. So, as an example, your car loan can be reaffirmed, and you keep the car and payments. However, your creditor will probably write a new loan, and if the new loan is for less than the balance of the old loan, they will still charge the difference off.

If you are considering filing bankruptcy, you should know that your credit won’t be the same for 10 years. You are going to have to work hard to rebuild, and it does take time. Explore your options with an attorney, and make sure you understand the implications of bankruptcy.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

If you are facing foreclosure, the first thing I would do if I were you is STOP reading this, CALL your mortgage company, and start trying to work things out. They are faced with so many defaults these days that they are often willing to work something out with you, like perhaps a lower interest rate, or deferred payments, or perhaps some other means. Honestly, they don’t want your house back. The market isn’t overly great right now, and houses are pretty hard to sell. If they get it back, they will have to go through a lot of hassle to sell it, and they will lose money on it anyway. Add in the legal costs of foreclosure, and you might have a good case to get a lower payment and keep the house. If you are financed through HUD, call a local office and ask for help. They WANT to help you stay in your home!

You’re still reading. Sorry to see that.

OK, so it happened. You are losing your home to foreclosure, or maybe you already lost it. It doesn’t matter why at this point, it just happened. Now you have to deal with a few things. The first thing is the fact that your foreclosure will show up on your credit report for the next 10 years. The second is that you are going to have a hard time getting a mortgage on another property for a while. And the third thing is you now have no place to live.

Let’s deal with the third thing first. You need to have a place to live. Of course, if things are really bad, you might be able to turn to friends or family for a while to be able to have a place to stay. That can help you recover for a while you get your finances in order. Another option is to rent, but there is a problem there: most companies that rent properties will not be interested in renting to a person that couldn’t handle their mortgage. My experience is that they will want at least 2 month’s rent held as a deposit, and they will probably charge you a steeper monthly rent. If you are like most people, if you had an extra 2 month’s rent, you probably would have been paying your mortgage!

Who can you rent from then? Well, a private owner may be willing to take a chance on you. Your local newspaper or a site like http://craigslist.com will have places for rent by owner as well as by corporations. An owner is less likely to run a rental history or credit check on you, as that costs them money and they might not know how to do a background check. However, they might also be less likely to fix things that are broken.

As far as a mortgage goes, it’s probably not going to happen. Unless you have a huge down payment and an income that makes Donald Trump jealous, you probably won’t get financing at this point. All is not lost, however. You can expect to be able to get a mortgage within a year or so. It may take a bit longer than that depending on the rest or your credit history, but if you start taking care of the rest of your credit and can show a consistent good payment history, it will help a lot.

And finally, what about your credit report. Well, two things are going to happen. First, the fact that you are going to mortgage means that you missed payments. So, you will have late payment notations that look something like this:

Late Payments (last 7 years): 30 Days Late: 260 Days Late: 490 Days Late: 4

You will get these notations on all three of your credit reports. Late payments are a big red flag to lenders, so this will hurt your credit scores. Worse, though, is this:

Remarks: [TransUnion] Foreclosure redeemed[Experian] Foreclosure proceeding started.Credit grantor reclaimed collateral to settle defaulted mortgage.[Equifax] Foreclosure Real Estate Mortgage This is from a tri-bureau report with a foreclosure on it. A foreclosure is the second-worst bad item on your credit report. The only thing worse is a bankruptcy. So, be prepared for the fact that it will take some time to fix your credit after going through foreclosure proceedings. Going through the loss of your home is horrible. If you have gone through it, I wish you well in recovering your situation. If not, and you read this anyway, try to work things out and avoid the problems that will plague your credit for the next 10 years.

To get a copy of my FREE e-Book ‘The Top 10 Questions A Debt Collector Might Ask You’, just click the link. You will be taken to a page where you can get more information about downloading the e-book. This book tells you what you might hear during a call from a collector, how they use the information they get from you, and how you can protect yourself by not divulging too much.

If you are getting hounded by a debt collector, they may be threatening to sue. By law, the debt collector can sue you, to try to get a judgment against you for any debt you have defaulted on. However, they have to do this within a certain amount of time. This time limit is called the Statue of Limitations, or SOL.

Each state has its own set of laws regarding SOL. In fact, each type of debt has its own statute of limitations. There are really two primary kinds of debt most of us get into; an open-ended agreement, and a promissory note. An open-ended agreement, like a credit card, has a varying balance, and not strict payment schedule. In other words, that payment amount change based on the balance of the account and the interest rate. A promissory note is commonly found in a car loan or mortgage, where all the terms are spelled out and the payments are on a fixed schedule, with fixed and well-known amounts.

In Colorado, both promissory and open-ended credit arrangements have a 6 year statute of limitations. In Ohio, promissory is 15 years, and open-ended credit has a 6 year SOL. In Arkansas, they really like the consumer, and have a 3 year SOL for both types of credit. Each state has different laws, and the SOL will vary. There may also be a variance in how the state defines the start of the SOL. In some cases, it is when the account becomes ‘due and payable’, or in other words when the creditor decides you aren’t going to pay and exercises their right to collect the full amount. In other states, it starts when the account is defaulted on, and can be reset based on other activities.

So what determines the law in your situation? That can be a bit tricky. When you fill out a credit application, you are agreeing that the company issuing credit can come after you for unpaid amounts. If you default on the debt, they have the right to collect their money, plus interest, penalties, and fees. Let’s take a look at a couple of common clauses in an agreement:

• Controlling Laws: “This Agreement shall be governed by and construed in accordance with federal law and applicable laws of the State of Florida…”
• Collection Costs: “In the event you default in the performance of any of your obligations under this Agreement … you agree to pay all court costs and collection expenses allowed by law, including reasonable attorney’s fees.”
• Default: “…All rights and remedies of the bank are cumulative and may be pursued singularly, successively, or together, at its sole option.”

You never read the fine print, did you? Well, they have you no matter how you look at it. If you default on your credit, and the reason you default is NOT the credit issuers fault, you owe them the money. How could it be their fault? Only if they have charged you for something that was NOT in the agreement, and you didn’t pay for it. Otherwise, the fees they charge are all legal, and, in fact, you agreed to them.

Now, how do they go about enforcing these clauses in the contract? Well, for one, they have fees. If you go over your limit, or you are late on a payment, they may ding you for 30 dollars or more. Most people will call in and see if this can be waived, but they have the right to collect those fees from you. Again, it is your responsibility to manage your card.

For a more significant problem, like a defaulted debt, a credit issuer will turn the account over to some collection process. This may be a debt collector, an internal attorney for lawsuit, or an external legal firm for action. When they do that, the collector will be calling to chat about the situation. They want their money, and they will do whatever they can legally to get it. They are faced with a dilemma, though, which is this: How long will it be until I can’t sue this person for the money they owe?

Lawyers have two ways of looking at the statute of limitations. In lawyer terms, a law can be looked at as procedural, or governed by the laws of the state you live in now, or as substantive, which means it is governed by the original contract. To put it into a little more human terms (sorry, lawyers!), I will walk you through an example.

Let’s take Martha, who was living in New York and took out a credit card with a major credit card vendor. Their agreement was governed by New York law. New York has a 6 year statute of limitations on open-ended agreements, so 6 years is the SOL. Martha gets hit by a layoff and ends up defaulting on a $5000.00 card balance. She gets a new job in Arizona, which has a 3 year SOL. A debt collector finds Martha 4 years after the default, and decides to sue her for the debt. Martha hires a lawyer, and they go to court.

Martha’s lawyer argues that the statute of limitations is procedural, and is set according to where she lives now. The collector’s lawyers will argue that the statute of limitations is substantive, and that the debt is still within SOL based on the original agreement. A judge then has to decide who is right.

If the collection company loses that argument, they are out money, as they cannot collect on the debt through a judgment. In Ohio, as an example, a recent ruling states that all open-ended debt is procedural, or based on where the debtor lives now. That can be in your favor (if you move to a state with a shorter SOL) or against you (if the SOL is longer in your new home state). Lawyers take this into account, and may assume that the SOL is always procedural, and take the current states SOL into account when they decide to try to pursue legal action. That way they don’t waste money having to prove they should be able to sue for that particular account.

OK, then, what causes the statute of limitations to be ‘reset’, so that they can go after you longer? The answer here is pretty simple: you make a payment of the old account. What that does is reset the clock to the date that the creditor or collection agency received the payment. So, if you are nearing the statute of limitations for an account based on where you live, making a payment will start you over.

Which leads us to a move. If you are in a state with a 3 year statute of limitations, and you defaulted 4 years ago, the collector can’t sue you for the money. If you move to a state with a 6 year statute of limitations, and the default was less than 6 years ago, a collector can sue you for the money.

So, what if you are beyond the statute of limitations in your state, are you safe? Well, probably. However, be aware that due to how backed up our court systems are, your case might not get in front of a judge for 18 months or more. The statute of limitations covers the filing date of the law suit, not the actual date in court. If a lawyer has filed prior to the SOL date, you will still have your day in court.

While this may seem confusing, it boils down to this: You can get sued as long as the statute of limitations is not passed. After it passes, they can’t sue you any more, but they can continue to pursue collections from you.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.