Dear Debt Adviser,
After being out of work for 16 months, I finally got a new job. My salary went from $122,000 to $60,000. After an inability to get things worked out with the mortgage company, they foreclosed on the house. Within the past month, I moved out and rented a place to live for now. During all of that time, many of my financial obligations weren’t met. Now I have about $35,000 worth of debt. I’m meeting with an attorney later this week, but I thought I would ask you a couple of questions.
1. Is my credit report looked at any better if I file Chapter 13 instead of Chapter 7 bankruptcy?
2. A friend co-signed a car loan for me. I would reaffirm the loan in the bankruptcy to keep the car. All loan payments have been made on time. Does this hurt my friend who helped me?
3. Do you think I would ever be able to finance anything in the future?
I’m 54 years old and never had any problems prior to the rug being pulled out from under me by the economy. I appreciate any light you can shed on this for me.
You are not alone. Small comfort, I know, but important as you’ll see further on. Even though you’ve come through a tough time, it sounds as if you are getting things back on track. Taking a salary cut like that is never easy, but I’ll tell you from personal experience that it needn’t be permanent. With tenacity and perseverance, you’ll be in a better position in the future. Just don’t give up.
I will answer your questions in the order asked. First, I’ll answer the question regarding your credit report: You already have a foreclosure, and the delinquencies that led up to it are on your credit report. That will have significantly lowered your score. For example, if you had a credit score of 720 before the foreclosure, your score likely dropped after the foreclosure to the low 600s. If you were to now file a Chapter 13 or Chapter 7 bankruptcy, your score would fall a bit more. The chapter you filed wouldn’t make a difference. The effect of a bankruptcy on a low credit score is much less than the impact it has on a good one. You’ll have little credit to lose when you lose your debts. One thing to keep in mind is that depending on the median income in your state, you may not qualify to file for Chapter 7. Ask your attorney about how to maximize your income deductions before you file. For example, if you tithe to your church, that money doesn’t count as income.
Second, any accounts that are currently being reported as positive on your credit report and that are excluded from the bankruptcy would remain positive. A co-signed, reaffirmed loan that appears on yours and your co-signer’s credit reports will remain a positive item.
Third, yes, absolutely you will be able to finance purchases in the future. Too many people are in the same boat as you for the lenders to ignore forever. Eventually credit standards will loosen up, and past mistakes will not count for as much as they once did.
Should you decide that bankruptcy is the best choice for you, just be sure that once you file you’ll be able to meet all your living expenses on what you make. You won’t be eligible to file and have another bankruptcy discharged for two to eight years, depending on which chapter you file. You may want to seriously consider saving the bankruptcy option and instead working out a repayment or settlement plan with your creditors, if possible.
Lastly, since you pointed out your age, I would be remiss if I didn’t encourage you to start saving. My recommendation is to save like crazy. The future and your retirement will be here before you know it.
Ask the adviser