Credit Scores

I had a client come in a couple of weeks ago and he said that he had enjoyed my posts. It surprised me and motivated me to write more. I have lots of speeches I give clients and I figured I can just save a lot of fuss if I get them written down. So here goes one of my favorites -- What does a credit score represent? No, not your score, but a credit score in general. A credit score is nothing more thana numerical representations of the odds on whether you will make all your payments in the next ninety days. This is obviously a little bit simplified, but that is the basic idea. What is a credit score based on? The information contained in your credit report is all that the credit score is based on. A credit score isn't like sitting down with a loan officer at the bank. The creditor feeds your report into the ravenous computer, digital machinations take place and out pops a brand new credit score every time you run the report. It is the ultimate reduction of the human equation down to a number -- cold and lifeless. What do you think would matter most in determining your credit worthiness that is nowhere to be found on your credit report? I don't know about you, but if I want to know if someone I loan money to has an income where they can afford to pay me back. Your income is nowhere to be found on your credit report. All of those calculations about your credit worthiness don't even consider how much money you make. What is the best way to improve your credit score? Show income on your credit report. I know, I just said that income doesn't show up on your credit report, but there is one way to show you have lots of money on your credit report -- have lots of unsecured credit lines that you aren't using. The twisted thinking of the credit scoring folks is that if you have lots of unsecured credit lines (i.e. credit cards) that you aren't using then you must have plenty of money and if worse comes to worse, you can always use that credit to make the payments. The converse is also true. If you max out those credit lines, then it looks like you are strapped for cash and you can kiss your credit score good bye.

Chapter 7 versus Chapter 13

The Bankruptcy Reform Act of 2005 changed my own personal approach to how I viewed the bankruptcy process and what would be best for my clients. The choice of which bankruptcy to file, whether it be Chapter 13 or Chapter 7 or no Chapter at all is a choice that should only be made after consultation with legal counsel. In case you were wondering, there is nothing mystical about Chapter 13 or Chapter 7, although it is intoned by attorneys with a certain heft of authority. The "Chapter" is simply the chapter in the law book in which the statutes governing that particular form of bankruptcy are found. Chapter 7 is essentially a liquidation bankruptcy. When a Chapter 7 bankruptcy is filed, all of the property owned by the Debtor becomes property of the bankruptcy estate, just like when someone passes away and all of their property becomes part of their estate. The Chapter 7 Trustee becomes essentially the owner of all your property. You get to retain the property that is exempt or has inconsequential value to the bankruptcy estate.

Sample Good Faith Estimate

Here is a sample of a Good Faith Estimate.

Buying a Home in Bankruptcy

Filing a Chapter 13 Bankruptcy does not mean that you have to forgo home ownership until after your bankruptcy is completed. In fact a Chapter 13 Bankruptcy can improve your ability to get an affordable home loan quicker than doing nothing or filing Chapter 7 bankruptcy.

Why?

Simple, Chapter 13 puts you in position to qualify for an FHA loan sooner than either of the other two options.

If you’ve had credit dings in the past and aren't in Chapter 13, you can reestablish your credit to qualify for a FHA guaranteed loan if you meet the following criteria: 1. Two years have passed since a bankruptcy has been discharged 2. All judgments have or will be paid 3. Any existing tax liens have or will be satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or state Department of Revenue and evidence of history of payments being made 4. Three years have passed since a foreclosure or a deed-in-lieu has been resolved

A Chapter 13 speeds this process up compliments of special rules that are in place for Chapter 13.

I quote from the Department of Housing and Urban Development’s website: QUESTION 3 - Can a mortgagor acquire a FHA-insured mortgage while in a Chapter 13 bankruptcy?

ANSWER - HUD underwriting rules state that a person in Chapter 13 bankruptcy can purchase a home subject to a FHA-insured mortgage. Requirements are the applicant: must have completed one year of payments as required while under Chapter 13 and must obtain a letter from the Trustee of the court, stating the dollar amount the applicant can borrow. See HUD Handbook 4155.1. Essentially Chapter 13 lets you speed the process up to a year faster. The wording of the HUD website is misleading, since it is not a letter from the Trustee or the court you will need. You will need a Court Order signed by the Judge.

In order to get the Court Order, our office will need the following:

1. A Good Faith Estimate from your Lender 2. A copy of the Real Estate Purchase Contract. 3. At least 45 days to get the Court Order signed, after we receive a copy of the Good Faith Estimate.

Feel free to Email the office with any Questions.

A Question from Steve -- Too Much Spread Out Debt

I received the following comment from Steve on my New Year's Day Post and since the blog is still somewhat nascent and I want to see how this works, I'm going to post his comment and answer his question. The hope is that in the future I can use the blog as a medium of communication with clients and readers to assist them in the future at a lower cost than the economics of a legal practice might allow. Since I know Steve, I'm sure he isn't going to mind being made a guinea pig.

I have an issue: I have so damned many accounts open, installment, credit card, mortgage on a couple of properties, etc., that I can't keep track of stuff any more. I mean, literally, I can have 50 bills a month or more. I have some set up on auto pay, but am loathe to set everything up because I can envision situations that would create a whole different financial nightmare.Do you have any suggestions for ways to manage this kind of a situation? I don't like the idea of taking out a home equity loan to pay a bunch of things off, but is that maybe the right thing to do?

I'm a big believer in automatic payments, but you have to have a regular income sufficient to cover those payments or you can end up in bank fee hell.

I crave more information to give better answers. These questions are good ones to ask yourself to begin to find out exactly where you are at.

• How much money are you spending each month in interest?
• What is your credit score currently?
• How does your debt break down between secured installment loans (usually cars and furniture), credit cards, unsecured loans, mortgages and other types of debt?
• Are you making minimum payments or are you paying extra on principal?
• Are you contributing to a retirement account? Other savings account?
• Do you have reserve funds?
• What is your monthly income? outgo?
• What are your monetary habits?
• What are your financial goals?

Those are the questions that I came up with off the top of my head this morning. Over the next week, I'd like to address some fundamental concepts of financial management that pertain to this problem. My inclination is to work on removing most of your debt -- completely. Reducing the debt will have numerous benefits, not the least of which is incredible savings on interest payments.

So, in the coming week I'm going to post on the following:

1. Credit Scoring and its importance
2. Debt Roll-up -- developing a plan to get out of debt
3. Considerations on what debt to retain and what debt to pay off

Steve, if you'ld like to email me more information about your situation, I'd be happy to disguise the information and use you as a case study.

Thanks for the question.

Happy New Year -- Credit For the New Year

Well, New Year's resolutions can come and go, but a resolution on your credit can mean money in your pocket not just this years, but in years, even decades to come. Just a preview of what is coming this year: 1. How to clean up your credit after bankruptcy. 2. Explanations of FICO scores and how they work. 3. The evils (and occasional good) of the Credit Card industry 4. The evils (and occasional good) of Banks 5. The evils (and maybe once in a lifetime good) of Pay Day Loans 6. Bankruptcy and what it can and can't do for you. I would like to get this blog to be event and question driven. Post a comment or a question and I will see that it gets answered.

And it gets worse . . .

For an update of our poor soul who paid $10.00 for a $10.00 cash advance, the $10.00 fee put her $0.99 over her credit card limit and the bank assessed her a $35.00 overlimit fee. Her $10.00 loan cost her $45.00 in the matter of a day. Dare we calculate the interest rate? $45.00/$10.00 = 450% interest per day. 365 days times 450% = 164,250% annual percentage rate. Considering the bank pays .15 % annually on their savings accounts, I'd say they are making out OK.

How Does It Feel to Pay Over 36,500% Interest? Not Good

Often, people don't think about the interest rate they are charged when handling an electronic transaction. I saw this one today and realized that the poor girl who did the transaction was being charged more than 36,500% on a very, very short term loan by the bank.

She made a transfer of $10.00 from her credit card to her checking account and was immediately charged $10.00 Internet transaction fee. On top of that the $20 total got added to her credit card balance which she will also have to pay interest on. Fees, particularly on small transactions, can be outrageous if you look at them as interest charges (which they are.)