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Chapter 7 Post Discharge Steps to Take to Rebuild Credit

1).  If you surrendered your vehicle and are unable to purchase a cash car or use a friend or family member’s vehicle then you will need to purchase a vehicle.  We advise our clients to start looking at traditional dealerships.  Try to avoid tote the note lot places.  Most major dealerships can work with a Debtor post discharge to get a vehicle financed.  If you do not require a vehicle move on to step two.  If you can put off purchase of a vehicle for about one-year you should get a decent interest rate from any dealer presuming you follow step 2.

2).  Obtain a credit card.  If possible, this should be a normal credit account, not a secured card. Most of our clients find that the major banks will issue them a credit card with a small limit immediately upon completion of a Chapter 7.  Pick something that you spend your money on each month – i.e. gas, groceries, utilities — pay the card off each month prior to the due date, and never have more than 30% of the credit limit outstanding at any one time.  If you need to pay the credit card more often than monthly to keep from hitting the 30% we recommend that you do so.  If a Debtor follows the above for approximately 1 year after the case is discharged then that Debtor would likely qualify for a reasonable auto loan less than 10% interest.

3).  90 days after a Debtor’s discharge date they should obtain a copy of their credit report from all three credit bureaus. Any unsecured debts that were incurred prior to a bankruptcy filing should show as a 0 balance and included in a bankruptcy.  If an included debt shows up in any other way you should dispute these items directly with the credit bureaus.  A debtor will need to show proof of the Chapter 7 Filing, Inclusion of the referenced Debt in the paperwork, and a copy of the Discharge Order entered in the case. If there are not any items to dispute on a Debtor’s credit report, then a substantial increase to the Credit Score should be seen about this time.  If there are items to dispute the Debtor should see a substantial increase in credit score upon favorable resolution of the disputes.

4).  During year two after discharge, continue to responsibly use credit.  If you have used the above credit card responsibly and you were required to finance a vehicle during the last 12 months, you should look at refinancing the note. If you kept a high interest vehicle through your Chapter 7 Bankruptcy you should explore refinancing to a better interest rate as well.   Capital One and State Farm Bank generally offer favorable refinance terms at this point.  Presuming responsible use of the Credit Card during year 1, year 2 should see an increase in credit limit on the card.  A second credit card could be sought if necessary.  Remember that number of accounts and how long an account has been open can negatively impact a credit score, so ensure you actually need the card that you are applying for.  Our firm would recommend cards that offer cash back.  www.nerdwallet.comcompares credit card perks start research there.  If you obtain a new card keep your first card open and active even if you are not going to use it.  Remember, age of accounts is important.

5).  At the two year from discharge mark, presuming you have followed the above steps, your credit score should be back to average, and you should not have any issue qualifying for credit.  At this point, a Debtor should qualify for a mortgage, vehicle at favorable terms, etc.

Can I get rid of my tax debt in a Chapter 7 bankruptcy?

Maybe.

Tax debt can be very crippling.  The IRS is often aggressive about collecting their debt, employing the use of liens and bank account garnishments to take what they believe is owed to them.

Some tax debt, luckily, is dischargeable in a Chapter 7 Bankruptcy.

First and foremost, your tax return MUST have been filed timely in order for it to be dischargeable. If you filed your return late, the debt is not dischargeable.  If you timely filed for an extension, and then timely filed your return within the time allotted pursuant to that extension, your return is considered timely filed.

Secondly, to discharge the tax debt, the tax return must have been originally due at least three years prior to your bankruptcy filing date. For example, if you owe taxes for tax year 2015, that return would have been originally due April of 2016.  Thus, you must file after April of 2019 in order to discharge your 2015 tax debt.

These are the two main obstacles to discharging your tax debt.  There are a few other nuances, but your bankruptcy attorney can guide you through those to make sure your tax debt is dischargeable.

Chapter 7 Bankruptcy: Is it too good to be true?

Chapter 7 bankruptcy can provide an enormous amount of relief to debtors in exchange for minimal consequences.  The huge upside, often combined with very little low side, can cause those seeking debt relief to question if Chapter 7 bankruptcy is fools gold.  When providing consults to those in need of debt relief, I occasionally find feeling like a snake oil salesman when I hear the cynical cliché: “sounds too good to be true”.

The truth, though, in most cases is that it does sound too good to be true. In a majority of my cases, a debtor can get rid of all or most of their debts, better their credit score, and keep all of their assets.  Negative consequences are typically limited to the bankruptcy showing up on their credit report for 10 years, and the inability to finance a home for two years after discharge.

Even the negative consequences are usually moot; who cares about the bankruptcy on their credit report if their score goes way up?  If you already own a home, who cares if you can’t buy one for two years? And if you’re renting – chances are you wouldn’t qualify for a home loan anyways because of terrible credit.  Further, Bankruptcy can actually put you on faster path towards home ownership because it cleans up your credit.

Chapter 7 bankruptcy is referred to in the Bankruptcy Code as “a fresh start”. Congress intended it to be too good to be true.  Those in our society who struggle with debt do not deserve to spend their lives in some abstract debtor’s prison, constantly being harassed and sued by creditors that they could not ever pay.

Congress’ intention was to give Americans a way out of debt, but to also treat creditors fairly.  If you do have non-exempt property (planes, boats, rare coin collections), it is fair to turn that over to the creditors in exchange for discharging your debts.  But most people do not have non-exempt property, so they are not faced with the consequence of giving up property.   If your income shows that you have an ability to repay creditors, you will likely have to file a Chapter 13 bankruptcy and pay back your creditors over time.  But if you do not have the income to support yourself and your family AND pay back creditors, Chapter 7 is your way out of debt.

Chapter 7 bankruptcy can be very beneficial financially (and for your sanity if you’re being harassed by creditors).  If you think that Chapter 7 bankruptcy sounds too good to be true, you may be right. But that is the point of Chapter 7 bankruptcy, and that was Congress’ point when writing the Bankruptcy Code. It is a way out of debt for struggling Americans – and in the end, society is stronger and better economically when our population isn’t burdened by unpayable debt.

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