Lesson 8: Credit Counseling vs. Bankruptcy Protection

Summary:

Debt Management Plans (DMPs) help people who are behind (or soon will be behind) on debt without going through bankruptcy
A Certified Credit Counselor can initiate a Debt Management Plan for you
Chapter 13 Bankruptcy Protection is good for people who are behind on automobile or house payments because it can stop lenders from seizing those assets
Chapter 7 Bankruptcy Protection is good for people who can pass a “Means Test” and have their unsecured debt completely forgiven
If you need help, you should contact a Wise Credit Professional for a free consultation
You can recover from bankruptcy fairly quickly by reestablishing credit and following the principles of Wise Credit Management
You can be eligible to get approved for FHA financing two years after filing for Chapter 7
You can be eligible for most mortgages four years after filing bankruptcy
Joy cometh in the morning

Wise Credit Management is a free Bible-based class that teaches how credit really works by showing factual information directly from the Credit Bureaus and FICO, and simplifies the subject to show everyone how to build good credit or handle bad credit. The class is fairly comprehensive and focused on getting good credit to qualify for a good mortgage rate and terms. WiseCreditManagement.com is a free community for members to take the class, join local groups (online or in person) for mutual support, and to find local professionals who volunteer to use their skills to assist members to success.

I am not a lawyer or Credit Repair Organization.

Home ownership is the way most Americans build wealth and a lack of education about credit is a huge contributor to the growing “Wealth Gap” in our country. Wise Credit Management is focused on teaching how to get good credit and qualify for a good mortgage rate and terms.

My work is protected by the “fair use” section of the U.S. Copyright Act.

If you are drowning in debt and see no way out, then this is the lesson for you. Usually, your credit report indicates your overall financial health. If you are going through great financial difficulty, you are not alone. You are not the first, and you will not be the last person to experience debt problems. Like we discussed in Lesson 7, U.S. Law is similar to Biblical Law in that it provides for a way to forgive the debts of those who cannot repay. Take care of yourself and your family first. Make sure you have a home, food and the drive to continue. This is a bad period of time in your life, not the end.

James 3:2 ~ We all stumble in many ways. ~

There are so many ways to easily get into debt. Usually, it starts with an unforeseen event like a medical problem or job loss. As we have discussed in Lessons 6 & 7, setbacks happen. Usually, we can find the good in this situation by working our way out of debt and learning to live below our means with a healthy emergency fund. Lesson 6 discussed how to develop an emergency fund using credit cards to while you work your way out of debt. But sometimes things get out of control, and you begin to drown in debt.

What if you can’t even make your minimum payments? There are several options including a Debt Management Plan set up by a Certified Credit Counselor, Chapter 13 Bankruptcy (which lets you keep all your property while you repay some of your debt) and Chapter 7 Bankruptcy (which erases all your debt and lets you keep some of your property).

Proverbs 22:7 ~ The rich rule over the poor, and the borrower is slave to the lender. ~

How much money do you spend on debt every month? How many hours per month do you work just to afford the minimum payments? This concept is what I refer to as economic slavery.

To get on the “right” side of the wealth gap you must first get out of economic slavery. We discussed how to budget and cut back in Lesson 6, but now you will have little to no choice.

Self-Imposed Debt Management Plan – This is when you create a budget and follow it, cut anything you don’t absolutely need out of your budget and put it toward your debt, and stick to it with a well-defined plan and set of goals. You might need help with developing your budget and plan to work your way out of debt and a Certified Credit Counselor can help with that. But by the time you are missing payments on your debts, this might not work. You are going to have to be drastic at this point. One of the best ways to get out of having to make payments on a vehicle is to sell the vehicle and use a cash car or public transportation. Maybe even going so far as to move or switch jobs to lower your rent or not need a vehicle while you are in debt.

Debt Management Plan (DMP) – Set up by a Certified Credit Counselor and usually referred to as “Credit Counseling”, a DMP will involve a credit counselor negotiating with your lenders to have one monthly payment that is less than what you would be paying for all the debts separately. You will usually have a 5-year repayment plan during which you cannot take new debt unless it is approved, and you will have a notation on your credit report beside your accounts indicating you are in credit counseling.

You must make your payment every month on time, otherwise your creditors can opt out and you will go back to where you started and lose everything you put into the plan and worked toward getting out of debt.

Being in credit counseling does not directly affect your credit score, however there are various ways the situation can affect your scores. If you are being reported as late on one or more accounts, a DMP can bring those accounts to “current”, which will raise your score. As you pay down your outstanding balance, your score will increase. If your creditors close your accounts even though the account has a remaining balance, your score will decrease. However, usually this won’t matter because you shouldn’t take on new debt during the plan.

A DMP does not help with your mortgage or rental payments and it does not help with auto loans. Those you will have to work out on your own. If you are a slave to your car, sell it! How much would you save in monthly insurance premiums alone?

Chapter 13 Bankruptcy – You can use this type of protection if you are behind on payments to your home or car loan, or you need to stop collections, wage garnishment, etc. While in Chapter 13 your lenders cannot seize your property. Similar to a DMP, you will have a 5-year repayment plan for unsecured debts which will be set up by a court trustee and you must make all your payments on time. You must get approval from the court trustee before you take any new debt.

You can still buy a home while in Chapter 13, with approval. You will have the Bankruptcy on your credit for 7 years after filing, and any late payments you made (or missed) before you file can still appear on your credit report. Your credit will be affected, but if you keep making payments to any secured debts, you should maintain some positive credit and be able to quickly reestablish credit after your 5-year repayment period is over.

Chapter 7 Bankruptcy – This is basically dismissing all unsecured debts, with a few exceptions. You can use this type of protection if you pass a “Means Test” – Is your most recent 6 months average monthly income (minus reasonable expenses) lower than your State’s median income? The court will allow you to keep exempt items such as some equity in your home, an inexpensive car, your retirement account, and personal items like your wedding ring.

Bankruptcy does not affect some obligations like Federal Student Loans or child support. You have to work those out on your own. However, as of this writing there is a movement in Congress to allow some student debt to be included in bankruptcy. You can ask the bankruptcy court to reduce your obligations due to hardship and you can ask your “ex” to reduce your child support burden voluntarily.

During Chapter 7 Bankruptcy, your unsecured debts are gone (with some exceptions) and your secured debts stay on your credit report. You can reestablish credit very quickly, especially if you keep a car or student loan payments, and you can qualify for an FHA loan after two years or conventional mortgages after three years. This bankruptcy stays on your credit for 10 years after filing, but its effect diminishes over time.

If you are drowning in debt, these options will allow you to keep some or all of your assets while you work your way out of the situation. You can rebuild your credit just like we discussed in lesson 4.

Psalm 30:5 ~ Joy cometh in the morning. ~

Please allow me to repeat what I said earlier, it is that important. If you are drowning in debt and see no way out, then this is the lesson for you. Usually, your credit report indicates your overall financial health. If you are going through great financial difficulty, you are not alone, you are not the first, and you will not be the last. Like we discussed in Lesson 7, U.S. Law is similar to Biblical Law in that it provides for a way to forgive the debts of those who cannot repay. Take care of yourself and your family first. Make sure you have a home, food and the drive to continue. This is a bad period of time in your life, not the end.

(repeated from Lesson 5)

Recovering From Disaster

What is the “worst” thing for your credit? Most people think that’s bankruptcy. But if you are drowning in debt for years while trying to work your way out, or worse if you have collection accounts and lawsuits hanging over your head, bankruptcy protection might not be the “worst” thing.

How can you recover after bankruptcy? Go back to Lesson 4 and learn to reestablish your credit.

Is it possible to get a bankruptcy off your credit report prior to 10 years after filing it is supposed to stay on there? Perhaps, but often that takes work from a professional and we are not going to focus on that right now. Can you buy a home after Chapter 7 Bankruptcy? FHA will approve you in as little as 2 years after bankruptcy as long as you rebuild your credit during that time. See Lesson 4 for step-by-step instructions. You can buy a home while you are in Chapter 13, with the Bankruptcy Court’s permission.

Next: Complete the Lesson 8 Quiz (first make sure you completed the Lesson 7 Quiz)