When you file for bankruptcy, your credit score can drop between 75 and 200 points. So what does that mean for the rebuilding process?
Your Credit Score and Rebuilding After Bankruptcy
Depending upon what your score was to begin with, filing for bankruptcy can drop your credit score between 75 and 200 points. For any entrepreneur that has been through a bankruptcy, the idea of rebuilidng credit and starting a new enterprise can feel overwhelming. Can you get a business loan after bankruptcy?
Bankruptcy allows consumers a way out of debt, but it’s important to remember that there are repercussions that can ruin people’s credit as well as put consumers at risk of not being able to start a new business. If you’re looking to start a new business after bankruptcy, know that it is possible, you will just need to take the same rebuilding steps that anyone going through a post-bankruptcy situation will.
As always, you’ll want to discuss your options with a phoenix chapter 7 bankruptcy lawyer.
Is Rebuilding Possible?
The rebuilding process will be determined by what form of bankruptcy you are filing. A phoenix chapter 7 bankruptcy lawyer will be able to review these further with you, but the most common types of bankruptcy for individuals: chapter 7 and chapter 13:
- A chapter 7 bankruptcy liquidates all non-exempt assets to pay off the debt you owe to creditors. This is typically considered the best option when you have little income and a large amount of unsecured debt. Unsecured debt includes: medical bills and credit cards.
- A chapter 13 bankruptcy reorganizes debt and establishes a repayment plan to pay debt owed to creditors. This is considered the best option for debtors that have income, but are needing some breathing room to be able to catch up on outstanding debts.
When it comes to determining how much of your assets can be seized is also dependent on the total worth of your belongings. Chapter 7 bankruptcy, which is the most commonly filed, means that a person does not have enough disposable income to make the payments on the debt owed and are seeking to have that debt eliminated. In a sense, a person then forfeits their assets to pay off at least a portion of the debt owed.
There are assets that are exempt though. The process of bankruptcy is meant to be a rebuilding one, not one that will leave you penniless and on the street. Assets including cash, your home, and your car, as well as retirement accounts like 401k plans are typically exempt from bankruptcy, depending on how much they are worth. Exemption amounts vary from state to state, and we will discuss the Arizona exemptions below, but typically, assets with equity lower than the exemption amount cannot be seized.
As financial planner Stein Olavsrud explains, “What the government wants is for you to have a method to be able to rebuild your life."
The way exemptions work is as follows: say that an exemption amount for a house is $100,000 (amount is set by the state). A person that has $50,000 in home equity (how much of the owners’ money had been paid into the house through down payments or over time with a reduction in principal on one or more mortgages) would not have his or her house seized. If that same person has $125,000 in home equity (over the $100,000 amount) he or she could have that property seized and sold to pay part of his or her debt.
Some people can keep their cars by filing what’s known as a reaffirmation agreement, according to bankruptcy attorney William Waldner. This is available in Chapter 7 and is an agreement that confirms to the lender that a person will still be responsible for making payments on a car loan, despite the fact that he or she is filing for bankruptcy. A person can still lose his or her car if they fail to make those payments, even though they have filed for bankruptcy.
Chapter 13 bankruptcy works a little differently in terms of assets because consumers are able to work out a plan for paying off a portion of their debt over three to five years. As Waldner explains, people filing Chapter 13 won’t lose their property as long as they keep making payments on time. Additionally, if a person initiates a Chapter 7 bankruptcy they are able to switch to Chapter 13 if they see much of their property being seized. Converting to a Chapter 13 will allow them to keep their assets while getting caught up on payments.
It’s possible to rebuild, and even keep your assets in bankruptcy, but you will want to work with an attorney that can guide you through the process.
In bankruptcy, the trustee takes control of your property and liquidates it to pay off creditors. However, there is a long list of exemptions under Arizona law. Exemptions are items of property you can keep (up to a stated fair market value) even if you file for bankruptcy.
Since the goal of bankruptcy is to give you a fresh start, rather than put you out on the street, the law does not take everything away. For example, you can keep most of your common household goods and furnishings, like furniture, beds and appliances.
What follows are several types of exemptions in Arizona (disclaimer: the exemption amounts are subject to change from time to time as the legislature sees fit):
- Homestead: Interest in real property upon which debtor’s house sits, condominium or cooperative, mobile home, or mobile home in which debtor resides plus the land upon which the mobile home is located in the amount of $150,000. May not be doubled by husband and wife. (A.R.S. § 33-1101)
- Personal property: Household furniture, furnishings and appliances not to exceed $4,000 (fair market value). (A.R.S. § 33-1123)
- All food, fuel and provisions for debtor’s individual or family use to last up to six months. (A.R.S. § 33-1124)
- All wearing apparel used primarily for personal, family or household purposes with a fair market value not to exceed $500. (A.R.S. § 33-1125(1))
- One car with a fair market value not to exceed $5,000. If debtor is physically disabled, the fair market value of the motor vehicle shall not exceed $10,000. (A.R.S. § 33-1125(8))
- Life insurance proceeds not to exceed $20,000 if payable to surviving spouse or child upon the life of a deceased spouse, parent or legal guardian. (A.R.S. § 33-1126(A)(1))
- Child support or spousal maintenance received pursuant to a court order. (A.R.S. § 33-1126(A)(3))
- IRAs (In re Herrscher, 121 B.R. 29 (D. Ariz. 1990))
- Workers’ compensation benefits (A.R.S. § 23-1068)
- Welfare assistance benefits (A.R.S. § 46-208)
Many people who file for bankruptcy in Arizona are entitled to certain exemptions. If you have lived in Arizona for two full years before filing for bankruptcy, you will be eligible for all
However, if you have lived in Arizona for less than two years, a complicated analysis is needed to determine which bankruptcy exemptions may be available. To make things more difficult, bankruptcy trustees have recently become aggressive in objecting to exemptions of people who have recently moved to Arizona.
The analysis is complex and is different for every person. In some cases, you will look at the exemption list in the state where they most recently lived, but in other cases you must look at federal exemptions. We will take a look at your case and make sure you get the complete list of exemptions for which you are eligible.
What Cannot Be Discharged
Nondischargeable debts: have been determined as too important to be eliminated in bankruptcy. A debtor is still responsible for paying them back even after filing bankruptcy.
Examples of nondischargeable debts include:
- child support and alimony
- criminal fines, penalties, and restitution
- certain tax obligations
- student loans (with rare exceptions), and
- debts acquired by fraud (creditors must prove fraud before debt will be deemed nondischargeable).
After you have filed for bankruptcy and been through the process, and your debts have been discharged it’s important to remember that there are ways to improve your credit score. This process can be started within six months to a year after the discharge is complete. These days, lenders tend to look more at credit scores than the comments that are on a credit report. This means that if you are actively working on rebuilding your credit, a lender will take that into account.
One first step is to review all of your credit reports, and often, to verify that all the information is correct and up to date. Stay on top of your credit reports, and as soon as the debt is discharged make sure it is reported. You can also contact a credit bureau to ensure that discharged debts do not show up as current debts.
You can also obtain a secured credit card that requires collateral, such as a cash deposit or savings account. If you are able to make payments in a timely fashion, a credit card will usually drop the requirement for collateral. This allows you to prove that you are capable of paying back debt in a timely fashion.
Working with a bankruptcy attorney can help you get back on your feet, especially if you are dealing with large amounts of debt that might not be discharged. Often times this means declaring bankruptcy on the debts that can be discharged so that you can pay down what cannot be.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 7 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008