Foreclosure, Deed in Lieu of Foreclosure, Short Sale, Loan Modification and Bankruptcy can all have long-lasting impact on an individual's ability to obtain credit. Homeowners need to get the facts before making critical decisions that will impact their lives for many years to come. In this series of seven blogs, I'll be examining each of these options in detail so you can get a better understanding of the myths and realities surrounding them and how they affect your credit.
One of the recurring themes in my book, The Big Score, and something I always emphasize to my clients is that being proactive the key to ensuring your credit score is as high as possible! In the case of your mortgage, the way to do this is by trying to renegotiate the terms of your agreement before things get out of control.
Loan Modification
A loan modification is when the lender agrees to modify a part or all of the terms of the original mortgage loan agreement. This existing note is modified and remains in place. Changes to the agreement can include: extending the term of the loan, changing the monthly payments, and changing the interest rate to make the loan more affordable and to help the homeowner avoid foreclosure or bankruptcy.
Today, in the wake of the devastating mortgage crisis, loan modifications are extremely common. So much so that a backlog of cases has forced lenders to prioritize their caseloads. This largely means that many homeowners are being forced into default to get their attention. This is unfortunate, because one 30-day late pay can cause a 50-80 point drop in credit scores.
The good news is that borrowers who choose this option vs. foreclosure or bankruptcy, show that they are exhausting every effort to pay the loan, and the effort will show in your credit scores and history.
How Does a Loan Modification Affect Credit?
A loan modification does not affect a person's credit score as long as the modification is completed before late payments begin.
What I've seen, is that Lenders will put a note on the borrower's credit report indicating that the loan has been modified. This note does NOT affect the credit score, but may affect future loan approval, depending on underwriting requirements of the lender.
If you have already incurred late pays on your mortgage, your credit scores will drop from 50-100+ points for those late pays. And in worst case scenario, Universal Default will kick off like a domino affect, basically equivalent to of every one of your creditors ganging up on you all at once and making your life a living hell. I talk about in great length in my book, The Big Score. So it is important to give every effort to negotiating that the lender remove any late pays incurred during the "waiting period" of when you submit your first request for the loan modification to the time of completion.
Here's a tip: Statistics show that 25% of homeowners who enter into a loan modification will default on their 2nd month under the new plan. Make a deal with the lender to delete all late pays after you have made 3-6 months of on-time payments. AND GET IT IN WRITING.
No Laws Requiring Lenders To Report To The Big Three
There are no laws in place requiring that lenders and creditors report negative information to the three major credit bureaus. Here's the section of the law from the Fair Credit Reporting Act:
§623. Responsibilities of furnishers of information to consumer reporting agencies [15 U.S.C. § 1681s-2]
(a) Duty of Furnishers of Information to Provide Accurate Information
(7) Negative Information
(E) Use of notice without submitting negative information. No provision of this paragraph shall be construed as requiring a financial institution that has provided a customer with a notice described in subparagraph (A) to furnish negative information about the customer to a consumer reporting agency.
Here's the text from subparagraph (A):
(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
There's more to this story, however. An August 13, 2008 announcement from Fannie Mae & Freddie Mac clearly states that they place NO requirement on how lenders report mortgage default accounts to the credit bureaus. In response to the frequently asked question about how these items should appear on the credit report, the announcement stated:
"For reporting these actions on Fannie Mae loans, we require that servicers report to one of the major credit reporting agencies, but it is our policy NOT to direct specifically how to report various actions."
So if the Fair Credit Reporting Act doesn't require lenders to report negative information at all, or in a specific manner, and the nation's largest buyer of mortgage loans does not require lenders to report negative information at all, or in a specific manner, this leaves the door wide open for negotiating deletions or non-reporting when it comes to short sales and loan modifications and in some instances foreclosures. So I reiterate: NEGOTIATE, NEGOTIATE, NEGOTIATE.
How Long Before You Can Buy Another Home After Loan Modification?
The good news is that there are no guidelines from Fannie Mae & Freddie Mac regarding consideration of Loan Modifications, however, there are rules when it comes to late pays. So if you have incurred let's say a 60-day late on your mortgage in the last 12 months, then you may be facing a waiting period. You should discuss this with your mortgage professional.
Recovering Your Credit After Late Pays While Waiting For Your Loan Modification To Be Approved
My Book, The Big Score - Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
In Conclusion
Be proactive in negotiating with your lenders and through loan modification you can potentially save your credit. In my next blog, I'll examine what might be considered the opposite scenario - bankruptcy.
For years, credit experts, including me, have told people that a foreclosure is the worst possible option for homeowners who are upside down in their mortgage and is something to avoid at all costs.
One of the alternatives to foreclosure that homeowners have is a short sale, which is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship that is usually related to the current real estate market climate and the individual borrower's financial situation. The homeowner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. Unfortunately, some of the characteristics of a short sale are changing in a way that can potentially hurt your credit even worse than a foreclosure, and here's why.
It used to be that only homeowners facing a foreclosure had to worry about being sued for the deficiency amount on a foreclosure sale. It all depended on what state you were in, and whether or not the loan was a recourse or non-recourse loan.
This is one of the main reasons why short sales have become so popular during the current economic crisis. If the lender agrees to the short sale amount, then it becomes a paid settlement and there is no deficiency amount to worry about. However, lenders are becoming creative in adding language to their short sale agreements-language that is putting homeowners into a vulnerable position when it comes to their credit and finances.
Here is a recent example of the type of language being added to short sale agreements by one of our nation's largest lenders:
"Upon the bank's receipt of [the short sale amount] the bank will release the lien and charge off the remaining debt as a collectable balance. Our recovery department will be in contact with you to make arrangements on this balance. We will report the account to the credit bureaus as a charge off with a balance owed."
In my opinion, this language leaves the homeowner open to inevitable lawsuits, wage garnishments, liens and judgments, which can ultimately be just as damaging as a foreclosure, and - in some instances - more damaging in the long term.
How Does a Short Sale Affect Credit vs. A Foreclosure?
To date, the short sales that I have seen reported on credit reports have appeared as "Paid Settlements" on a mortgage account. But as you read above, with lenders keeping their options open to collect on the deficiency amount, this will soon change.
Let's take a look at the impact on your credit reports and scores of a foreclosure vs. the potential impact of a short sale under these new conditions.
Foreclosure: The credit score ramifications of a foreclosure are usually 100-150 points, in addition to the points already lost for late pays. In order to get to the point of foreclosure, the homeowner usually has incurred rolling 30, 60, 90, 120 day late payments, which can drop the credit score approximately another 100 points, meaning the total credit score drop in a foreclosure can range from 100-250 points. Whether or not a lender can file a judgment against a homeowner for the remaining amount to make up for the gap between the loan amount and what the lender can sell the house for after foreclosure varies from state to state.
A foreclosure can be reported on a credit report for 7½ years from the date of the first late pay that led to foreclosure. Many consumers and lenders believe that it is 7 years from the completion date of the foreclosure process, but that is inaccurate. A foreclosure falls under the same rules as a collection, charge-off, or other similar action. I discuss the 7-Year Reporting Period and Statute of Limitations in great detail in my book, The Big Score.
Short Sale: When it comes to short sales, on the other hand, there is very little legal structure on either a federal or state level, meaning issues surrounding deficiency amounts are not clearly spelled out the way they are in the case of a foreclosure. As you now know, some of the country's largest lenders are taking advantage of this vagueness to pursue lawsuits, garnishments, and judgments against homeowners who opt for a short sale.
Here are the potential credit score ramifications for how a short sale is reported:
Paid As Agreed-Won't hurt the score at all as long as the borrower has kept payments current.
Unrated-May drop a few points, in addition to any points already lost due to delinquent payments which can drop credit scores an additional 100 points, depending on how many points the borrower still has to lose.
Paid Settlement-Credit scores will drop 50-125 points in addition to any points already lost due to delinquent payments, however, if the borrower immediately implements my 10-Step Take Action Plan, their scores will start recovering immediately.
Charge Off With A Collectable Balance-Credit scores will drop 100-150 points, in addition to any points already lost due to delinquent payment, and in this instance scores will not start recovering until the charged off balance is paid in full.
Judgment For Deficiency Amount-If the lender files a judgment for the deficiency amount in addition to the charged off rating, credit scores can drop an additional 100+ points. Keep in mind that a judgment is a public record which has the most severe impact on credit reports and scores.
In terms of how long these items will remain on a credit report, if reported as a paid settlement or charge off, the item can be reported for 7½ years from the date of the first late pay that led to the paid settlement or charge off. If a judgment is filed to collect the deficiency amount, the judgment can remain for 10-20 years and, under certain state laws, can be renewed until paid in full.
How Long Before You Can Buy Another Home After Short Sale?
The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a Short Sale is 2 years from the date the Short Sale proceeding is completed. There is no exception for extenuating circumstances.
However, keep in mind that if a judgment is filed against you for the deficiency amount, you will not receive loan approval until that amount has been paid in full.
Click here to read my article on how long before you can buy another home after foreclosure.
Tax Ramifications & Short Sales - The Mortgage Forgiveness Debt Relief Act Of 2007
When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower; leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties. The new law applies to debt forgiven in 2007, 2008 or 2009. Click here to read about this act now.
In Conclusion
Over many years in the credit business I've seen much devastation to credit scores, the result of economic crisis. I speak with countless individuals who have abandoned their last hope of salvaging their home ownership and now fight to save their credit.
In this instance, my view is that NO ONE should agree to the kind of language I cited above under the concept of a short sale. A short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender, by saving them thousands of dollars in foreclosure costs. Plus, banks and lenders don't want to be property owners. But in cases where banks and lenders are not willing to negotiate, and the ramifications of a short sale are more severe than a foreclosure, short and long term, I'm having a hard time advising my clients to choose short sale as an option.
The good news is that legislation has not caught up with the short sale tidal wave-and to date-there is no law on the books relating to this mortgage option. As a result, there is a huge opportunity for the borrower to negotiate credit reporting with the lender. I've seen several successful negotiations.
My advice to any homeowner who is upside down in their mortgage is, first and foremost, find out what options are available. Do the research. Consult the experts. Gather as much information as possible, and weigh the pros and cons. What may seem to be the best answer right now may also have a serious impact for many years to come, so make an educated decision.
The great news is that whatever fate falls upon your credit scores right now, you can start improving your situation immediately.
My Book, The Big Score - Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
While the roots of the modern credit report can be traced all the way back to 1898, the numerical credit score wasn't devised until the 1950s and didn't become a major part of the American financial system until the last twenty years. In 1956, Bill Fair and Earl Isaac devised analytical tools that attempted to quantify the risk of loaning an individual money and launched a company based on this scoring system. Their company was called Fair Isaac & Co., better known by the acronym FICO. After several decades of success in Europe, FICO's system caught on in the United States beginning with Equifax in 1989 and continuing with the other two major credit bureaus, Experian and TransUnion, in 1991. Since then, the now-familiar three digit score from 300 to 850 has become an integral part of the American credit system.
The many factors that go into determining a credit score can seem complicated and daunting, and it's taken a while for most consumers to get up to speed about how their use of credit affects this score. But just when you thought the credit score reporting process couldn't get more confusing for consumers, some major changes have taken place in the last year with the rollout of the new FICO score model known as FICO 08.
I've always encouraged people to be proactive in addressing and fixing any credit challenges they may have-and that still applies. However, it's more important than ever before to take a hands-on approach to your credit, and understanding how recent changes may affect your credit scores is a key part of being proactive.
FICO 08 - The Algorithm Has Changed
Beginning last year, Fair Isaac & Co. implemented changes in how your FICO score is computed, calling the new system FICO 08. The model replaces the existing FICO model, which has remained relatively unchanged since the 1980s.
Per Fair Isaac, here are the key changes in the new model:
Do Authorized User Accounts Still Work? One of the credit-repair tricks that became popular in recent years was paying thousands of dollars to be listed as an "authorized user" on the account of someone with good credit (usually a stranger), thereby improving your FICO scores enough to get into that home or auto loan immediately. That stops with FICO 08, and rightfully so - because this practice was an obvious form of fraud.
Here's the good news-the new model will still allow legitimate authorized users such as a spouse and/or family member. And I can tell you confidently that this credit building technique still works for spouses and children who have the same last name as the credit card owner. There have been two cases in the last 60 days where I have seen my clients' credit scores jump 50-60 points after being added to their spouse's credit card account.
As a true consumer advocate, my advice is to build your own credit if possible because that gives you power and control, but as a last resort this option will help. To maximize the benefit of this option, you should make sure that the account you are being added to belongs to someone you trust, has NO negative history reporting at all, has and keeps a balance under 30% of the limit and is at least 2-3 years old. Click here to read more about adding credit.
Having just one big black mark on your credit, like a repossession, will matter less than it used to if your report demonstrates responsibility overall.
Collection accounts with balances less than $100 will not impact the credit score any longer.
Maxing out those credit cards will drag your score down even more than it used to! FICO 08 increases the emphasis on having available credit.
Having a mix of credit is also more important in FICO 08. This means you MUST have at least 1-2 active major credit card accounts.
As a credit score expert, the changes that I have seen in hundreds of credit reports are NOT representative of what consumers were led to believe a year ago when the new model was introduced. FICO said that the new model would have less impact on credit scores under certain circumstances, however, in my experience, the new model appears to be producing lower scores under almost every circumstance. Especially when it comes to credit card balances and late pays. So if you are one of those people who are out there wondering why your credit scores have dropped in the past few months-even though nothing has changed, this could be why.
So what can you do?
Maximize What You Have. The most effective way to improve your credit score is by ensuring the information used to generate the score is accurate. Click here to download my Special Report, Save Your Credit-Save Your Life: A 10-Step Take Action Plan to Improve, Protect and Maintain Strong Credit Reports & Scores. You may also want to consider purchasing a copy of my book, The Big Score - Getting It & Keeping, which is a comprehensive How-To Guide on getting and maintaining strong credit reports and credit scores.
Keep Credit Card Balances As Low As Possible. Carrying balances over 50% of your credit card limits (PER CARD) was always something to avoid, but it can hurt you even more under the new FICO 08 model. Anything over 50% will cost you points on your credit score, and anything between 30% and 49% means you're just treading water. To improve your credit, you need to carry a balance under 30%, on your credit card statement. If-in an emergency-you must charge something that puts you over the 30% or 50% mark, if possible, rush home and pay the balance down immediately! Other basic strategies still apply - don't ever go over your credit card limit, stay clear of the two extremes of closing accounts on the one hand-and opening accounts you don't need on the other. And make sure that all positive accounts and credit card limits are being reported to the three major credit bureaus, Equifax, Experian and TransUnion.
Pay Your Bills On Time. There are TWO important DON'Ts when it comes to late pays:
DON'T underestimate the affect that late pays have on your credit.
DON'T overestimate the kindness of creditors to remove late pays just because you have a good payment history with them.
One 30-day late can cost you 50-80 points immediately. Trust me on this-late pays are the most difficult derogatories to have removed from your credit reports and they take at least 2 years to start significantly aging out.
The easiest way to make sure you're on time is to sign up for automatic withdrawal, if it's available. If that's not possible, then try to pay your bills as soon as you receive them. If you don't have the cash flow to do this, at the very least be sure to mail your payments 7-10 days before the due date (or pay online 3-5 days before the due date) to ensure your payments are received and processed by the time they're due. You can also consider working with your creditors to change your monthly due dates to better fit within your budget.
In Conclusion
I want to once again stress the importance of always being proactive. Regardless of these changes and any others that may come along in the future, the primary responsibility for your credit rests with the same person it always has: you! If you continue to follow the basics of money management that have been applicable for years, and continue to do everything you can to maintain strong credit scores, then you will be in a strong place financially no matter how the credit scoring system changes.
My Book, The Big Score - Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
Foreclosure, Deed in Lieu of Foreclosure, Short Sale, and Bankruptcy can all have long-lasting impact on an individual's ability to obtain credit. Homeowners need to get the facts before making critical decisions that will impact their lives for many years to come. In this series of seven blogs, I'll be examining each of these options in detail so you can get a better understanding of the myths and realities surrounding them and how they affect your credit.
Foreclosure
Foreclosure is the legal process by which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.
If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower's other personal property, obligating the borrower to repay the difference or suffer the loss of one's property. It gives the lender a legal right to collect the remainder of debt out of the borrower's other existing assets.
However, there are exceptions to this rule. If the mortgage is classified as "non-recourse debt," then in the event of foreclosure the borrower has no personal liability. This is often the case with residential mortgages. If so, the lender may not go after the borrower's personal assets to recoup additional loss.
The lender's ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans; however, refinanced loans and home equity lines of credit are not.
If the lender chooses not to pursue deficiency judgment-or can't, because the mortgage is non-recourse-and writes off the loss, the borrower may have to pay income taxes on the un-repaid amount even if it can be considered "forgiven debt."
Any other loans taken out against the property being foreclosed (second mortgages, home equity lines of credit) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction's proceeds.
How Does a Foreclosure Affect Credit?
A foreclosure can be reported as a Foreclosure or Repossession and carries the most negative penalty on a credit score just under a public record (i.e. bankruptcy, tax lien, or judgment.) There is a misconception that foreclosures are considered public records to the scoring system. However, they are not. Although there is a Public Notice Record on file once a foreclosure is started, this record is completely different than a credit report public record.
Unless a foreclosure becomes a public record, such as a judgment, it can only be reported on a credit report for 7½ years from the date of the first late pay that led to foreclosure. Many consumers and lenders believe that it is 7 years from the completion date of the foreclosure process, but that is inaccurate. A foreclosure falls under the same rules as a collection, charge-off, or other similar action. I discuss the 7-Year Reporting Period and Statute of Limitations in great detail in my book, The Big Score.
A foreclosure can drop credit scores from 50-250 points (this includes points already lost due to delinquent payments). The difference in point loss depends on how many points someone has to lose in the payment history factor of his or her credit report. Thus if someone has a 750 credit score and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 600 credit score, they may only lose 100 points for the same derogatory.
If a deficiency judgment or tax lien is filed in connection with a foreclosure, credit scores can drop an additional 100 points.
How Long Before You Can Buy Another Home After Foreclosure?
The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a foreclosure is 5 years from the date the foreclosure proceeding is completed.
However, if extenuating circumstances caused the borrower to enter into a foreclosure proceeding, such as the sub prime mortgage crisis fallout, loss of employment or a severe medical crisis, the waiting period, if approved, is 3 years from the date the foreclosure proceeding is completed.
My Book, The Big Score - Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
In Conclusion
When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact, including deficiency judgments for the amount not collected by the lender and a high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien. As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower is upside down in a home mortgage.
One technique some people use to avoid foreclosure is called a "deed in lieu of foreclosure." We'll take a look at that next time!
"Is it better to file for bankruptcy or to be foreclosed?"
"What is a short sale and how can it affect my credit?"
"What about a Deed In Lieu of Foreclosure? Or a Loan Modification?
"What should I do?"
Every day, these questions are asked of me by frightened homeowners who are quickly trying to respond to the financial chaos that continues to arise from the sub prime mortgage fiasco which has touched millions of American homeowners.
Like no other financial crisis this country has seen since the Great Depression, the home lending fiasco has turned the American Dream into the American Nightmare. It has taken down millions of homeowners. It has brought the global financial markets to its knees. And it has catalyzed the implosion of massive banking entities whose greed proved the key to their unraveling.
Millions of homeowners are now wondering how they will manage their way through the lending crisis. How will they manage their credit through the turbulent economic and financial strangleholds in which they find themselves trapped? Is there relief? Is there any salvaging of the current housing market? What is the best path for consumers to get there?
There's no question that many families will have to leave their homes. Their biggest question now is how to most effectively do so (without devastating their credit scores) so that they will someday be able to buy a home again. I speak to families every day, and I am heartened by those who have the wisdom and emotional strength to face these tough issues head on! They will be served well by their courage, and their credit scores will be better off for it!
Now is the time for tough questions to be asked and answered about Foreclosures, Short Sales, Loan Modifications and how these options affect credit reports and scores. And my next several blogs will do exactly that. But in this blog, I want to empower you with some powerful and significant information -
There are no laws in place requiring that lenders and creditors report negative information to the three major credit bureaus, Equifax, Experian and TransUnion. Let me repeat that--there are no laws in the US Code that require lenders to report consumer payment history to the three credit bureaus.
This is an especially difficult reality for individuals who find themselves in the midst of a crisis. Everyone has dark times in their lives: illness, a death in the family, job loss, unexpected expenses, and most recently the mortgage crisis. When hardship occurs and people cannot keep pace with their bills, they can instantly be labeled as a default. That means they could lose everything that they've worked for. That is just not right.
Here's the section of the law from the Fair Credit Reporting Act:
§623. Responsibilities of furnishers of information to consumer reporting agencies [15 U.S.C. § 1681s-2]
(a) Duty of Furnishers of Information to Provide Accurate Information
(7) Negative Information
(E) Use of notice without submitting negative information. No provision of this paragraph shall be construed as requiring a financial institution that has provided a customer with a notice described in subparagraph (A) to furnish negative information about the customer to a consumer reporting agency.
Here's the text from subparagraph (A):
(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
There's more to this story, however. An August 13, 2008 announcement from Fannie Mae & Freddie Mac clearly states that they place NO requirement on how lenders report mortgage default accounts to the credit bureaus. In response to the frequently asked question about how these items should appear on the credit report, the announcement stated:
"For reporting these actions on Fannie Mae loans, we require that servicers report to one of the major credit reporting agencies, but it is our policy NOT to direct specifically how to report various actions."
Again, this is powerful and significant information. If the Fair Credit Reporting Act doesn't require lenders to report negative information at all, or in a specific manner, and the nation's largest buyer of mortgage loans does not require lenders to report negative information at all, or in a specific manner, this leaves the door wide open for negotiating deletions or non-reporting when it comes to short sales, loan modifications and in some instances foreclosures. So I reiterate: NEGOTIATE, NEGOTIATE, NEGOTIATE.
In Conclusion
If I were in a position of authority, I would initiate legislation that allows for hardship cases. If a person shows legitimate proof, then creditors should be required to provide lenience and be disallowed from blacklisting a person's credit standing. There should also be varying levels of hardship. For instance, there should be an established timeframe payment extension for consumers who have lost their jobs, especially due to a sluggish economy.
Be sure to check back soon - my next blog will cover what you need to know about foreclosure and your credit. After that, we'll take a look at a variety of options for avoiding foreclosure.
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Although the current credit crisis is causing more couples to stay together because they cannot afford to financial support two households, statistics still show that 1 out of every 2 marriages ends in divorce! That's a daunting statistic and one that brings with it an abundance of emotional and financial upheaval for more than half of all married people. It is also a statistic that creates an urgent need for all individuals to become aware of how they can protect their credit standing in the face of a major life change; a change that will surely impact their financial situation.
While a divorce is easy enough to obtain and can be done in a fairly short period of time, the financial and credit issues emanating from the dissolution can linger for years to follow. Confusion or disagreement about who is to pay what bills and who is using specific credit cards can wreak havoc on your credit score. Late pays, no pays and insufficient funds can quickly cause the very best credit scores to plummet-and as credit score expert, I will tell you confidently that it doesn't have to be that way. By proactively taking just a few simple steps, individuals who are starting over can ensure that they are doing everything possible to start over with their good credit intact.
Following is an example from my book, The Big Score - Getting It & Keeping It, of a proactive action plan that will help you protect your credit during and after a divorce.
STEP 1: GETTING A CLEAR PICTURE
Get copies of your credit reports: Request copies of your credit report from each of the 3 major credit bureaus, Equifax, Experian and TransUnion so you will have full disclosure of your situation.
Get all of your information into one place: Make a list of all OPEN accounts and accounts with balances. Then create a spreadsheet with columns for the following information:
Creditor Name
Creditor Contact Number (if it's not listed on the credit report, you can find the customer service number on the back of your statement, or you can always search for it on the Internet. Where there's a will, there's a way.)
Account Number (sometimes credit reports do not list the full account number, so you may have to dig up some paperwork, but it will be well worth it.)
Type of Account (i.e. auto loan, mortgage, credit card)
Current status of the account (i.e. current, past due, collection, etc.)
Total amount due
Monthly Payment Amount
Vesting of Account (i.e. Joint/Individual/Authorized Signer)
STEP 2: ACTING ON THE INFORMATION
Once you have assembled your information in one place, you can now begin to determine the best course of action for handling the accounts. There are two types of accounts you will be dealing with: secured and unsecured. Both are handled very differently during a divorce. Secured accounts are all accounts that have an asset attached to them, i.e. a mortgage or a car loan. Unsecured accounts are debts with no assets backing them, i.e. credit card accounts. Here are my suggestions:
A. Unsecured Accounts-Your Options:
Eliminate Obligations Where You Can: A credit card or a statement with your name on it does not make you a joint owner of the account. Unless the account was originally opened with an application SIGNED BY YOU, you may only be an authorized signer and you can request to have your name removed from the account immediately. Or vice versa, if your spouse is on the account as an authorized signer you will want to have his name removed to avoid any future charges. Be aware however, if negative credit was incurred while you were on the account, the past information will still remain.
Close Joint Accounts: If there is no balance on the account, call the creditor and close the account immediately.
Freeze Any Future Charges: If there is a balance that cannot be paid off right away, the creditor typically will not allow you to close the account. In this case, call the creditor and request to freeze the account from any future charges. This will allow you to pay off the balance over time without making you vulnerable to more debt. Such an action will stop BOTH spouses from using the account, so it is important that you make certain you have another credit card in your own name before you take that course of action.
Transfer Balances To Responsible Party's Individual Card: Request that the responsible spouse transfer remaining balances on a joint card to another credit card with available credit that is in their name only. Once this is done, CLOSE THE JOINT ACCOUNT IMMEDIATELY.
B. Secured Accounts-Your Options:
Sell It: This is the safest and best option. You sell the asset, pay off the loan in full, wipe the slate clean and move on.
Refi It: If the spouse who has responsibility can qualify for a refinance in their own name, or they have a family member who can assist them with the loan, you can have them buy you out completely and you can walk away without obligation and get your name removed from the account.
Be Careful: The least desirable option is to keep your name on the loan with certain terms and conditions. This option leaves your credit vulnerable to the responsible spouse's actions going forward. A late payment or a default on the loan will damage your credit.
SOME IMPORTANT TIPS THAT WILL HELP:
Make Sure The Bills Get Paid-No Matter What The Judge Says: Regardless of what the divorce decree stipulates, it does not override your account agreements with your creditors. Both spouses are liable and responsible for joint debt regardless of who the judge orders to pay the bill. If the bills are not paid and an account defaults, both spouses can be sued, and both spouses can have their wages garnished. Most late pays occur during the divorce negotiations phase. Don't allow this happen. One 30 day late can drop your score anywhere from 50-80+ points, and it takes months to gain those points back.
Protect Yourself In Joint Account Situations: The best way to handle joint accounts is to eliminate such accounts whenever possible. Because joint accounts are approved using the information from both spouses' credit reports, a creditor will not remove one spouse's name from an account regardless of the presence of court documents declaring a specific spouse responsible for payment and upkeep.
If You Decide To Leave Your Name On A Secured Loan Account, Be Sure That Your Name Remains On The Title: Once your name is removed from the title, you no longer own the asset. This means that if the responsible spouse defaults on the loan, and you have to pay it, you'll be paying for something that you no longer own.
FINALLY, putting the action plan to work as early in the divorce process as possible will ensure your credit will be protected to the greatest extent possible. Decisive, quick action will empower you to move forward.
Though it may seem challenging at first, you will soon find that putting the above recommendations into action is easily done once you get started. You will also put behind you a crucial first step toward moving on with your life.
Click here to read about Linda Ferrari's new book, The Big Score - Getting It & Keeping It. A must have for every professional.
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A bankruptcy is reported on your credit report as a public record, and there is no doubt that your scores will drop anywhere from 100-300 points when it first hits, depending on how many points you still have to lose in your payment history factor. Keep in mind, by the time you have filed bankruptcy your scores have already taken a serious hit from the delinquent accounts. That's the bad news. The good news is that you can start rebuilding immediately.
How Long Will A Bankruptcy Remain On Your Credit Report?
Section 605 of the Fair Credit reporting Act states that bankruptcies can remain on a credit report for up to 10 years. Here's the language:
605. Requirements relating to information contained in consumer reports [15 U.S.C. §1681c]
(1) Cases under title 11 [United States Code] or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.
That legal language states that no bankruptcy can be reported for longer than 10 years; however, all three credit bureaus report as follows: Chapter 7 bankruptcies for 10 years from the date of the filing, and Chapter 13 bankruptcies for 7 years, also from the date of filing.
That does not mean that you have to wait 7-10 years to seek removal. I've said it before-to my knowledge there is no language in the law that states items MUST be reported for a certain period of time, only that they CAN be.
Steps For Recovering & Rebuilding Credit After Bankruptcy
FACT: I have reviewed more than 15,000 credit-challenged cases and have NEVER seen a single bankruptcy reported accurately
Very often, individuals suffer an emotional surrender when they resort to bankruptcy. Frequently they just abandon concerns regarding their credit reports and scores, certain that they face a long and painful road back.
This, absolutely, does not have to be the case. You can embark on your path to recovery from bankruptcy immediately after filing. Doing so will help you emerge from bankruptcy stronger and faster. It will also give you a huge emotional boost because you will feel proactive as opposed to resigned.
TIP ONE: Pre-Bankruptcy. As soon as you have decided to file bankruptcy, pull your credit reports and scores. You should clean up any inaccurate or outdated derogatory information before the file goes to bankruptcy. Specifically, you want to validate all delinquency dates on the accounts you will be including-specifically collection accounts. If the 7-Year Reporting Period is around the corner or has already passed, you do not want to include that account in the bankruptcy filing. It will only obligate you to either pay it through a Chapter 13, or may extend the overall reporting period of that account on your credit reports.
If you are proactive in cleaning up your credit reports prior to filing for bankruptcy, it will lessen the score penalty when the bankruptcy hits. I've seen many credit scores in the mid to high 600s within six months to a year after a bankruptcy has been filed and that is because the rest of the credit was strong. Start as far in advance as you possibly can. Don't make the mistake of assuming that the bankruptcy will take care of everything in the file; it won't.
TIP TWO: Bankruptcy Re-List. Don't rely on your attorney to clean up the mess. It's not their job. The strongest tool you have to rebuild after a bankruptcy is through a bankruptcy re-list.
This is a very simple, mission-critical process. Once your bankruptcy has been filed, a bankruptcy re-list requires that you go line by line through your credit report to make sure that all items are reported as "included in bankruptcy," listed with a $0 balance. This is very important because it draws a line around the disaster. The credit scoring system has been programmed to understand that there is a containment plan in place and that the items listed in the bankruptcy have been dealt with.
The credit score penalty for a bankruptcy supersedes all other ratings on each account included. So if the accounts included are not showing as included, you will be receiving multiple penalties where you should be receiving only one big penalty.
Plus, if accounts are still showing as open, in collection with a balance, collection agencies will continue to try and collect; making your life miserable.
I have seen hundreds of instances in which a bankruptcy re-list has improved consumer credit scores by 50 or more points instantly. If you do not have the energy to conduct the re-list on your own, hire a professional credit repair company to act on your behalf. But this is one step you cannot overlook.
TIP THREE: Get a Secured Credit Card. Do not fall prey to scams. There are many creditors out there who focus specifically on people who have just been through bankruptcy. They see them as easy targets because they know consumers automatically assume they will not be able to get any credit. Stick to a safe plan and apply for a secured credit card within 4-6 months. Then, apply for another secured card within 2-3 months after that. There are specific rules on how to manage credit cards that I cover in detail in my book, The Big Score - Getting It & Keeping It.
TIP FOUR: Own It. It's very important that you take full ownership of your long-term credit situation. The court and the lawyers will get you through the bankruptcy, but that's all they will do for you. They will do nothing for your credit recovery, no matter what your lawyer tells you. You need to manage your credit perfectly to get the attention of the scoring system. And that means being vigilant and being consistent. Pull your credit reports every 4-6 months. Re-establish credit steadily, pay on time, keep balances low, and watch your credit for that 80% chance of error that has nothing to do with you. Use the knowledge you have gained from this book.
In Conclusion
The decision to file for bankruptcy is an extremely personal one. The decision requires weighing many conditions; both financial and personal. What I have tried to do in this article, and in my book, is to show you some reasonable strategies to recover should bankruptcy be your chosen debt relief option.
Click here to read about Linda Ferrari's new book, The Big Score - Getting It & Keeping It. A must have for every professional.
If you liked this article, click here to read other great articles written by Linda Ferrari.
Click here to opt in to Linda's Free Newsletter/Article list.
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Although the current credit crisis is causing more couples to stay together because they cannot afford to financial support two households, statistics still show that 1 out of every 2 marriages ends in divorce! That's a daunting statistic and one that brings with it an abundance of emotional and financial upheaval for more than half of all married people. It is also a statistic that creates an urgent need for all individuals to become aware of how they can protect their credit standing in the face of a major life change; a change that will surely impact their financial situation.
A bankruptcy is reported on your credit report as a public record, and there is no doubt that your scores will drop anywhere from 100-300 points when it first hits, depending on how many points you still have to lose in your payment history factor. Keep in mind, by the time you have filed bankruptcy your scores have already taken a serious hit from the delinquent accounts. That's the bad news. The good news is that you can start rebuilding immediately.
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