Bounce Back from Bankruptcy

Transcription

BOUNCE BACK
FROM
BANKRUPTCY
A STEP -BY-STEP GUIDE TO GETTING
BACK ON YOUR FINANCIAL FEET
4 TH E DITION
For Kaye and Jervais, who always
remind me home is where the heart is.
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Also by Paula Langguth Ryan
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Giving Thanks: The Art of Tithing
21 Days to a More Abundant Life (audio)
How to Create Supercharged Intentions that Effortlessly Manifest (audio)
How to Manifest the Right and Perfect Mate (audio)
Effortless Freedom From Clutter and Debt
(with Janet Hall)
Bounce Back
From
Bankruptcy
4th Edition
A Step-By-Step Guide to
Getting Back on Your Financial Feet
Paula Langguth Ryan
Pellingham Casper
Communications, LLC
Annapolis
Bounce Back From Bankruptcy copyright 1996-2007 by
Pellingham Casper Communications, LLC
How-To Publications That Make A Difference
All rights reserved. Printed in the United States of America. No part
of this book may be used or reproduced in any manner whatsoever
without written permission except in the case of reprints in the
context of reviews. For information, write Pellingham Casper
Communications, 1121 Annapolis Road, Suite 120, Odenton, MD
21113
987654321
Publisher‘s Cataloging-in-Publication
(Provided by Quality Books, Inc.)
Ryan, Paula Langguth
Bouncing back from bankruptcy : a step-by-step guide to getting back
on your financial feet / by Paula Langguth Ryan.
4th ed.
p. cm.
ISBN 1-889605-16-6
Bankruptcy — United States — Popular works.
2. Finance, Personal. I. Title
KF1524.6.R93 2007
346.73‘078
QBI01-301
Pellingham Casper books are available for special promotions and
premiums. For details, contact:
Director, Special Markets, 800/507-9244
Fourth Edition — 2007
Cover photo by Stephanie Wooten
Hair and makeup by Shirley Proctor Studios
This publication is designed to provide accurate and authoritative
information in regard to the subject matter covered. It is sold with the
understanding that neither the author nor the publisher is engaged in
rendering legal, investment, accounting, or other professional services.
If legal advice or other expert assistance is required, the services of a
competent professional person should be sought.
Table of Contents
Introduction ............................................................................... 11
Choose to Succeed .................................................................................. 11
Why You Need to Read This Book ..................................................... 12
Why It‘s So Easy to Get Credit After Bankruptcy ............................ 13
A New Life After Bankruptcy ............................................................... 14
Who Should Read This Book? .............................................................. 15
What This Book Will Do ....................................................................... 16
What Creditors Don‘t Want You to Know ........................................ 18
Why I Wrote This Book ......................................................................... 19
Chapter 1: The First Step Toward Rebuilding Your Credit ...... 21
Getting Copies of Your Credit Reports .............................................. 22
Getting a Credit Report After Being Denied Credit, Insurance, a
Job or Having Your Terms Changed .............................................. 23
Getting Credit Reports if You‘re Unemployed or Applying for
Welfare Assistance .............................................................................. 24
Getting Your Credit Report After Identity Theft or Credit Fraud
................................................................................................................ 25
States Offering Free Annual Credit Reports .................................. 25
Get Your Free Annual Credit Reports – the Right Way! ................ 27
How to Order Your Free Annual Reports By Telephone .......... 28
How to Order Your Free Annual Reports By Mail ...................... 28
Ordering Your Free Annual Innovis Credit Report ..................... 29
Why You Should Avoid Using 3-in-1 Credit Reports ...................... 30
What If You‘re Not Eligible for a Free Credit Report?................... 30
What Your Credit Report Says About You ........................................ 32
What You Need To Look At First .................................................. 33
Updating Your Discharged Accounts .................................................. 34
Common Post-Bankruptcy Errors ....................................................... 35
Bringing Your Credit Reports Up-to-Date ......................................... 36
What If You Run Into A Snag.......................................................... 39
Writing a Credit History Statement ...................................................... 41
Credit Repair Warning Signs.................................................................. 41
Finding A Legitimate Credit Repair Company ................................... 44
Waiting For Your Credit Reports ......................................................... 44
Chapter 2: Laying a Foundation for Financial Security ............. 47
The Root Cause of Your Bankruptcy .................................................. 47
The Best Choices at the Time ........................................................... 48
Knowledge IS Power .............................................................................. 49
Healing Your Relationship With Money ............................................. 50
Making the Best of Our Intentions.................................................. 51
Removing Obstacles to Honoring Our Commitments .................... 53
What Stands Between You & Financial Independence? ..............54
Releasing Others From Blame about Our Finances .....................54
Getting Radically Honest About Your Money Matters ................55
Regaining Control Over Your Money ..................................................56
How Ill-Gotten Gains Shortchange You ........................................56
Overcoming the Fear of Not Having Enough...............................57
Acknowledge Your True Fears .........................................................58
Empower Rather Than Victimize.....................................................58
Stop Looking For Places to Lay Blame................................................59
Where Are You Consenting to Feel Inferior? ................................60
Releasing Myths That No Longer Serve You.................................61
Be Patient With Your Financial Growth .............................................61
Playing on Life's Abundant Playground...............................................63
Clarity About Your Financial Future ...............................................64
Chapter 3: Getting Rid of Your Remaining Debt ...................... 67
What If a Creditor Tries to Collect a Discharged Debt ....................68
What to Do About Bounced Checks ...................................................69
Do You Pay Income Tax on Discharged Debt? ................................70
What to Do With Debts That Were Not Discharged .......................70
To Reaffirm or Not to Reaffirm ...........................................................71
Redeeming Items Instead of Reaffirming .......................................73
What to Do if You‘ve Already Reaffirmed Other Debts .................74
When Does It Pay to Reaffirm A Credit Card? ..................................76
What if You Had a Zero Balance on a Credit Card? ....................77
Falling Behind on Reaffirmed Debt .....................................................79
Paying Off Any Remaining Debt ..........................................................80
Putting the DebtBuster Strategy to Work For You............................81
Need More Time to Pay Down Your Debts? ................................81
Paying the Highest Interest Rate Bills First ....................................82
DebtBuster Strategy.................................................................................83
Paying the Smallest Balance Bills First ............................................84
Repaying Your Student Loans ...............................................................85
Consolidating Your Student Loans ..................................................86
Work With the Natural Ebb and Flow of Money..............................88
Chapter 4: Breaking the Debt Cycle — For Good! .................... 91
How to Become a Credit-Savvy Consumer ........................................91
Ten Tips For Breaking the Debt Cycle — For Good!......................95
Use Affirmations to Release Prosperity in Your Life ........................97
Should You Repay Discharged Debts? ................................................98
Use GoalGetting™ to Change Your Money Thoughts .......................98
Using the GoalGetter™ Sheet to Your Best Advantage ............... 100
Get Your Whole Family Involved in GoalGetting™ ................... 101
GoalGetter™ Sheet .................................................................. 103
Chapter 5: Selecting the Best Credit Card ............................... 105
Shopping for the Best Secured Credit Card...................................... 108
What‘s the Best Credit Card For You? .............................................. 110
Secured Credit Cards to Avoid............................................................ 111
The Only Secured Credit Cards Worth Your Time ........................ 112
Other Secured Cards to Consider ....................................................... 113
Are Credit Builder Plans Worthwhile?............................................... 114
Make Sure Your Credit Card Helps You Rebuild Your Credit ..... 115
Finding the Best Secured Credit Card on Your Own ..................... 116
Need a Higher Limit On Your Secured Credit Card ...................... 118
Are Pre-Paid Credit Cards As Good as Secured Cards?................. 118
Can You Get An Unsecured Credit Card After Bankruptcy? ....... 120
Do-It-Yourself Checklist for Selecting a Good Credit Card ......... 122
How Much Credit is Good For You? ................................................ 123
Is a Debit Card Right For You? .......................................................... 124
How Exactly Do Debit Cards Work?............................................ 125
The Downside to Debit Cards........................................................ 126
Ready to Get a Debit Card? ............................................................ 128
Three Tips for Keeping Your Credit Card Bills Under Control ... 129
Getting a Gasoline Credit Card........................................................... 129
Checking the Safety of a Gas Company‘s Stock .......................... 131
Start Investing Your Money So It Keeps Growing .................... 132
Chapter 6: Buying a Car After Bankruptcy .............................. 135
Need a Car Before Your Credit Report is Completely Cleaned Up
or While You‘re Still in Chapter 13? .................................................. 135
Ready to Finance a Car? ....................................................................... 137
How to Find a Decent Car Loan ........................................................ 138
Tips For Financing With a Credit Union...................................... 139
Ready to Get a Car Loan?................................................................ 139
Should You Get a Co-Signer?......................................................... 141
The Best Way to Buy a Car From a Dealer ...................................... 141
What if You Already Have a High-Interest Car Loan .................... 144
Leasing a Car —Don‘t, Unless You Have No Other Choice ....... 145
Chapter 7: Easing Your Job Fears After Bankruptcy ............... 149
Can You Lose Your Job? ..................................................................... 149
Finding a New Job With a Credit Check........................................... 150
Chapter 8: Rent the Apartment or House You Want After
Bankruptcy............................................................................... 153
Strategies to Get the Rental You Want.............................................. 153
Talking With the Landlord................................................................... 154
Chapter 9: How to Travel Without Credit................................ 157
How to Reserve a Hotel Room Without a Credit Card ................. 157
How to Rent a Car Without a Credit Card....................................... 159
How to Buy Plane Tickets Without a Credit Card.......................... 162
Chapter 10: How to Buy a Home After Bankruptcy ................ 163
Strategies to Help Reduce Closing Costs .......................................... 168
Where to Get Your Down Payment ................................................. 169
Don‘t Have Money for a Down Payment? ...................................... 170
State-by-State Listings of Housing Authorities ........................... 172
Thinking Outside the Box to Buy Your Home ............................... 190
Other Strategies for Buying a Post-Bankruptcy Home ............. 190
What Type of Mortgage Lender Should You Use?......................... 192
How to Buy a Home Less Than a Year After Bankruptcy............ 193
Refinancing After Bankruptcy ............................................................ 194
Refinancing During Chapter 13 Bankruptcy ............................... 196
Any Advantages to Interest-Only Mortgages?................................. 198
Creating a Home Wherever You Are ................................................ 198
Chapter 11: Making Yourself Identity Theft Proof................... 201
Avoiding Identity Theft ....................................................................... 201
Freezing Identity Thieves in Their Tracks ....................................... 202
Requesting a Security Freeze .......................................................... 202
Temporarily Lifting a Security Freeze........................................... 204
Permanently Removing a Security Freeze .................................... 206
Tips for Avoiding Identity Theft ....................................................... 207
If You Suspect Identity Theft ............................................................. 209
How to Stop Identity Theft in its Tracks ......................................... 209
Recovering from Identity Theft ......................................................... 213
Chapter 12: What If You Get In Over Your Head Again? ........ 215
Short-Term Strategies to Help You Get Back On Track .............. 217
What to Expect When You Use a Credit Counselor ...................... 222
Selecting a Good Credit or Budget Counselor ................................ 223
Choosing the Best Credit or Budget Counselor For You ............. 225
Do You Find it Hard to Stop Spending More Than You Make?. 226
Could You Have a Gambling Problem? ........................................... 228
How to Keep From Falling Back Into Debt.................................... 229
Call Your Creditors for a New Repayment Schedule ................ 229
Write Your Creditors if That‘s More Comfortable .................... 230
What if You Fall Behind on Your Mortgage?.................................. 232
What if You Don‘t Have an FHA Mortgage? ............................. 235
How to Contact and Work with Your PMI Insurer .................. 236
What if Your Lender Threatens to Foreclose? ................................ 237
What to Do About Your Credit Cards .............................................. 238
What to Do About Other Bills You Have ........................................ 239
What if You Have to Declare Bankruptcy Again ............................ 241
What to Do if You Declared Chapter 7 Bankruptcy Within the
Past Eight Years ................................................................................ 243
What to Do if You Declared Chapter 13 Bankruptcy and You‘re
Still in Repayment ............................................................................. 244
Chapter 13: Building Financial Security .................................. 249
Investing Your Money Once You‘re Out of Debt ......................... 249
Build Your Investments By Buying What You Know .................... 251
Prepay Big Loans and Save Thousands in Interest.......................... 251
Best Ways to Prepay Your Mortgage............................................. 252
Ten Strategies to Help You Avoid Money Drains .......................... 253
Chapter 14: Keep Up the Good Work! ...................................... 257
Four Strategies to Keep You On Track ............................................ 257
Good Resources To Check Out ......................................................... 258
A Final Word From the Author ................................................ 260
Excerpt from the Break the Debt Cycle – For Good! ............... 261
INTRODUCTION
Introduction
Today, you have an opportunity to create what you truly want in
your life. It doesn‘t matter whether you are mentally struggling with
your decision to declare bankruptcy or whether you are rejoicing at
being out from under your debt. It doesn‘t matter whether you have
sworn off credit forever or you have gotten yourself back into debt
again after going bankrupt.
What‘s important today is the fact that you‘re holding this book in
your hands. While you‘re reading this book, promise me that you are
going to start fresh today. Make a decision, right now, to set aside
your anger and frustration and resentments about your past financial
experiences and events. Just for today, instead of worrying about your
financial situation, promise me that you‘re going to choose to move
forward toward creating true financial freedom. Promise me that you
are going to take the time, today, to ask questions and keep asking
questions until you get answers you understand, so you can make the
best, informed financial decisions for your life.
Today, you can make a difference in your life. Today, you can start
laying a firm foundation for your financial security, regardless of
anything that has happened in the past. Today, you have a choice: are
you going to choose to be a victim, or are you going to choose to
succeed?
CHOOSE TO SUCCEED
Most people who have gone bankrupt have one great fear: That
they will never again be able to get credit. You may be afraid that you
will never be able to buy a home, or get a new car, or even take a
vacation. Creditors know you have these fears. All their marketing
pitches are designed to play into your fears. In fact, creditors are
counting on your fears to get you to apply for loans, credit cards and
other debt as quickly as possible. Why?
Because creditors know something we don‘t want to admit. Our real
fear is that we believe it is impossible to have the home or car – or
even the life we desire – without credit. Creditors count on the fact
that you will use your credit limit as an extension of your income.
They are keeping their fingers crossed that eventually you‘re going to
get over-extended and start carrying a balance. And, with any luck,
they hope, they can count on you to eventually make a late payment.
All of these events make your creditors more money.
Most people think of ―over-extended‖ as meaning ―I‘ve got so
much debt that it‘s a struggle to pay the bills from month to month,
from paycheck to paycheck.‖ The truth is ―over-extended‖ really
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BOUNCE BACK FROM BANKRUPTCY
means that ―I‘m carrying a balance from month-to-month‖ or ―I‘m
borrowing money to pay for things over time that I would be better
off buying with cash.‖
Creditors want you to get back into debt as quickly as possible after
bankruptcy because they know that, for most of us, the way we deal
with money after our bankruptcy is going to be the same way we dealt
with money before our bankruptcy.
For example, many people sincerely believe that they must have a
credit card for emergencies. Even more people believe there is no way
they can buy a car without a car loan and almost everyone believes
that buying a house without a mortgage is a completely impossible and
unrealistic idea.
This is why other books for newly bankrupt consumers focus
primarily on how to quickly get credit after bankruptcy, how to get
creditors to work with you when you have a bankruptcy on your credit
report and how to get the lowest payments at the best interest rates.
The main purpose of other credit after bankruptcy books or credit
repair books is to help you get credit again as quick as possible after a
bankruptcy. These books answer a huge need people have. And, on
the surface, they are enormously popular. There is only one catch.
What happens when you take on credit? You‘re actually getting into
debt again. This starts the whole cycle over again.
WHY YOU NEED TO READ THIS BOOK
Bounce Back From Bankruptcy: A Step By Step Guide to
Getting Back on Your Financial Feet is a different kind of book.
Yes, you‘ll find great information on how to get the best deals on
credit after bankruptcy, how to rebuild your credit scores and how to
compare loans and find lenders who will work with you after your
bankruptcy. You‘ll also find specific credit cards, mortgage companies
and auto lenders who will work with you even though you have a
bankruptcy on your credit report.
You will also find that I‘ve given you the tools to evaluate and select
from new opportunities yourself, so you can make informed decisions
rather than trying to guess what credit offer is going to actually be in
your best interest. The financial world changes so often, it is
impossible for any book to contain 100% updated information. So I
make it easy for you to do the research yourself, by giving you stepby-step instructions and information. In Bounce Back From
Bankruptcy, you will find much more information you won‘t find in
any other book on rebuilding your credit after bankruptcy.
Bounce Back From Bankruptcy is specifically designed to give
you a roadmap to financial freedom so that you never feel over12
INTRODUCTION
extended again. In these pages, you will find step-by-step afterbankruptcy strategies to help you:






rent an apartment or house
buy or refinance a home
travel without credit
ease job fears after bankruptcy
buy or lease a car
get a reasonable credit card that actually helps you rebuild
your credit score
 get back on track if you‘re in over your head again
 easily and effortlessly start building savings and investments
 keep up the good work when the unexpected happens
You see, ultimately, the sole purpose of most other ―life after
bankruptcy‖ books is to get you right back into debt again. To me,
this is a true tragedy. What you need today is a fresh start, which
comes by taking a step back and examining why you got into
bankruptcy in the first place – before you take one step toward taking
on new debt again.
WHY IT’S SO EASY TO GET CREDIT AFTER BANKRUPTCY
When I wrote the first edition of Bounce Back From
Bankruptcy, back in 1998, very few creditors would even consider
extending credit to newly bankrupt consumers. Those who did extend
credit hedged their bets and minimized their risks by only offering
―secured credit.‖ Secured credit means that you have money in a
savings account equal to all or a portion of the amount of credit you
are being given by the lender. If you don‘t pay your bill, the creditor
can get most or all of their money back simply by closing out your
savings account.
Today, nearly a decade later, creditors are stumbling over
themselves trying to court newly-bankrupt consumers with unsecured
credit offers. What‘s changed? For starters, creditors lobbied hard to
get the bankruptcy laws changed. The Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 was the ultimate result.
This new law is designed to make it harder for consumers and
small-business owners to declare bankruptcy without repaying
creditors a good percentage of the debt they are owed. At the same
time, however, creditors are making it even easier for bankrupt
consumers to get new credit.
Why do creditors now find it a good business decision to offer you
unsecured credit? Mostly due to a new law that says your creditors
13
have the right to raise your interest rate to 25% or higher if you are
even one day late with a single payment. Check out the fine print on
any credit applications you receive (or for any credit you currently
have). Most creditors now have a clause in their contracts, called a
universal default clause, that lets them change the interest rate and
other terms of your contract with them whenever they feel that you
pose an increased risk to them. Some creditors will actually increase
your interest rate to near usury levels – more than 25% – if your
monthly payment is late by even one day. Some creditors even invoke
this clause if you are late paying any bill, from any creditor. Other
creditors change your interest rate after pulling your credit report in a
random search and seeing that your ratio of current debt to available
credit has increased.
No wonder creditors are more than happy to offer you a zero
interest car loan or a 5.9% mortgage — they know that most people
who declare bankruptcy have done nothing to change the way they
use money. They believe the odds are in their favor that eventually you
will be late paying a bill, or you will start taking on too much debt
after your bankruptcy in an attempt to quickly raise your credit score
and rebuild your credit. And when you do, they will get the same high
interest rates from you that they have in the past. Think of it this way:
a drug dealer always gives a ―free sample‖ to former users who are
now clean, because they know that an addict is always going to come
back for more – which will then cost them a great deal more.
Creditors are doing the same thing to consumers. They‘ll give you the
great teaser rate, even with a new bankruptcy on your record, because
they know the debt will cost you more (and make them more!) in the
very near future.
Creditors now see bankrupt consumers as a much more profitable
customer base and are more than willing to extend you unsecured
credit. In fact, most creditors no longer issue secured credit cards.
There‘s just no money in it for them. The few creditors who do still
offer secured cards often now charge higher annual fees or a high
application fee, to offset their expenses.
A NEW LIFE AFTER BANKRUPTCY
Why am I writing a fourth edition of this book? Because I wanted
you to have a tool that would truly make a difference in your life, after
bankruptcy. When you are finished reading this book, and begin to
apply the strategies it contains, you will start developing new skills for
handling money more effectively. When you are ready to take on new
credit, you will be fully informed and fully able to make the best,
smartest money decisions for your life. And you‘ll be ready to
14
INTRODUCTION
recognize the role you played to get where you are – which means you
can recognize that you‘re the one who can get you to where you are
going!
I will be the first to say that it was extremely hard to admit that my
bankruptcy was a result of my own choices. It was far easier to point
to the creditors who extended credit to an unemployed college
student; creditors who weren‘t willing to work with me when I fell
behind on payments.
Many people come to me and tell me that they had ―great credit‖
before their bankruptcy. By this, they mean they paid all their bills on
time each month – even if it meant living paycheck-to-paycheck –
until something happened. Being able to pay all your bills doesn‘t
mean you have great credit. It just means you‘re able to pay your bills
each month.
I don‘t say these things to be mean or to make you feel bad about
declaring bankruptcy. I say these things because time and time again
people come to me who declared bankruptcy, got new credit, were
able to pay their monthly bills, bought a home (or several!), and then
suddenly they experienced a layoff, or an illness or divorce, or they
lent money to someone which left them cash-strapped, or they
counted on income from a tenant who wound up moving or a client
or employer who didn‘t pay, or some other event occurred that
disrupted their carefully-constructed plan.
One leading bankruptcy recovery expert even admitted in print that
he and his wife were 95% maxed out on their revolving credit cards 12
years after their bankruptcy. Another newly bankrupt consumer got a
credit card to rebuild his credit, got a car loan and a mortgage and
then was late one day on a payment and has watched all his interest
rates jump so high that now he struggles to pay his bills each month.
He took advantage of new credit deals because they were offering
such great terms and he was afraid he would never have a new car or a
house – and he wound up back in serious financial trouble.
I know exactly what this is like because one year after my
bankruptcy, I was one of these people. I was $3,000 in debt again
before I knew it. I was so frustrated with myself for getting right back
into debt that I vowed I would do whatever I could to help other
bankrupt people avoid making the same mistakes I had made.
WHO SHOULD READ THIS BOOK?
In the 20 years since I went bankrupt, I have discovered that there
are four groups of people this book will help. I think you‘ll find
yourself among one of these groups:
1. You are newly bankrupt and want to make sure you don‘t repeat
the same mistakes that got you into debt.
15
2. You are newly bankrupt and want to get credit again but want to
make sure you do it right this time.
3. You went bankrupt recently, discharged your debts or are
repaying through a Chapter 13 plan, and you have started getting new
credit and want to make sure you don‘t get in over your head again.
4. Your bankruptcy was discharged years ago or you‘re in Chapter
13 and you‘re still struggling to get credit, have credit at really high
interest rates, or went the whole ―credit after bankruptcy‖ route and
find yourself with credit card balances, a car loan and maybe even a
mortgage – and all these debts eat up 40%-50% of your take-home
pay.
Even though the first three editions of Bounce Back From
Bankruptcy helped hundreds of thousands of people find a fresh
start financially, I really had hoped to never be writing a fourth edition
of this book. Less than a year after the new bankruptcy bill went into
full effect, I started receiving calls from people who had gone
bankrupt, had gotten a credit-rebuilding book of some type and were
now buying my book because they had gotten back into debt again
after their bankruptcy. Once again they were living paycheck to
paycheck, struggling to make ends meet. Their self-esteem was
demolished and their hope for a better financial future seemed to be
slipping away.
I had hoped, after the bankruptcy bill passed, that other books
would come along to help consumers rebuild after bankruptcy without
getting drawn back into that debt cycle. This hasn‘t happened. Instead,
I realized that if a truly consumer-friendly book was going to exist it
would have to come from me.
I‘m not saying the other books on rebuilding your credit don‘t have
merit. They are fine books and they will help you accomplish your
goal, if your goal is to get back into debt as quickly as possible. Don‘t
delude yourself into believing that what you‘re doing is ―getting credit
in case of an emergency,‖ or taking on a car loan because it‘s the only
way you can afford a reliable car, or simply taking steps to rebuild
your credit so you can get credit at low interest rates like everyone
else. The fact is, most people who get a new credit card after
bankruptcy are carrying a balance from month to month within a year
of their discharge date. Remember: I was one of them!
WHAT THIS BOOK WILL DO
The purpose of this book is different from the books that are
designed to get you right back into debt again. The purpose of this
book is to help you get back on your financial feet – with or without
credit. In this book, you‘ll discover how to examine your money habits
16
INTRODUCTION
and behaviors, pinpoint where you‘ve stepped away from taking
financial responsibility for what you have created in your life, and
identify new and better strategies for dealing with credit.
Whether you never want to see another credit card as long as you
live, or you ultimately determine that you do have the resources on
hand to have a credit card, take out a car loan or purchase a house,
this book offers concrete solutions.
This book is designed to help you live a happier, more financially
secure life after bankruptcy. Let me ask you a question: To date, has
declaring bankruptcy made you happier? This isn‘t as odd a question
as it may seem. You see, a recent study showed that happy people
make $14,000 more per year on average. I‘m sure you can think of a
few good ways to spend an extra $14,000 a year. A few ideas probably
even jumped into your head as you read that sentence, didn‘t they?
Take a minute and jot down on a piece of paper, or in the margin of
this book, exactly how you would like to use that extra $14,000 each
year. Would you like to buy a car using cash? Want to use that money
as a down payment on a house? Or even use it as seed money for an
investment or to launch a business, or to take that honeymoon you‘ve
postponed for more than a decade? Would you like to give it to
charity? Set it aside for a family member‘s education?
Now, ask yourself: do you want to use $14,000 of someone else‘s
money every year to do these things, and be tied to monthly payments
that total twice that amount, keeping you in debt for decades? Or
would you rather discover the strategies and techniques that will
provide you with this extra $14,000 annual raise without having to
take on any new debt? The choice is entirely yours.
I am confident, with this book, that I can help you truly realize how
credit can be a useful tool – but not the antidote – for creating what
you want in your life. You may have realized this yourself right away,
or you may have gotten back into debt again, trying to rebuild your
credit after bankruptcy. Either way, you‘re in the right place now.
That $14,000 ―happiness‖ raise study may have seemed like an odd
example to share with you. But I used it for a specific reason. The
truth is, most of us view our credit limits as unofficial raises that we
give ourselves permission to spend before the money shows up in our
paychecks. Creditors count on us using credit this way. This is why
Bounce Back From Bankruptcy also provides you with the tools to
analyze credit offers and financing options so you are in the driver‘s
seat. These tips and strategies will save you thousands of dollars
should you eventually choose to finance a purchase.
17
WHAT CREDITORS DON’T WANT YOU TO KNOW
The bottom line is: creditors are making it far too easy to get back
in debt. They make credit offers incredibly alluring and do everything
they can to maximize the profit they receive from your debt. For
example, car loans can now be had that offer five- and six-year
financing, yet most Americans still owe more on their car loans than
their car is actually worth. From the moment we drive a new car off
the dealer‘s lot, most of us are upside down on our car loans.
Even mortgage lenders have found a way to maximize the amount
of income they receive from you, offering 40-year mortgages and
interest-only loans with adjustable interest rates. The less you pay on
the principal each month, the more interest you pay over the life of
the loan. Take the cost of borrowing $100,000 using a 40-year
mortgage versus a 30-year mortgage. In exchange for the slightly lower
monthly payment, lenders generally charge a quarter percent higher
interest rate on a 40-year mortgage, which winds up costing you
money in the long run.
My job, in this book, is to help you see the lower monthly payments
for what they are – a thinly disguised attempt to get you to put more
of your hard-earned money, year after year, in your creditors‘ bank
accounts, rather than in your own bank account.
Hopefully, by the time you finish this book you will discover what
countless other readers have discovered: that it is possible to change
the way you handle money so you are no longer at the mercy of
creditors. You will establish firm strategies for creating a healthier
relationship with money. You will create a new and positive outlook
on money. And you will feel more financially secure, more financially
safe and more financially solvent.
Remember what I said about happy people making $14,000 more
per year than unhappy people? Not worrying about money would
certainly make you happier, wouldn‘t it? Feeling in control of your
finances will give you that peace of mind and contentment, right?
When you finish reading this book I want you to feel like you no
longer have to jump at credit offers – because you know that you can
take or leave any credit offer and still have what you want in your life.
I want you to feel fully empowered to determine when it is in your
best interest to save up and pay cash for what you want. And I want
you to know that you have a savings strategy firmly in place for
making that happen. I want you to be able to quickly and easily look at
a credit offer and be able to tell if it will give you the best value for
your money or if it is stacked in the creditor‘s favor.
Even more importantly, though, I want you to know you have the
confidence to tell, instantly, when you are making a financial decision
18
INTRODUCTION
out of fear rather than because it is the best financial decision for you
at the moment.
WHY I WROTE THIS BOOK
I am living proof that bankruptcy is not the end of the road. In fact,
it can actually be the beginning of a brand new start. Whether or not
you ever want to see a credit card again is up to you. At some point,
however, you may want to get a car loan or buy a home with a
mortgage. The strategies in this book will help you get the best
possible loan or mortgage, regardless of your past mistakes.
You can get a credit card, a car loan and even become a homeowner
after declaring bankruptcy. Bankruptcy is not a ten-year mistake, as
some people would have you believe. My bankruptcy was still on my
credit reports when I accomplished all these goals – without paying
higher interest rates.
My bankruptcy was finalized in 1988. By 1989, I had a new credit
card, in my name alone. In 1993, I was able to get a $6,000 car loan (at
a reasonable 9% interest rate back then) and bought a used Honda.
Finally, in 1994, less than six years after I declared bankruptcy, I
bought my very first home.
Many stumbling blocks tripped me up along the way. I could have
avoided these obstacles – and rebuilt my credit much sooner – if
someone had been able to show me the right way to get back on my
feet. That‘s why I decided to take what I had learned and share it with
others. Through the years, the process of getting back on track has
evolved but my resolve to help consumers has never wavered.
Step-by-step, this book will show you how to get back on a firm
financial footing, put your bankruptcy behind you, live debt-free and
take on new credit only when it‘s truly in your best interest. I hope
you will use these strategies as a springboard to a new, more
financially secure life.
These strategies have worked for me and thousands of others who
have declared bankruptcy. In fact, my former sister-in-law followed
the steps in an earlier edition of this book and bought her first home,
a huge Victorian, one year after bankruptcy. Now you too can put
these strategies to work for you. You don‘t need to waste all the time
that I did, running around in circles, trying to rebuild your credit, or
getting caught up in the allure of new credit and running yourself back
into debt again.
Once I declared bankruptcy and started to rebuild my credit, as I
said earlier, it wasn‘t long before I found myself in trouble again. I had
the best intentions to live within my means. But offers of ―easy credit‖
were appealing and I bought the marketing ploy that the most
important thing for me to do was improve my credit score right away
19
after bankruptcy. One thing led to another, until I found myself
carrying debt from month to month again.
I knew I needed to break the debt cycle, so I started looking for
ways to change my lifelong money habits. Along the way, I discovered
that the best way to change my use of money was to first change my
attitude about money.
I was amazed at the difference in my life once I started changing my
attitudes about debt and money. You, too, will be amazed at how easy
it is to stay out of debt and start building real prosperity and wealth
for yourself and your family. You can start rebuilding your credit and
changing your attitudes about money, right now. So what are you
waiting for?
The highest compliment readers give me is when they tell me they
wish they‘d had a copy of this book before they declared bankruptcy. If
you have a loved one who is having financial troubles, please share
this book with them, before things get worse. Working together, I
believe we can all be empowered to make good financial choices that
will bring us financial freedom instead of keeping us slaves to
MasterCard® and other creditors.
Let‘s get started on your new financial future!
20
CHAPTER 1
The First Step Toward
Rebuilding Your Credit
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Your credit problems can be a thing of the past, starting today,
whether your bankruptcy was a Chapter 7 or Chapter 13, if you take
your time and move step-by-step through the process of getting
financially fit. I urge you not to make it your goal to get new credit as
quickly as possible. Instead, I urge you take your time and make it
your goal to rebuild your credit in a quality way.
Think about rebuilding your credit the way you would build a
home. Do you want to buy a house that is assembled as quickly as
possible with the materials that are available and most easily accessible,
regardless of the cost or quality of materials, the workmanship or the
stability of the foundation? Or would you rather buy a house that is
assembled using quality materials, with the best workmanship
possible, at the lowest possible price, with complete assurance that the
house is being built on a firm foundation?
The strategies in this book will help you create a firm foundation of
financial security underneath you, so that every money decision you
make is one that helps you (not your creditors!) determine what you do
or don‘t do in your life. As a result, you‘ll find that the wealth you
build is true, solid wealth, not wealth that is dependent on outside
factors.
Let‘s look at the nuts and bolts of what it means now that you‘ve
gone bankrupt. Your bankruptcy will continue to be listed on your
credit reports, legally, for up to ten years. In addition, depending on
information that was on your credit reports before you declared
bankruptcy, creditors may still turn you down because of problems
that show up on your credit report — even if the problem occurred as
many as ten years ago. This doesn‘t mean that your credit is ruined for
ten years. It doesn‘t mean you are financially ruined for ten years. It
simply means that this information will be listed on papers that future
creditors are going to see. The good news is that there are strategies
you can use to put your bankruptcy, and your past and future credit
history, in the best possible light.
Many strategies exist that will compromise your integrity or cause
you to take on more debt than you‘re truly comfortable handling. I
will do my best to teach you how to identify these strategies so you
can avoid them. No matter how alluring they may seem, they‘ll cost
you much more in the long run. The strategies I recommend are legal,
ethical and financially sound. Remember: Our goal is to create a
quality financial future for you — starting today.
Your first step, once your bankruptcy has been discharged, is to
check all of your credit reports. Creditors use your credit reports to
determine how safe a credit risk you are. Luckily, bankruptcy doesn‘t
automatically make you a bad credit risk. In fact, as long as all your
other credit information is good, bankruptcy can actually make getting
credit easier (which can be a good thing or a bad thing!). That‘s
because you can only declare bankruptcy once every eight years if you
discharged your debts under a Chapter 7 bankruptcy. So, you‘re much
less likely to default on a creditor.
If your bankruptcy hasn‘t been discharged for at least 90 days, you
may want to write that 90 day date on your calendar, skip ahead to
Chapter 2 and order your credit reports later, once your bankruptcy
has been discharged 90 days. This way the information being reported
on your credit reports will be as up-to-date as possible regarding your
bankruptcy.
GETTING COPIES OF YOUR CREDIT REPORTS
There are ways you can re-establish yourself as a good credit risk,
no matter what your credit history may be. But, you need to see what
your creditors see about your bill-paying habits. And, even more
important, you need to make sure the information in your credit
report is correct.
By law, you have the right to know what information is included in
your credit reports. Under a new federal law, you are entitled to one
free copy of your credit reports from all credit bureaus every 12
months. There are now four major credit bureaus (Equifax, Experian,
TransUnion and Innovis), plus many smaller regional and local ones.
If there are no local credit bureaus listed in your phone book, call your
bank or a local department store and ask for the name of your
regional credit bureau.
In order to get the free credit reports under the Fair and Accurate
Credit Transactions Act (FACT Act) from Equifax, Experian and
TransUnion, you must get them from what‘s called ―The Central
Source.‖ The Central Source is an online resource these three credit
bureaus created in response to the FACT Act. The Central Source
website can be found at AnnualCreditReport.com.
Given that nearly 30% of all people don‘t use the Internet, this
makes it a bit challenging if you prefer to do things over the phone or
by mail. In a minute, however, I‘ll show you the best strategy for
ordering your credit reports. This strategy will save you time, money
and reduce stress. Please don‘t immediately jump to the website I
22
:
THE FIRST STEP TOWARD REBUILDING YOUR CREDIT
mentioned above, without reading this entire chapter, unless you are a
glutton for frustration! The website is actually the worst way you can
order your free reports. Let‘s look at all your different options first.
GETTING A CREDIT REPORT AFTER BEING DENIED CREDIT, INSURANCE, A
JOB OR HAVING YOUR TERMS CHANGED
In addition to the free annual report you are now entitled to receive,
you can get additional free copies of your credit report from the credit
bureaus throughout the year. Anytime you are denied credit, insurance
or employment, or a creditor suddenly raises your interest rate or
reduces your credit limit, you can find out — for free — what‘s in the
credit report that was used, as long as you request your credit report
within 60 days of being turned down.
If one of these events has happened to you, request a free copy of
your credit report from the credit bureau whose report was accessed
(use the address for whichever credit bureau was contacted by the
creditor), using the letter below:
(Date)
Equifax
PO Box 105873
Atlanta, GA 30348-5873
Experian
Attn.: NCAC
PO Box 2002
Allen, TX 75013
888-397-3742
Innovis Consumer Assistance
PO Box 1358
Columbus, OH 43216-1358
800/540-2505
TransUnion
Customer Disclosure Center
PO Box 2000
Chester PA 19022-2000
800/888-4213
Dear Sir/Madam:
23
I am writing to request a copy of my credit report. I was denied
[credit, insurance or employment or had an adverse action taken] by a
company [name of creditor, insurance company or employer who
denied you credit, insurance or employment or raised your interest rate
or reduced your credit limit] on [date action occurred] based on
information in my credit report. As requested, I am providing my
personal information.
• First Name, Middle Initial, Last Name (+ Jr., Sr., II, III,
IV if applicable)
• Spouse’s First Name and Social Security number
• Present Home Address, including any apartment number, and
zip code
• Previous Home Addresses for the Past 2 Years, including any
apartment numbers, and zip codes
• Social Security number
• Date of Birth
Also attached is a copy of the declination letter from [creditor’s
name]. I thank you in advance for your help in this matter.
Sincerely,
[Your name]
Be sure to send a copy of the declination letter you received, not the
original.
You should receive your credit reports from the credit bureau
involved within three weeks. Mark your calendar 21 days after the date
you sent the letter (and be sure to send the letter certified mail, with a
return receipt requested). If you haven‘t received your credit report by
then, call the number listed for that credit bureau and request
assistance. If you still have a challenge getting your credit report, it will
be time to contact the Federal Trade Commission. I‘ll tell you more
about this later in the chapter.
GETTING CREDIT REPORTS IF YOU’RE
UNEMPLOYED OR APPLYING FOR WELFARE ASSISTANCE
If you are unemployed and will be applying for a new job or seeking
welfare assistance in the next 60 days, you‘re also eligible to get free
copies of your credit reports. Write to the same addresses listed above
and send them this letter:
Dear Sir/Madam:
24
:
I am writing to request a copy of my credit report. I am
unemployed and in the process of [seeking employment] OR [applying
for public welfare assistance]. As requested, I am providing my
personal information.
IV if applicable)
zip code
• Date of Birth
I certify with my signature below that the above statement
regarding my [being unemployed and seeking employment] OR
[application for public welfare assistance] is a true statement. I thank
you in advance for your help in this matter.
Sincerely,
[Your name]
GETTING YOUR CREDIT REPORT
AFTER IDENTITY THEFT OR CREDIT FRAUD
If you believe your credit reports may have inaccurate information
due to identity theft or credit fraud, you are also eligible to get a free
copy of your credit report.
In Chapter 11, you‘ll find the best strategy for protecting yourself
from identity theft, what to do if you suspect you may be a victim of
identity theft, how to stop it and how to recover from it.
STATES OFFERING FREE ANNUAL CREDIT REPORTS
A handful of states already allowed residents to get a free copy of
your credit reports every 12 months. These states are: Colorado,
Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont.
If you live in one of these states you can get a free copy of your credit
report each year directly from the credit bureaus, without having to go
through The Central Source.
If you live in one of these states, send the following letter to each of
the credit bureaus, at the addresses listed below:
25
(Date)
Equifax Information Services, LLC
Disclosure Department
P.O. Box 740241
Atlanta, GA 30374
800-685-1111
Experian
PO Box 9595
Allen, TX 75013-0036
888-397-3742
PO Box 1358
800/540-2505
TransUnion
PO Box 390
Springfield, PA 19064-0390
800/888-4213
Dear Sir/Madam:
I am writing to request a complimentary copy of my annual credit
report as per state law. As requested, I am providing my personal
information.
• First Name, Middle Initial, Last Name (+ Jr., Sr., II, III, if
applicable)
• Present Home Address, including any apartment number and
zip code
apartment numbers and zip codes
• Date of Birth
• Current Employer
• Phone Number
26
:
Also attached is a copy of my latest [creditor billing statement,
utility bill or driver’s license] verifying my current address. I thank
Sincerely,
[Your Name]
You must include all the personal information listed in the letter, and
proof of your current address. A copy of your utility bill, billing
statement or driver‘s license will do the trick.
You will notice that I included the phone numbers under each
address. You can order the reports by telephone as well, but I don‘t
recommend it. Ordering through the mail means that you can send
your letters certified mail, with a return receipt requested so you have
verifiable proof of when you ordered your reports.
You can also use the above letter to get a second free copy of your
credit report each year from all credit bureaus if you live in Georgia.
All other states charge a processing fee of up to $10 for each credit
report. You do get a break if you live in a state where the fee is
capped, as it is in these four states: California ($8), Connecticut ($5),
Minnesota ($3) and Montana ($8.50).
GET YOUR FREE ANNUAL CREDIT REPORTS – THE RIGHT WAY!
If you don‘t live in a state where you can get a free copy, then go
ahead and order your credit reports from Equifax, Experian and
TransUnion through The Central Source. Do not go through the website
they’ve set up “for your convenience!‖
Although the annual credit reports are supposed to be free and
downloadable, there‘s a catch. AnnualFreeReport.com takes you to
each credit bureau‘s website, where you‘re supposed to be able to
download and look at your credit reports for free. What really
happens, though, is that they make it virtually impossible for you to
get your credit report without paying something.
Equifax, for instance, will offer you upgrades, such as being able to
look at your credit score, all for a price. If you select no to all the
upgrades, they thank you for your order and give you a transaction
code. If you push the button to ―view my product‖ however, you are
taken to a login page, where you need to login as a member, with a
user name and password.
Here‘s the catch, though. You can‘t login unless you‘re registered
and you can‘t register unless you‘ve actually paid for a product. The
27
free annual credit report doesn‘t count. If you want to view your
―free‖ credit report on line, it will cost you $10 to do so.
Save the $10 you would pay for each credit report and use that
money to start funding your savings account instead. Now is the time
to cultivate patience.
Patience and persistence are the two habits that will help you create
the financial future you truly want. Unless you would truly take $30
and light a match to it, don‘t waste your money on getting instant
online access to your credit reports. Instead, order your reports from
The Central Source via telephone or mail.
HOW TO ORDER YOUR FREE ANNUAL REPORTS BY TELEPHONE
To order all three reports by phone, call 1-877-322-8228. The
process will take about seven minutes of your time. This is an
automated phone call that is activated by voice recognition, so speak
slowly and clearly. If you have an accent, or you get frustrated easily,
you may be better off ordering your report via mail. The phone
system will ask you your name, address, Social Security number and
date of birth.
The system will also prompt you for your previous address if you
have moved in the past two years. Be sure to follow the directions
completely, once the system starts asking you which reports you want.
Initially the reports are listed in order as ―1,‖ ―2,‖ ―3‖. Each time you
select one report, however, they eliminate that one from the list and
start again with ―1,‖ ―2,‖ and so on. If you want all three reports,
select ―1‖ each time. Pressing ―2‖ or ―3‖ at any time will disconnect
you from the call.
HOW TO ORDER YOUR FREE ANNUAL REPORTS BY MAIL
To order your credit reports by mail, you‘ll need a copy of the
official request form. You can print out the request form from their
website, or you can print a copy by going to
www.newcreditafterbankruptcy.com/annualfreereport.pdf.
Print the form, fill it out and mail it to:
Annual Credit Report Request Service
P.O. Box 105281
I highly recommend ordering your credit reports by mail and
sending the report form via certified mail, with a return receipt
requested. This way, you have a dated document showing when they
received your annual request.
28
:
ORDERING YOUR FREE ANNUAL INNOVIS CREDIT REPORT
Now, let‘s talk about getting your free annual credit report from the
fourth major credit bureau, Innovis. Innovis may or may not have
credit information on file for you. This company recommends that
you order your credit report via mail, for efficiency sake and for
security reasons, which makes me like them right off the bat. In
addition, they are highly responsive and people generally get their
Innovis credit reports much faster than they get their reports from the
other bureaus. The Innovis credit reports are also generally more
accurate than the reports from other credit bureaus.
To order your free annual credit report from Innovis, send them
the following letter.
(Date)
PO Box 1358
Dear Sir/Madam:
I am writing to request a copy of my free annual credit report as
per the Fair and Accurate Credit Transactions Act (FACT Act).
As requested, I am providing my personal information.
• First Name, Middle Initial, Last Name (+ Jr., Sr., II, III, if
applicable)
• Present Home Address, including any apartment number and
zip code
apartment numbers and zip codes
• Date of Birth
• Current Employer
• Phone Number
Also attached is a copy of my latest [creditor billing statement,
utility bill or driver’s license] verifying my current address. I thank
Sincerely,
[Your Name]
29
You must include all the personal information listed in the letter,
and proof of your current address. A copy of your utility bill, billing
statement or driver‘s license will do the trick.
Believe me, getting your credit report from each of the four major
credit bureaus will be the most worthwhile investment you will ever
make in your financial future!
WHY YOU SHOULD AVOID USING 3-IN-1 CREDIT REPORTS
You might be tempted to use a credit report compiling company
like Credco, myFICO or others, which merge information from all
your credit reports into what they call a 3-in-1 report. I don‘t
recommend doing this, for several important reasons.
First, when you merge all three credit reports, especially if there are
any errors, all you get is one big mess. You will wind up with a
summary page loaded with incorrect information that will take you
weeks to sort out — if you can sort it out at all. You also don‘t get any
guidance or a dispute form for fixing errors that you find. They have
simply taken the information from your three credit reports and
created their own credit file containing your information.
Any disputes must still be directed to the individual credit bureaus,
so you will have to contact the individual credit bureaus in the end any
way. So you might as well start with them in the first place. Instead of
getting a compiled report, go ahead and get each individual credit
report and clear up any errors – one report at a time.
WHAT IF YOU’RE NOT ELIGIBLE FOR A FREE CREDIT REPORT?
If you need to pay for copies of your credit reports, you may be
able to order each report on-line, over the phone or by mail (my
preference), depending on the credit bureau. If you‘re ordering on-line
or over the telephone, you must be willing to give out your
credit/debit card information. Before you give out your credit card
number over the Internet, check to make sure you‘re on a secured site.
If the site doesn‘t specifically state that you will be making a secure
transaction, I‘d recommend giving them your credit card information
over the phone. You‘re going to be working very hard to rebuild your
credit; I don‘t want credit card fraud to get in your way.
Equifax: http://www.credit.equifax.com; 800/997-2493
Experian: http://www.experian.com; 888/397-3742
TransUnion: http://www.transunion.com; 800/888-4213
30
:
When you call the automated phone lines, an automated voice will
ask you a few personal questions, including your Social Security
number. If you don‘t know your Social Security number off the top of
your head, grab your Social Security card before you call. Your
answers will be recorded, and you‘ll receive your credit report in 4-6
weeks.
If you‘ve recently moved, the automated system may not have your
current address on file. In this case, you‘ll need to order your credit
reports by mail. For efficiency sake (and to avoid the frustration of
being told you‘ll need to request your report by mail after you‘ve taken
time to fill out the on-line form, or spent 10 minutes on the
automated phone call), I highly recommend ordering all your
credit reports by mail.
I‘ve only included website addresses and phone numbers for the
three major credit bureaus, since Innovis recommends that you order
their reports by mail for efficiency and security. I urge you to order all
your reports via mail (have I mentioned this before?), using a check or
money order.
Seriously, though, since you‘re going to be ordering your Innovis
credit report by mail, and taking it to the post office to send your
request certified, return receipt requested, you might as well do the
same for the other three, right?
(Date)
Equifax
PO Box 105252
Experian
PO Box 2002
Allen, TX 75013
PO Box 1358
TransUnion
PO Box 390
Springfield, PA 19064-0390
800/888-4213
Dear Sir/Madam:
31
I am writing to request a copy of my credit report. As requested, I
am providing my personal information and any necessary fee.
IV if applicable)
• Present Home Address, including zip code
• Previous Addresses for the Past 5 Years, including zip codes
• Date of Birth
Also attached is a copy of my latest [utility bill or driver’s license]
verifying my current address. I thank you in advance for your help in
this matter.
Sincerely,
[Your Name]
Once your credit reports arrive in the mail you‘ll be another step
closer to your goal of financial security. The next step is to find out
exactly what your credit report says about your credit history — and
your credit worthiness.
WHAT YOUR CREDIT REPORT SAYS ABOUT YOU
Your credit report contains a list of many of your current and past
creditors, how much you borrowed from them and whether you paid
your bills on time. It should also confirm that your bankruptcy has
been discharged and list any outstanding liens or judgments against
you.
Most creditors only report information to credit bureaus when your
account becomes 90 days or more past due, or if your account is sent
to a collection agency. Other creditors report information to the credit
bureaus every month, so your payment history on those accounts will
be very detailed.
Almost all creditors will list your payment history in 30 day
increments. Your credit report will show how many times you paid 30,
60, 90, or 120 days late. To show all this information, most credit
bureaus use a coding system that is explained on the back of your
credit report.
Basically, your accounts will be listed as ―R‖ for revolving credit,
―I‖ for installment loans, or ―O‖ for open-end loan, followed by a
number that tells whether you paid on time or late. Most credit cards
32
:
are considered ―revolving‖ credit. Car loans and mortgages are usually
considered installment loans and home equity lines of credit are openend loans.
An ―R-1‖ for example, refers to a revolving loan that you ―paid as
agreed,‖ ―R-2‖ means you ―paid in more than 30 days, but not more
than 60 days,‖ etc. (up to ―R-5,‖ which means ―paid in more than 120
days‖). An ―R-9‖ means the account has been charged off as an
unpaid debt. Once your bankruptcy is discharged, you can start
improving your credit report by bringing all remaining accounts up-todate and continuing to pay on time.
It‘s important that you understand every piece of information on
your credit report. Otherwise, you could wind up overlooking
something that is important to a future creditor, and you could wind
up getting turned down for a car loan or mortgage because of an error
on your credit report. I don‘t want to see that happen. So, if anything
is unclear, call the credit bureau at the number listed on your credit
report. Ask a representative to walk you through the information.
WHAT YOU NEED TO LOOK AT FIRST
When you look at your credit report, there are two basic places
where obvious errors commonly occur: incorrect personal information
and out-of-date information. Most errors are very simple errors in
your personal information.
1. Incorrect personal information. Start by checking your personal
information to make sure it‘s correct. Verify your name, address,
Social Security number, and employment information. Next, make
sure all the accounts listed actually belong to you. If you have a
common name, or are a Jr., Sr. or II, etc., you may have information
in your credit report that belongs to someone else.
Pay close attention to any unusual or unfamiliar addresses or places
of employment that are listed as well. These items are clues that your
information may be mixed up with someone else‘s file, or that you
may have been a victim of identity theft.
2. Out-of-date information. Many other errors occur when old
information is left on your credit report. For the most part, negative
(and correctly reported) information that is more than seven years old
must automatically be removed. Here are the exceptions:
 Chapter 7 bankruptcies remain for ten years.
 Chapter 13 bankruptcies stay on for seven years from the
date you complete your repayment plan.
 Tax liens, paid lawsuits and judgments stay on seven years
from the date you paid them off.
33
 Unpaid lawsuits or judgments will stay listed on your credit
report for seven years from the date they were entered or the
time allowed by law for collecting the judgment, whichever is
longer. This period of time varies from state to state, but it
can be as long as 20 years.
To find out how long an unpaid lawsuit or judgment can stay on
your credit report, contact your State Attorney General‘s Office
(which you can find in the blue pages of your telephone book) and ask
what the ―statute of limitations‖ is for unpaid lawsuits. If the statute
of limitations is longer than seven years, that‘s how long it will take for
the unpaid lawsuit or judgment to fall off your credit report.
UPDATING YOUR DISCHARGED ACCOUNTS
Once you‘ve corrected all of these obvious errors, it‘s time to take a
look at your credit report with a more critical eye — to see what other
information is being reported in error. The first place to start after
your bankruptcy is discharged is with the accounts that were included
in your bankruptcy.
When you‘re correcting your credit reports, it is vital that you
update the way your discharged accounts are listed. Sit down with
your bankruptcy paperwork and compare your discharged debts to the
debts that are listed on your credit report. Check off each item on
your bankruptcy papers as you look for it on your credit report. You
should find these debts listed on your credit report as ―discharged
under bankruptcy protection,‖ or ―reorganized under Chapter 13
bankruptcy.‖
If these debts are still listed as delinquent accounts, under
collection, or charged off, your creditor may not have notified the
credit bureau that their debt was included in your bankruptcy.
Sometimes this information just falls through the cracks. Luckily,
updating it and removing the now incorrect delinquency is pretty easy.
Start by making multiple copies of your bankruptcy paperwork.
You‘ll need copies of your listed debts (Schedules D, E and F), and
copies of your notice of discharge (Order of Discharge). Next, you‘ll
need to send a letter to the credit bureau pointing out each account
that continues to appear delinquent. For example, my Equifax credit
report showed that I still had an outstanding car loan, and that the
creditor had slapped me with a lien. But my car loan had been listed,
and discharged, under my bankruptcy.
What seemed like a big problem actually had an easy solution. Use
the following letter to update your negative information and wipe your
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slate clean of any incorrect information. The following letter was all it
took to get the incorrect information off my credit report.
(Date)
[Credit Bureau]
[Address]
[City, State, Zip]
Re: [Your Social Security number and/or Account Number]
Dear Sir/Madam:
My credit report shows that the following account is [status of
account as it currently appears on your credit report].
Enclosed is a copy of my listed debts and my final discharge
papers which show that this account was discharged under my
bankruptcy on [date of final discharge].
Please update your records to show this change and send me a
letter indicating that this change was made.
I appreciate your help in this matter.
Sincerely,
[Your Name]
You can use one letter to list all accounts that need to be updated at
each credit bureau. Most credit bureaus now provide easy-to-fill-out
forms that accomplish the same thing. Use these ―Request For
Reinvestigation‖ or ―Dispute‖ forms to update your credit report if
you can, since the credit bureau specifically designed these forms to
include all the information you must provide about your accounts. Of
course, I still encourage you to include a nice, short note — even a
handwritten one — along with your form. A pleasant letter often
makes for speedier results.
COMMON POST-BANKRUPTCY ERRORS
Two other common post-bankruptcy credit report errors you
should look for are:
 A collection agency listed separately from the creditor it
serves. Why should you look like you have two debts when
you only have one? Since the debt was discharged under your
bankruptcy, only the original creditor should be listed.
 Closed accounts that are listed as open, or as being closed by
a creditor (make sure they‘re listed as being closed by you if
you are the one who closed them). One exception: If a
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creditor lists a closed account as open, and the payment
history is all positive, leave that account alone, since it shows
your past payment history in the best light possible.
Remember to update all incorrect information at each and every
credit bureau. You never know which credit bureau a creditor will use
to check your credit — and I don‘t want you to be turned down for
credit in the future when the negative information you cleared up on
one credit report shows up again unexpectedly on another credit
bureau‘s credit report.
Finally, looking at your credit report, you need to check for
incorrect information on existing debts. When I applied for a car loan,
I was up-front with the loan officer about my past bankruptcy.
Everything was going smoothly until the loan officer got my credit
report, which showed an unpaid lien from a landlord I‘d had — five
years before. Since I had no idea there was a judgment against me, I
also had no idea the judgment was on my credit report.
I had to call the landlord‘s attorney to find out how much I owed
($93). Then I had to leave work to go in person to pay the money and
get a receipt. Then I had to take the receipt to the courthouse to prove
the lien had been satisfied and wait for the courthouse to give me a
certificate of release. Then I had to go to the bank and give all these
documents to my loan officer and then finally I got my car loan. I
could have easily avoided all that running around at the last minute,
and solved everything through the mail, if I had known what was on
my credit report before I applied for my car loan.
BRINGING YOUR CREDIT REPORTS UP-TO-DATE
Just because an overdue bill has been paid doesn‘t mean that all
negative information about that account will be erased from your
credit report. Errors show up all the time. Luckily, it‘s easy for you to
get out-of-date and incorrect information removed from your credit
report.
Let‘s say you find incorrect information in your credit report
regarding a debt for which you have a bad payment history. You need
to make sure that even the negative information is being reported
correctly, so it reflects your credit history in the best possible light.
You may have existing debts that weren‘t included in your bankruptcy.
Perhaps you have a personal reason for not including a particular debt
(maybe it‘s a loan you had someone co-sign for).
Or maybe the debt couldn‘t be discharged under your bankruptcy,
which might be the case for a defaulted student loan or back taxes, or
the remaining payments on your mortgage once your Chapter 13
repayment plan ended. Anytime you have existing debts that have a
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bad payment history, I urge you to pay close attention to them. You
can bet future creditors will!
Start by making sure that the information listed in your credit report
is accurate. If a creditor shows you were 60 days late on several
payments, while your checks or receipts prove you were only 30 days
late, write the credit bureau and let them know they‘ve got the wrong
information. To a creditor, there‘s a big difference between being 60
days late and being 30 days late.
Find the ―Request For Reinvestigation‖ or ―Dispute‖ form that the
credit bureau included with your credit report. Fill out the form, listing
which information is wrong, and what the correct information should
be. If you don‘t have this form, simply write a letter to the credit
bureau requesting an investigation of the information you believe to
be incorrect. Here‘s a very effective letter you can use.
(Date)
[Credit Bureau]
[Address]
[City, State, Zip]
Re: [Your Social Security number and/or Account Number]
Dear Sir/Madam:
My credit report shows that [Name of creditor] lists my account
as having been delinquent ___ days, _____ times.
I believe this is an error. Please ask this creditor to provide proof
of these delinquent payments. If no such proof is found within [30
days in most states; 10 in Maine; 45 in Louisiana], please update
my file and remove this information, as required by law.
I thank you in advance for your help in this matter.
Sincerely,
[Your Name]
Start a file for each credit bureau and keep a copy of all letters and
forms you send. And remember to always send your letters via
certified mail, return receipt requested, so you have proof of the date
when you sent your request.
The credit bureau will then contact your creditor to be sure that the
information is correct. If the creditor cannot verify the incorrect
information, by law, the credit bureau must drop it from your report.
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You can expect to hear from the credit bureau in about 45 days. If a
month and a half goes by and you still haven‘t heard anything, write
another letter requesting an update on your investigation. Again, send
the letter via certified mail, return receipt requested, and keep a copy
of your letter.
If you still don‘t get a response, contact the Federal Trade
Commission (FTC). For the number of the nearest FTC office, call
800/688-9889. The FTC regulates credit bureaus and will help you
work through any problems you encounter.
Don‘t volunteer copies of any receipts or canceled checks unless the
creditor claims the information is correct. Any creditor who can‘t back
up their claims must remove all the bad information — even if you
really were late paying! Without proof, your creditor must upgrade
your account to show that you weren‘t delinquent at all — even if you
had been 30 days late in the past.
You could actually wind up with positive credit information on your
credit report, if the creditor shows that you‘ve always been current in
your payments. In the very worst case, your records would show you
were 30 days, rather than 60 days, late (still a big improvement).
Take me, for instance. I had defaulted on my student loan when I
was a struggling writer living in New York. Which means my account
was at least 120 days past due for quite a while. After declaring
bankruptcy, I worked out a payment schedule with the student loan
issuer. A computer glitch, however, showed that my account was
falling further and further behind.
Every few months, I called the creditor who assured me by phone
and letter that everything was fine and that my account was current.
But they never notified the credit bureau. When I applied for a car
loan, the banker was ready to turn down my loan based on the
information in my credit report.
When I finally requested my credit report, I saw what my creditors
had been seeing: a really bad post-bankruptcy debt — even though I
had been diligently making payments on this debt after declaring
bankruptcy. I sent a letter to the credit bureau questioning the
creditor‘s payment history. The credit bureau investigated and
responded with a letter stating that the creditor had confirmed that the
information was correct!
Once I stopped storming around the house, I called the creditor
myself. I calmly explained the problem and asked for a letter stating
that my account was, and had been, current, and that the problem was
a computer error. With this letter in hand, I went back to my banker
and I was able to get my car loan. More importantly, I sent a copy of
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this letter to the credit bureau as proof that the account was current,
and they updated the account to show it was never delinquent.
If you have an error on your credit report and the credit bureau says
your creditor claims the incorrect information is correct, call or write
to your creditor directly and ask them for a letter stating that the
account is current (or the correct status). Once you receive a letter
from your creditor saying your account is current, make copies and
send one copy to each credit bureau that is reporting the wrong
information about your account, along with the following letter.
(Date)
[Credit Bureau]
[Address]
[City, State, Zip]
Re: [Your Social Security number and Account Number]
Dear Sir/Madam:
My credit report shows that [name of creditor] lists my account as
having been delinquent ____ days, ____ times. You investigated
this matter for me on [date they sent you notice that information had
been confirmed] and were notified by the creditor that the account was
correct as reported.
Enclosed is a letter from the above creditor, showing the correct
current status of this account.
Please update my file to show the correct status and remove the
negative information from my credit report, as required by law, within
the next [30 days in most states; 10 in Maine; 45 in Louisiana].
I thank you in advance for your help in this matter. Please send
me a revised copy of my credit report with the new updated
information.
Sincerely,
[Your Name]
WHAT IF YOU RUN INTO A SNAG
The credit bureaus should respond about 30 days after receiving
your letter. (Maine must respond in 10 days; Louisiana has up to 45
days.) If you have trouble with a credit bureau and they refuse to
remove incorrect or out-of-date information from your credit report,
write to the Federal Trade Commission (FTC).
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In your letter, include the name of the credit bureau, its address and
phone number. Explain your problem, the dates you contacted the
credit bureau, and with whom you spoke. Include copies of any
documents pertaining to your problem. Then send a copy of the
whole packet — including your letter and a copy of your
documentation — to the credit bureau. Your letter should get
someone at the credit bureau to sit up and take notice of your
problem. And it will make the FTC step in. Here‘s an example of an
effective complaint letter which you can send to the FTC:
(Date)
Federal Trade Commission
6th & Pennsylvania Avenue, NW
Washington, DC 20580
Dear Sir/Madam:
On [date], I requested a copy of my credit report from [credit
bureau name]. On [date], I sent a letter requesting that the following
information be updated: [Account name and number. Explain why
information is incorrect or out-of-date]. To date, [name of credit
bureau] has failed to update this information on my credit report, even
though I provided documentation.
Enclosed is a copy of the [type of documentation] already
submitted to [name of credit bureau], proving that the information on
my credit report is incorrect. I thank you in advance for your help in
this matter.
Sincerely,
[Your Name]
cc: [Credit Bureau Name]
You can also complain to your State Attorney General‘s Office or
Office of Consumer Protection. You‘ll find these offices listed in the
blue pages of your telephone book.
Sometimes, you may run into a snag where a tax lien still shows that
you owe money even if you paid it off under your Chapter 13
bankruptcy agreement. If the credit bureaus still show the tax lien is
unpaid, write down the names and addresses of all the courthouses
where the lien was filed. You‘ll find this information on your credit
reports, listed with the tax lien. Once you have this information in
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hand, call the IRS at 800/829-1040 and ask them to send a release to
all the courthouses.
The sooner you start correcting the errors on your credit report, the
better. Begin cleaning up your credit report today. The process may
take a few months, but it‘s definitely worth the trouble. Remember:
The sooner you update your credit report, the sooner your credit
improves.
WRITING A CREDIT HISTORY STATEMENT
The Fair Credit Reporting Act (FCRA) allows you to add a
statement to your credit report explaining any outside factors that led
to you declaring bankruptcy. This statement becomes a permanent
part of your credit report until you change it.
Bankruptcy is often caused by factors such as a job loss, illness,
divorce, lack of money management skills –– that may now be under
control. Use your statement to summarize the nature of your past
problem and, if possible, show creditors how you are better able to
handle credit now. If the credit bureau limits your statement to fewer
than 100 words, the bureau must help you prepare a summary. Call
and ask the credit bureau for help writing your statement. Their
representatives can help you put your past credit history in the best
light.
Adding a statement about why you declared bankruptcy, and what
you‘ve changed to prevent it from happening again, is a personal
touch that may not change your FICO scores, but it does let creditors
see that you are more than a number; you are a person who has taken
action to change the way you now handle money, credit and debt.
Cleaning up your credit report is just the first step. To rebuild your
credit, you also need to keep up with your future bill payments at all
times. Know all the due dates for your bills, and make sure you put
your payments in the mail early enough so that they never arrive late.
If you‘ve decided to use an on-line banking service from your bank, be
sure to read my tips in Chapter 13 for making sure that your bills are
always paid on time.
CREDIT REPAIR WARNING SIGNS
Updating your credit report will take a little time and energy on your
part, but it is worth it. It might seem like updating your credit report
would be a lot easier if you could just pay someone else to take care of
it for you, right? Don‘t do it!
Most credit repair companies are scams. The simple truth is, no one
can get true negative information off your credit report for good.
Correct information, good and bad, stays on your record for seven
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years. Your bankruptcy will stay on your report for ten years (and no
more than seven years after you finish repaying your debts under
Chapter 13 bankruptcy).
There is no legitimate way to remove a bankruptcy from your credit
report unless the bankruptcy was someone else‘s and is showing up on
your credit report due to identity theft or because someone you cosigned a loan for has gone bankrupt.
Having a bankruptcy listed on your credit report doesn‘t mean
you‘ve got an eternal ―black mark‖ on your credit report. It simply
means the credit bureaus will report that you had a bankruptcy in the
past. It‘s up to you to take the steps necessary to turn that bankruptcy
into an asset. And I know you can do it!
As you‘ve just seen, you can build up your credit rating by
improving or updating the existing negative information so it reflects
you in the best light. You‘re better off doing this yourself than you are
paying someone to do it for you. All it takes is five to six hours of
your time. Invest your time one Saturday or Sunday and you will be
through the hardest part. When you‘re done, you will know that your
credit report contains the best possible credit history it can. And you‘ll
know you didn‘t get ripped off by a credit repair scam.
If you did get taken in by a credit repair scam, however, don‘t beat
yourself up. Chalk up the money spent as the fee for an important
lesson and move on. Get copies of your current credit reports and
start using the information in this chapter to update your credit report
yourself.
It‘s easy to see why many people wind up using credit repair
companies. Some companies offer a written guarantee that they‘ll get
negative information off your credit report, or you don‘t have to pay
them. Don‘t believe it! They‘ll temporarily give you a clean slate and
then they‘ll take your money (usually $500 to $1,000) and run – before
the negative information reappears. Here are a few Credit Repair
Warning Signs to help keep you from being scammed. Avoid any
company that:
1. Asks for a large up-front fee of several hundred dollars. Most legitimate
companies charge a very small amount for their services, and they
don‘t ask for their money until you are completely satisfied that your
credit reports have been corrected.
2. Says they can remove true, negative information from your credit report. The
methods these companies use can get negative information taken off
your credit reports for a short time — but when the creditor reports
that the information is correct, it will be back on your reports again.
These companies appeal the bad information on your credit report. By
law, the credit bureau must remove the information while it‘s under
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investigation. The repair clinic then shows you the next month‘s credit
report, with the negative credit information removed. They charge you
their fee, you pay them, and bang — when you apply for a mortgage
or a loan down the road — the negative information is back on your
credit report and you‘re out hundreds of dollars.
3. Assures you that they can remove a bankruptcy from your credit report.
Unless the bankruptcy was discharged over ten years ago (seven years
for a Chapter 13), there is no legal way for anyone to remove your
bankruptcy. There is a fraudulent way, which involves requesting your
bankruptcy file from the courthouse archives, then questioning the
listing on your credit report. I don‘t recommend it.
Some bankruptcy recovery experts advocate hiring a lawyer to
remove the bankruptcy from your credit reports. I don‘t recommend
this. Yes, you can use legal loopholes to get the bankruptcy removed.
Don‘t invest your time, energy and resources fixing the bankruptcy so
it doesn‘t show up on your credit report. Instead, invest that time and
money into creating healthier financial habits or using a good
prosperity or financial coach. Examine and change your beliefs about
financial issues and the driving forces behind your actions (or
inactions) when it comes to dealing with money. That‘s an investment
that will truly pay off.
Having a bankruptcy listed on your report will not prevent you
from getting credit. But having other post-bankruptcy negative
information on your credit report might stop you from getting credit
you deserve — which is why I encourage you to examine and update
your credit history as soon as possible. And why I encourage you to
slowly rebuild your credit rather than trying to get a quick fix using a
credit repair company.
If you‘ve been taken advantage of by a credit repair company,
contact the Credit Practices Division at the Federal Trade
Commission (FTC). To find the number of the nearest FTC office,
call 800/688-9889. Once the FTC has a history of consumer
complaints against a credit repair company, it can take action to stop
the company from continuing business.
There are a number of credit repair companies, and almost all of
them claim to be ―non-profit‖ companies. Empower yourself to take
charge of your financial future and don‘t use any company you haven‘t
thoroughly checked out with the FTC and the Better Business Bureau
first. One big credit repair company which was sued for credit repair
fraud is Credit Resource Management Group (CRMG). Steer clear of
these guys, for sure!
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FINDING A LEGITIMATE CREDIT REPAIR COMPANY
Legitimate credit repair companies or credit counselors can help
you do the perfectly legal strategies that you‘ve just read about. They
can write the letters to the creditors on your behalf and work to have
negative information updated and have incorrect information
removed.
You now have all the tools you need to ―do-it-yourself,‖ right here
in your hands. But if you do want to have someone else help you, use
the Credit Repair Warning Signs I just gave you to make sure the
company is on the up and up. I also recommend that you call your
State Attorney General‘s office to find out if the credit repair company
is legitimately licensed to do business in your state. You‘ll find your
State Attorney General‘s office listed in the blue pages of your
telephone book.
If you know where the company is headquartered, you can check
with the Better Business Bureau in that state to see if the company has
any complaints on file. If the company isn‘t licensed to do business in
your state, or has a long record of complaints about it, keep your
money in your pocket.
WAITING FOR YOUR CREDIT REPORTS
You‘ll have a few weeks to wait for your credit reports, so put this
time to good use. Use this time to read Chapter 2 and start practicing
your new internal money habits. If you have reaffirmed any debts,
now would also be a good time to dive into Chapter 3, where you‘ll
find easy-to-use strategies for getting rid of your remaining debt. Once
your credit reports arrive, you can come back to this chapter and start
straightening out any errors you find.
If you didn‘t reaffirm any debts or you‘re in a Chapter 13 repayment
plan, read ahead in Chapter 4 to see some strategies you can start
using to create and build savings and wealth.
If compulsive spending has been a problem for you in the past
(wanting to live beyond your means and using credit cards or other
forms of debt to accomplish this desire), then you might want to turn
to Chapter 10 for some useful information on breaking free from your
debt addiction.
Whatever next step you take, I encourage you to take a minute to sit
and congratulate yourself for taking action toward creating what you
want in your life. You‘re taking bold steps toward creating a financially
secure future that is based on a firm financial foundation of new
knowledge, new skills and new habits. You‘re on your way!
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Chapter 1: Action Items
1. Order copies of your credit reports from the four major credit
bureaus so you know what your creditors are seeing about your credit
history.
2. Start files for your credit reports and keep copies of all
correspondence and conversations you have with creditors or the
credit bureaus.
3. Check your personal information on all reports, check for out-ofdate information and update all accounts discharged in your
bankruptcy.
4. Look for other common post-bankruptcy errors, including debts
that are listed more than once and closed accounts that are still listed
as open.
5. Bring all negative information up-to-date.
6. Follow-up if a credit bureau doesn‘t correct a problem.
Go straight to the creditor to get the information you need to update
your credit report, if necessary.
7. Write a statement about your credit history to explain what caused
your bankruptcy.
8. If you‘re approached by a credit repair company, use the
Credit Repair Warning Signs as a guideline to make sure the
company is legitimate and call your State Attorney General‘s office to
see if the company is licensed to do business in your state.
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46
CHAPTER 2
Laying a Foundation for Financial Security
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
While we wait for you credit reports to arrive so you can start
getting into the nuts and bolts of actually rebuilding your credit, it‘s
time to start laying a strong foundation for your financial security.
Creating the foundation that will work best for you will depend on a
few different factors. First, you have to know where you are starting
from. Second, you have to know what it is you are working with.
Think of someone laying a foundation for a house. Your starting point
will be different if the ground where you want to build is already
graded smooth than if it‘s full of rocks. And your game plan will also
be different if there‘s already a makeshift structure in place where you
want to create your firm foundation.
To determine your starting point we have to figure out exactly what
caused you to go bankrupt in the first place, so you can take
preventive measures to make sure it doesn‘t happen again. Then we
need to see what you‘re working with so we can determine the best
game plan for you. How your game plan unfolds will depend on
factors such as whether you:
 Were able to pay all your bills on time before your
bankruptcy
 Had already stopped paying your unsecured creditors before
your bankruptcy
 Were behind on your car payments, rent or mortgage
payments
 Still struggle month to month to pay the remaining expenses
you have after your bankruptcy
 Kept any debts like student loans, personal loans, credit card
debts or a mortgage
 Have taken on new debt since your bankruptcy was
discharged
 Are struggling to keep up with your new debts
THE ROOT CAUSE OF YOUR BANKRUPTCY
You may think you already know the answer to the next question
I‘m going to ask, but I encourage you to bear with me – because the
true answer may surprise you!
What caused you to go bankrupt? Was it a job loss? A cut in
overtime hours? A medical problem? A family break-up due to death
or divorce? Little or no emergency savings? Harassing creditors who
weren‘t willing to work with you? Late payments that resulted in
penalties, higher interest rates and late fees? A natural disaster such as
a fire, flood or hurricane? Lack of or insufficient insurance? Out of
control spending? Identity theft? A friend or family charging things to
your accounts? Circle any of the above that apply to your situation,
and write down any others that you come up with.
How many of the things you circled or wrote down were due to
your actions or inactions and how many were completely out of your
control?
How surprised would you be if I told you that every item on the list
above (and most likely every item you added to the list) was something
that was actually within your control to one degree or another? Before
you argue with me, or toss this book down and stomp on it and tell
me that I‘m crazy and that I‘m blaming you for your bankruptcy, let
me explain.
THE BEST CHOICES AT THE TIME
We all make choices with our finances. We make the best choices
we can at the moment we make them. Sometimes we make choices
out of fear. Sometimes, we make certain choices because we don‘t see
how there are any other options available. Other times we make
choices by not taking action when it could make a difference.
For instance, when we get laid off, we usually think it will only take
a few weeks – a month tops – before we find a new job. So we live on
credit cards. Then the weeks turn into months and sometimes years.
We don‘t choose to get rid of the extra car, or pull the kids out of
private schools, or sell the house and get something smaller, or move
back in with our folks when we get laid off.
We choose the lower monthly insurance payment that gives us 80%
coverage rather than the higher monthly payment that covers us
100%. We choose not to scale down our holiday spending or brown
bag it every day when things start getting tight. Or we don‘t talk about
or take away the credit cards that a spouse uses on a spending binge,
because we don‘t want to deal with their emotional (or physical)
outbursts when we bring up money issues. Or we didn‘t get educated
on the possible pitfalls of keeping the mortgage in the divorce while
our spouse took the credit card debt – and then promptly turned
around and went bankrupt on all those joint accounts s/he had agreed
to pay off, leaving us with the mortgage and the credit card debt.
We can always come up with hundreds of reasons why we choose
to do what we do when it comes to our relationship with money.
Don‘t judge the choices you‘ve made in the past. Just recognize them
and acknowledge that today you‘re making different choices.
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LAYING A FOUNDATION FOR FINANCIAL SECURITY
Often, by the time we change our money habits and get financially
informed, the financial hole is so deep that there‘s no way out except
for bankruptcy. The important thing here is not to blame yourself or
anyone else for why you wound up in a bankruptcy court. The
important thing is to simply recognize and honor the choices you
made as having been the choices you made at that time.
If you‘re prone to blame yourself or others, you may find this
phrase extremely helpful: It seemed like a good idea at the time. You must
have thought it was a good idea at the time, for whatever reason you
had, or you certainly wouldn‘t have made that choice, right?
It‘s easy to look at catastrophic events and think that they are
unexpected events – and unexpected events can‘t be planned for,
right? The truth is we can plan to protect ourselves from unexpected
events, no matter whether they are a lost job, an illness, a death in the
family, a divorce, a fire, a hurricane, a disabled car or even identity
theft. We just need to learn how – and to learn how to overcome the
fears that keep us from thinking that we can‘t learn.
Some of us learned how to save money and others of us didn‘t.
Some of us learned how to ask the ―right‖ questions to make sure we
were making informed financial decisions and others of us didn‘t.
I can still remember when I was laid off from my job at a publishing
company, less than a year after I had purchased my first home. I had
my six month‘s emergency reserve in savings, and every month I
dipped into those savings to pay the mortgage, until finally, there
weren‘t any savings left. I remember calling the mortgage company
and being transferred to a division called ―the workout division.‖
I had an FHA loan which had been financed through HUD, and
the sweet woman on the other end was most apologetic when she
said, ―I wish you would have called us six months ago, before you
used up all your savings.‖ It turns out that HUD loans had a special
program called ―assignment‖ where you could get your monthly
payments reduced or possibly suspended and tacked onto the end of
your loan, for up to three years, while you got back on track. I didn‘t
know about this program. Of course, I could have beaten myself up
for not knowing, and for spending my savings and leaving myself
cash-strapped. Or I could acknowledge that spending my savings
seemed like a good idea at the time.
KNOWLEDGE IS POWER
Knowledge is power, they say. And it‘s true. If I had known about
the assignment program, I would have entered it earlier, gotten a
reduced monthly mortgage payment, and been able to support myself
with my savings until my income increased again. I simply made a
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different choice. It was a choice that seemed like a good idea at the
time, based on the knowledge I had at the time.
Our next step is to give you the knowledge you need to take control
of your finances. You may be more than ready to start taking control
of your finances, or there may be a part of you that still wishes
someone else would take care of the financial details in your life. You
may even prefer not to know anything about money matters. The
more you know, however, the more you will be able to create a secure
financial future for yourself.
Think about any situation in your life where there are a lot of
unknowns. Unknowns make most of us very uneasy. As you get clear
about the way money works in your life, and the money decisions
you‘re making, you will be truly amazed at the progress you will make
and the new sense of lightness and freedom you will feel.
As you bounce back from bankruptcy, there are internal and
external things you‘ll be changing in this step-by-step process. In
Chapter 1, we took the first external step, which was to order your
credit reports and take a good look at how your credit history is being
reported. Now it‘s time to work on the internal stuff.
I recommend you read through this chapter once, so you can start
thinking about some of the questions it raises while you wait for your
bankruptcy discharge to show up on your credit reports and wait for
your credit reports to arrive. Do this and you‘ll have a firm foundation
for your financial future by the time you even begin rebuilding your
credit!
Once you do start actually rebuilding your credit, be sure to come
back to this chapter so you can take a look at the relationship you
have with money, identify what stands in the way of you healing your
relationship with money and put an end to the ways you – knowingly
or unknowingly – sabotage your financial security. This chapter will
help you create that firm financial foundation you‘re looking for – and
help you build true financial freedom after bankruptcy.
HEALING YOUR RELATIONSHIP WITH MONEY
There are always going to be things that will distract us from our
goal of having a healthier relationship with money. It will always be
easier to focus on those things instead of focusing on the places where
we need healing. And we will always have good excuses for why we
didn't get around to the work we "wanted" to do. We had good
intentions, after all, right?
The drawback with good intentions is that they will always remain
intentions. They will always be "something I meant to do, but..." The
only way to turn an intention into a goal is to consciously commit to it
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(we‘ll explore some great strategies for easily and effortlessly setting
and getting your goals in Chapter 4). The only way to turn your
intention to heal your relationship with money into actual healing is to
concretely outline the goal. What is it, exactly, that you want to do?
Do you want to:
 stop living paycheck to paycheck
 stop feeling like you don't have enough
 stop feeling like you can't afford the things you want to do,
be or have for yourself and your loved ones
 stop feeling indebted to others
 stop arguing about how money is spent in your family
 start feeling more comfortable about giving and receiving
money
 start creating real savings, investments and wealth
You probably have a number of these intentions floating around in
your head, and they're very good intentions. Country music singer
Travis Tritt has a ballad called "The Best of Intentions." Hearing the song,
I visualized him making a commitment to his spouse, carrying through
on that commitment throughout the years, occasionally falling short as
we all do, but expressing the fact that even when he fell short his
intentions were pure.
Then one day I saw the video. The video unfolds with Travis
playing a man who is in and out of jail, expressing remorse for all the
times he let his wife down. He had the best of intentions, but he never
took any actions toward making a commitment to stop putting himself
in situations that would land him in jail.
MAKING THE BEST OF OUR INTENTIONS
Many of us state our intention after bankruptcy to never again have
debt, or never again carry a balance on a credit card, or to definitely do
things differently this time. But we don't make a commitment to stop
putting ourselves in situations that add to our debt. In fact, a 2001
survey by the National Consumer Law Center (NCLC) showed that
48% of people who declared Chapter 7 bankruptcy didn‘t give
themselves a true fresh start. Instead, they chose to reaffirm (agreed to
continue to pay) at least one debt.
Others of us are so firmly convinced that our bankruptcy was
entirely due to circumstances beyond our control that we don‘t look at
how our attitudes and actions around money contributed to our
winding up in bankruptcy court. The truth is, we can take
responsibility for our actions and inactions without blaming ourselves
or anyone else.
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New credit may become real tempting, especially right after your
bankruptcy is discharged, when you start wondering if it‘s true that
bankruptcy is a ten-year mistake and you‘ve ruined your credit forever.
It‘s also easy to get back into debt again during the holiday season
when you‘d like to buy more things than you have cash to spend.
And then there‘s the post-bankruptcy ―real estate investment
boom‖ where people buy residential and commercial real estate after
bankruptcy and use the equity in their properties to buy more
properties. They talk about how much real estate they own when in
fact, they don‘t own anything, or actually own very little – because all
the properties carry 90%, 100% or even 125% mortgages.
I really didn‘t want to write this edition of Bounce Back From
Bankruptcy. (In fact, I procrastinated about it for months, much to
my publisher‘s dismay!) And at the same time, I couldn‘t stand by
while people who had gotten into this cycle were coming to me, in
shock, about to lose their million dollar real estate portfolios because
they had pulled out all the equity from the properties to buy more
properties, or to live on. They lost a tenant or two and suddenly their
carefully constructed real estate empire was crumbling because they
were drowning in debt.
The one soothing piece of information I could give them was to
help them see that the actual investment they were losing was usually
closer to $10,000 or $20,000. This was the amount of their own
money they had invested, since they had borrowed against the
increased value of the property for improvements or living expenses.
Real estate has often been touted as the one true surefire
investment. And it can be, when we spend our money wisely to
acquire the real estate, instead of using our earnings as simply a means
to acquire more and more properties. I spoke with a friend who is a
highly regarded real estate investor. Her company operates so that the
debt they carry on all their investment properties is never more than
50% of the total value of their real estate portfolio. Wise advice to
follow!
It‘s all too easy to get caught up in the debt cycle by rationalizing
every time we spend more money than we truly want to spend in any
area. So what stops us from honoring our commitment to ourselves to
handle our money in a healthier way?
The answer is fear. It always comes back to fear. We're afraid other
people will think we're cheap. Or we're afraid someone will buy us
something more expensive than what we bought them. Or we're afraid
our children will think poorly of us if we don't buy them what they
asked for, or if we have to change what we are able to do or give
them. Or we‘re afraid people will think we‘re poor or stingy. Or we‘re
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afraid that we‘ll never, ever, have the life we truly desire; we‘ll never be
able to afford to have children, or a nice car, or a home of our own, or
that nice vacation.
We use our fears to put up obstacles to our commitment. This way
we can avoid facing the fear. Instead, we can point to the obstacles
and say things like "I would have, but..." or "I was going to, but..."
Making the commitment to heal your relationship with money is a
great first step. But you have to also be ready and willing to commit to
removing the obstacles that you create in order to avoid honoring that
commitment. So – how do we commit to clearing up the things that
stand in the way of having a whole, healthy relationship with money?
REMOVING OBSTACLES TO HONORING OUR COMMITMENTS
A good starting point for removing obstacles to a healthier
relationship with money is to acknowledge what your obstacles are.
Then look beyond the obstacles to identify the fear that caused you to
create the obstacles. Let‘s use your bankruptcy as an example, okay?
You went bankrupt. And the obstacle to honoring your
commitment to paying off a particular debt may have been that your
creditors wouldn‘t work with you to create a reasonable monthly
payment. Or because your home was about to be foreclosed on. Or
your clients were slow to pay you, so you didn‘t have the income to
pay the debts. Or your paperwork was destroyed in a natural disaster,
or you were too physically or emotionally overwhelmed to deal with
the stress of your finances.
The debt may be gone now, but the reasons the debt happened are
either still there or have the potential to show up again unless we
change something within ourselves.
Maybe you had unexpressed anger, resentment or envy toward the
person or company you owed money and so you got angry or
righteously indignant and decided you were not going to work with
your creditors. Or you may have been afraid that any repayment plan
you suggested would be rejected (again!). Or you may have been afraid
to look at how much debt you actually owed – and setting up a plan to
repay the debt would have meant acknowledging the exact dollar
amount of your debt.
While you‘re waiting for your credit reports to be updated to show
that your Chapter 7 bankruptcy has been discharged, or while you‘re
working through your Chapter 13 payment plan, take five minutes
every day to commit to healing your relationship with money. Identify
and clear up the obstacles that stand in the way of you achieving this
goal. Turn those good intentions into firm commitments and step out
in faith, leaving the fear behind.
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WHAT STANDS BETWEEN YOU & FINANCIAL INDEPENDENCE?
Healing our relationships with money means being open and willing
to change the way we think and feel about money. It is our thoughts
and feelings about situations involving money that keep us from
having a healthy relationship with money, not the situations
themselves.
Now is the time for me to ask the hard questions. Are you willing to
shine a light into the dark places and look at what lurks there without
running away? Are you willing to create a game plan of specific actions
that you can take to claim your financial independence?
You may find that it's helpful to take a few deep breaths, or take a
friend or mentor with you as you explore the really scary parts of your
money relationship. I assure you, however, that while every dark
crevice you explore contains a scary shadow, more often than not the
shadow is a reflection of a gift for you.
RELEASING OTHERS FROM BLAME ABOUT OUR FINANCES
As long as we hold onto the belief that other people, or outside
events in our lives (past or present), are to blame for our having gone
bankrupt, or for our current financial situation after our bankruptcy
discharge, we are allowing these people and events– not ourselves – to
control our lives.
What do you need to let go of in order to become a financially
independent individual? It could be releasing old thought patterns, old
spending patterns, or the sense that you‘re a financial victim.
You must ask yourself: What are you willing to give up for your
financial security? Our thoughts, actions and words must line up with
what we say we want in our lives. If you feel used, taken advantage of,
like a sellout, or like you're sacrificing your values or future, take these
as signals that something is out of alignment in your financial
independence.
Look at every financial situation that comes up in your life as an
opportunity to check in and ask yourself: How aligned am I with my
goal of financial independence? Think about your financial
independence like a car, for a minute. When you want to check your
car‘s alignment, you would observe the way it‘s driving, to see if it
pulls to the right or left on the road. Do the same thing with your
financial actions. Don‘t judge them. Just observe them: Are your
financial actions heading straight toward your goals, or are they pulling
you out of alignment with your goals? Observe your actions closely
and they will give you some basic information that is an important key
to getting realigned and developing your financial independence.
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Begin to look at the changes you are afraid of, as well as the changes
you want to make. Ask yourself: How can I minimize my fears and
embrace what I want? Then start taking small steps forward in these
areas and watch how empowered you begin to feel.
GETTING RADICALLY HONEST ABOUT YOUR MONEY MATTERS
How many times have you told a white lie or half-truth about your
financial situation? Ever inflated your current salary during a job
interview because you were afraid you wouldn't get the salary you were
asking for otherwise? Told the panhandler you didn't have any change
because you were afraid he or she would use the money for booze or
because you didn't want to deal with their harsh reality? Said "the
check is in the mail" when it wasn't? Said "we can't afford it" about
something you didn't want to spend money on? Dodged creditors
when they called? Didn‘t list a credit card in your bankruptcy papers
and rationalized that it was okay because the card had a zero balance?
Ever said "you don't really want that" when you were actually
concerned about how much something cost or because you secretly
wanted something else but weren't able to speak up about it? Ever
tried to get a discount or something for nothing, just because you
thought you shouldn't have to pay more? Ever sidestepped someone‘s
question about the cost of an item because you thought they were
being nosy or judgmental? Ever hidden your bankruptcy from family
and friends?
Almost everyone, at one time or another, has been afraid to fully
reveal themselves financially. (Sometimes, we rationalize the fear by
saying that it‘s nobody else‘s business, or it‘s private information.)
This fear, which drives us to conceal what we're actually experiencing
regarding money, comes up even when we‘re working hard to
overcome it. And this fear sets us up for financial failure in ways we
don't even realize.
It‘s time to make a conscious commitment to reveal yourself
financially, rather than continuing to conceal yourself financially. This
means taking a long, radically honest look at your current financial
situation. It means examining every bump and wrinkle and money
decision you made that led up to your bankruptcy. And it means
examining these things without getting upset and without judging
yourself or others. It means facing all those money fears head-on,
even when doing so is painful, makes you anxious or brings up anger
and fear you had long ago pushed aside. It means being willing to
reveal the truth about your finances and how you feel about money.
Take a deep breath. It really isn‘t as scary as that last paragraph
makes it seem, I promise!
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REGAINING CONTROL OVER YOUR MONEY
Start with a few simple questions. Ask yourself: What do I need to
change about myself and the way I deal with the financial situations in
my life in order to feel like I have control over my finances? In order
to feel like I'm not wasting money and that I do have enough? In order
to realize that others having more than I do doesn't mean I can't have
more for myself?
Remember, you're making a commitment to being radically honest
in your financial dealings. What exactly does it mean to be radically
honest? It means asking before you make personal copies on the
office copier, or offering to pay for them before you make them. It
means not asking others to compromise themselves in order for you
to get what you want. It means actively speaking up about what you
do want and not assume others will (or should) know what is
important to you.
Now, you might be asking yourself: what is the point of radical
honesty? Being radically honest means you're aligning your intentions
with your actions. Ever been shortchanged by a person or company?
How did you react? Most of us usually go out of our way to go back
and have them set the situation right or we go out of our way not to
do business with them again. Radical honesty means taking those
same extra steps to correct situations where a person or company
accidentally shortchanges itself – and to avoid shortchanging others.
HOW ILL-GOTTEN GAINS SHORTCHANGE YOU
Many of us are quick to teach our children a lesson in right and
wrong when we catch them stealing a pack of gum from the store, for
example, yet we see nothing wrong with pilfering a pack of legal pads
from the office.
We're quick to go out of our way to let our insurance company
know if they haven't paid us for a claim, but we're not as quick to let
them know if they pay the same claim twice.
We justify our actions with practical truths. We'll be using the legal
pads for business work, mostly. The insurance company can afford to
pay us twice. But radical honesty calls for us to step up to the radical
truth behind our actions.
I was once in this situation and did nothing. My excuse? I was short
on time. As I climbed back in the car, hurrying to my next errand, I
realized I had received two booklets of stamps, but had only been
charged for one. I told myself that the next time I was at that post
office, I would correct the situation. Yet I didn‘t make it a priority to
go to that post office, and every time I did get there, the windows
were usually closed.
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I could still set the situation right, however, by dropping a check
into the postal slot, with a note addressed to the postmaster,
explaining what the check was for and asking that a receipt be placed
in my mailbox, which is what I ultimately did.
OVERCOMING THE FEAR OF NOT HAVING ENOUGH
Why did I accept the stamps and not fix the situation right then and
there? Why do we take the office supplies or use the office phone for
personal long distance calls or use the copier to copy our personal
materials without asking? Why do we look for ways to "get a better
deal?"
Fear. It always comes back to fear. Fear that we won't have or don't
have enough time, energy or money to do what we want to do. And
this fear often manifests as anger. "They" – the corporation, the
government, the wealthy neighbor whose tool we borrowed and broke
and put back as if nothing happened to it – can "afford" the expense.
We want more and they have more, and this makes us angry and
fearful. After all, we pay a lot in taxes, or sweat or premiums, or we
work as hard as our neighbors, or whatever. They "owe" us.
The only problem is, this mindset constantly keeps us indebted to
others by not honoring our relationship with complete honesty. We
try to replace the fear with a sense of having been wronged.
But then our anxiety kicks in, which is a symptom of our fear. We
start thinking about the copies that need to be made, for instance, and
our pulse begins to race. What if someone comes in while we're
making copies? What if we forget to take the originals with us?
What if the insurance company discovers it overpaid us and wants
its money back? What if we‘ve already spent the money?
This energy-draining anxiety keeps us from staying focused on our
goal. The phrase "ask and you will receive" isn‘t just an empty saying.
By asking permission to borrow a piece of office equipment or use
office supplies, for example, you receive self-respect, you receive
energy and greater abundance. You receive all these things no matter
what the answer is to your request to use the copier. Because you
made sure your integrity was intact.
The next time an opportunity comes up that has ties to a financial
issue for you, be bold and daring and reveal your radical truth. Put the
truth on the table. Tell your mate you'd rather spend your money on
new curtains than on a belt sander (or vice versa!), instead of
chastising your spouse for wanting to buy "something we can't
afford."
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The truth isn't about a fear of not being able to afford the item. The
truth is that you have desires too, that you aren't talking about. You
want more, too. And that‘s okay!
ACKNOWLEDGE YOUR TRUE FEARS
Starting today, take a bold step toward your financial security and
speak your truth about money situations. Voice the fears. By giving
them a voice you acknowledge them and that acknowledgement helps
ease the fears.
Think about an argument you might have had with someone
recently. Chances are you didn't actually need them to say you were
right (although you might have thought you wanted them to say that
you were!). You just needed to have your point of view understood
and acknowledged. That's the true measure of winning an argument,
and the true measure of how well you're revealing yourself. You'll
know you're revealing yourself completely regarding your finances
when you can walk away from a situation feeling proud and anxietyfree, knowing that you spoke the truth about the situation.
Whether you're avoiding creditors, sneaking materials from work,
hiding purchases or not sharing your true feelings with a friend or
family member, or avoiding settling matters with a person or
organization who has more than you do, you are concealing yourself.
When we put ourselves in these situations, we're like children who
stay home sick from school. We get upset about having to take
medicine. But once we do, our health starts improving. Speaking the
radical truth about your finances is the medicine that will help you
heal your relationship with money.
EMPOWER RATHER THAN VICTIMIZE
Now it is time to learn how to not take your financial challenges
personally. We need to separate ourselves from the financial feelings
and fears of being a victim. Our goal is to empower ourselves to
recognize and support our financial strengths. How do you claim your
financial power? The next time you want to ask someone for financial
help, or accept financial help from someone, stop and examine your
motivations and their motivations. Be sure you are coming from a
place of strength and not from a place of weakness, fear or out of a
sense of being a victim who needs rescuing.
Before you ask for or accept financial help from someone else, ask
yourself: "Why do I feel I have to ask for help? Is my request born of
a desire to be rescued? Is my request a test of the other person's love,
loyalty or commitment to me? What's behind my request to have my
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need filled? Will this financial aid empower me or make me feel like a
victim?
One sure way to assess whether your actions and the actions of
people around you are empowering or victimizing is to actively
concentrate on how you feel physically and emotionally when you
think about a particular financial decision. Empower yourself to say
NO to financial decisions that don't feel right to you.
Say no to well-meaning friends who offer to float you loans when
you're trying to get through your Chapter 13 payments or trying to pay
cash for everything after your bankruptcy is discharged. Say no to
friends or relatives who insist on bailing you out of financial
difficulties when their assistance makes you feel like you owe them
something. And say no to lending money under the same
circumstances when you're not sure that your intentions are pure.
If people don't respect your efforts to heal your relationship with
money, you may need to consider distancing yourself from them.
Imagine you're a recovering alcoholic. Sometimes you must create
distance between yourself and friends and relatives who actively drink
or who victimize you by absent-mindedly offering you a drink
whenever they see you, or by leaving booze out in the open when you
come visit. You may need that same distance in your financial
recovery.
Starting today, I encourage you to consciously choose to use your
money only in ways that empower you and the people in your life.
Consciously choose to stop making financial decisions that make you
feel guilty, that make you feel like a knight in shining armor or the
fairy godmother, or that make you feel like you‘re better than the
other person.
STOP LOOKING FOR PLACES TO LAY BLAME
During the last lap of the 2001 Daytona 500, veteran race car driver
Dale "The Intimidator" Earnhardt bumped or "rubbed" a competitor
who was making a move to overtake him. He died instantly in the
resulting crash, and many people blamed his death on the failure of his
waist belt harness. Some even went so far as to call the manufacturer
with death threats.
Those closest to Dale, however, didn't point fingers. They were
aware that Dale was 100% responsible for, and the source of, the
crash that claimed his life. Dale was noted for his aggressive driving
style, and for bolting out of his car after a wreck and encircling his
competitors' necks with his strong hands, as if to throttle them for
causing the dents in his race car.
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Isn't that how we generally react regarding our finances? It may
even be how you have reacted to your bankruptcy. Something wrecks
our well-laid plans and we immediately look for somewhere else to lay
the blame. We look for someone else to accept responsibility for what
happened.
If we get laid off or fired, it's not our fault. It's because of the
economy or our boss' poor business skills, or the top brass collecting
big salaries. If we can't do the things we want to do or buy the things
we want to buy, or pay the bills we want to pay it's not our fault. It's
because a client canceled or because our boss doesn't pay us what
we're worth, or because our parents didn't pay for our college
education, or because we just never get a break, or because a well-off
friend or family member isn‘t more generous.
Or maybe we join the chorus that says society doesn't properly
value helping professions, or teachers, or police officers, or alternative
healing practitioners, and that's why we don't earn as much as we're
worth. It's easy to find an outside source to lay blame on for the past
and current state of our finances, because that's what we've habitually
done. It's easy to claim that life could be easier if it wasn‘t for
someone else who did or didn‘t do something to us or for us. But
what if our life is exactly what it is because we‘ve been holding ourselves
back?
WHERE ARE YOU CONSENTING TO FEEL INFERIOR?
The very vibrant, self-assured Eleanor Roosevelt once said "No one
can make you feel inferior without your consent." Eleanor Roosevelt
said this after growing up in a family where her mother constantly
complained about her and put her down, telling her that she had best
develop a strong personality because she was too ugly to ever land
herself a husband.
Eleanor could have easily felt inferior and allowed her mother's
negative words to crush her spirit and hold her back. Instead, Eleanor
chose to believe that no one, including her own mother, could make
her feel inferior without her consent, without her agreement. She
refused to consent, and instead took 100% responsibility for creating a
vibrant, joy-filled, soulful life. And wound up married to a man who
was to become President of the United States, to boot.
Eleanor Roosevelt refused to be a victim. She claimed responsibility
for creating the life she desired. Recognizing and acting as if we are
each 100% responsible for, and the source of, the current state of our
finances is the next step toward no longer playing the role of a victim.
This is perhaps the biggest step you can take toward healing your
relationship with money. By taking responsibility, and accepting our
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part in creating where we are right now, financially – with our jobs,
our debt, our savings or lack thereof, our spending habits and our
earning habits – we empower ourselves in a way that is infinitely
courageous.
RELEASING MYTHS THAT NO LONGER SERVE YOU
What would happen if you acted as if you were 100% responsible
for, and the source of, the current state of your finances? What myths
would you have to release? What stories would you have to stop
telling? Who would you have to forgive? How much courage would it
take to step forward and admit the role you played in every event that
happened in your life that you feel held you back?
How much courage would it take to own up to all the passive ways
you kept yourself down, so that you wouldn't have to face the
unknown, wouldn't have to disappoint another, wouldn't have to risk
being afraid?
Many people, as they begin taking steps to heal their relationship
with money, and raise their prosperity consciousness, find themselves
feeling like Al Pacino's character in one of the “Godfather” movies.
Every time you take positive steps to get out of a financial mess,
something happens to pull you back in. You can't seem to get a lucky
break.
When you start to despair, when the pink cloud of your freedom
from debt after bankruptcy begins to fade, when the darkness
threatens to overtake you, stop and take a deep breath before you
throw up your hands and quit. You're on the edge of a major life
change. Give it time to appear in your life without trying to fake it by
using credit to solve the problem.
BE PATIENT WITH YOUR FINANCIAL GROWTH
When you toss a pebble into a pond, it sends out ripples. Those
ripples keep going, and then they come back. Even if you never drop
another stone into the pond, the ripples continue, until they finally
settle into a new pattern of calm. That's what's you‘ll soon discover is
going on with your finances after you go bankrupt.
The ripples from the old financial decisions and the old financial
patterns will continue to make waves in your life for a while. Stay the
course and remember, without judgment or blame, that you are 100%
responsible for, and the source of, the current state of your finances,
based on your past actions or inactions. This includes the parts you
celebrate as well as the parts you would rather deny. This is no small
commitment. Taking ownership for our lives brings up many fears,
resentments and disappointments.
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I once spoke with a 62-year-old woman who believed her financial
situation would only improve if her step-brother shared his
inheritance with her. If only he would give her a share of the proceeds
from the house her father had given to her step-mother, which this
woman believed she was entitled to share, then her financial situation
would improve.
I asked her to imagine what her financial situation would look like if
her step-brother didn't share the house with her, if she alone were
responsible for her financial future.
She hated this idea with a passion. The fear of having to take
responsibility for her future financial situation made her see her fear
of taking responsibility for the current state of her finances. She saw
that this would require a major shift in the way she thought and felt
about money. Only then was she ready to take the first steps toward
this healing.
Another woman had let her driver‘s license and registration expire
months earlier. She kept putting off going to the Department of
Motor Vehicles because she was afraid of the fine she would have to
pay. Once she decided to act as if she was 100% responsible for the
current state of her finances, even if that meant having to pay a fine,
she went to the DMV, simply to find out how much she would owe.
She approached the counter and told the woman she needed to
renew her license and registration and that she wanted to know what
she would need to pay. She offered no excuses for her expired license
and registration. She simply asked for information. The woman
looked at the license and registration, commented on how long it took
her to renew, stamped a piece of paper, asked for the renewal fee and
told the woman to go stand in line to have her picture taken. By
becoming willing to take responsibility for her finances, it no longer
became necessary for her to have to pay a fine.
Another woman wanted to take a trip to Ireland and put down a
non-refundable deposit. She soon became fearful about her ability to
raise the funds necessary to pay for the rest of the trip by the deadline.
She also was concealing from her family the fact that she was taking
the trip, because she was afraid of how they might judge her decision
since she‘d just spent all her money buying a new house. Eventually,
she released her fear of how the money would come to her and
released her attachment to going on the trip.
When the deadline came and went, and she hadn‘t saved up all the
money to pay for the trip, she let the travel agent know she would be
unable to take the trip because of her current financial situation.
Because she took responsibility for the state of her finances, and was
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honest and upfront about her situation, the agent refunded her nonrefundable deposit.
I encourage you to explore the ideas in this chapter over the next
few weeks while you wait for your bankruptcy to be discharged 90
days so you can order your credit reports, and while you wait for your
credit reports to arrive in the mail.
What comes up for you when I ask you to explore your relationship
with money? What supports you or stands in your way when you
think about creating a healthier relationship with money? How would
your life change if you were 100% responsible for, and the source of,
the current state of your finances, without blame? Are you ready,
willing and able to undergo this transformation?
PLAYING ON LIFE'S ABUNDANT PLAYGROUND
The woman who let her driver‘s license expire shared that she
received many gifts after she began taking steps to have a healthier
relationship with money. Committing to the awareness that she is
100% the source of her current financial situation – as scary as that
was to her – resulted in her being more present to the financial things
in her life.
During the next several weeks, she noticed that every time she
showed up and took steps to rectify situations she had avoided in the
past, she was rewarded with unexpected reductions in the amounts of
money she would have owed, or by the sudden disappearance of
obstacles that in the past had been financially and emotionally
draining.
Simply by having the willingness to accept responsibility, she created
a healing energy force that is effortlessly healing her relationship with
money. She is moving forward toward her financial goals and enjoying
the ride.
So, how can you build momentum in your prosperity consciousness?
How can you learn to "go with the flow?" Think of the last time you
pushed a child (or an adult!) on a swing. When do you push the
person on the swing? Do you connect with them and push as they're
coming back toward you? Or do you wait until they've reached you
and are just at the turning point, just at the moment when they're
about to begin going forward again?
You wait. You bide your time. And then you join in the forward
momentum, without fear, without hesitation. Too often in life, we
jump in too soon or wait too long to take action on something. We
rush in or hesitate out of fear of being wrong, of choosing a wrong
path for ourselves. We rush in or hesitate out of fear of the unknown.
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Or we rush in or hesitate because we are afraid of not having what we
want, or because we haven't clearly defined what it is we do want.
When we push a swing, we are present in the moment. We are
committed to having a good time and what we want is clear. We want
to be part of something that is going higher and higher, part of
something that is giving ourselves and someone else joy, part of
something that is breaking free from the limitations of gravity here on
earth. That‘s where you are right now, having gone bankrupt. You are
ready to begin going forward again.
CLARITY ABOUT YOUR FINANCIAL FUTURE
A mile is walked one step at a time. A swing soars higher, one push
at a time. All journeys begin this way. How do we learn to put one
foot in front of the other? How do we learn to push a swing at just the
right time? Trial and error. Not every attempt is perfect. It's progress
we're seeking, not perfection. Ask anyone who's jammed a finger
pushing too soon, or felt their fingertips barely brush the back of the
person on the swing because they've pushed too late. Ask any toddler
who's taking those first tentative steps. It's all trial and error.
But what keeps us trying? What keeps us moving forward and
waiting for the next opportunity to take those steps or to push the
swing again? Hope. Hope, and a commitment to having a good time
playing on the playground. Life is your own personal playground. And
each swing represents a different relationship in your life. Money is
one of these relationships.
Starting today, think differently about your relationship to money.
Don‘t view a budget as a restricting tool, for example. Look at a
budget the way a beachcomber sees a metal detector. A budget is a
tool – a spending plan – that helps you get untold and unexpected
rewards. Yes, a beachcomber could find gold coins simply by walking
around all day, waiting for a teak treasure chest to wash ashore, or
stopping and sifting through handfuls of sand. But a metal detector
makes finding the buried treasures much more likely. With a spending
plan, you expand your possibilities and create the opportunity for
limitless abundance to appear in your life.
For the next few weeks, write down where your money comes from
and where it goes and see what patterns emerge. Don‘t judge the
choices you make, just observe them, so you can decide if where you
are spending your money is where you want to be spending your
money.
Before you know it, your baby steps will turn into giant strides, and
you will find soon yourself skipping for joy at the financial security
you have created, effortlessly, in all areas of your life. This does not
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mean that you won't have missteps, jammed fingers and missed
opportunities as you deal with money issues. But I guarantee you will
keep moving forward, if you have hope and make an effort to keep
the momentum going.
Use the information in this chapter to build a firm foundation for
creating the financial freedom you‘re looking for – the financial
freedom you tried to find in the past using credit to create the illusion
of freedom. You may find, like so many other readers have, that you
begin shedding some of the old limiting beliefs that you‘ve clung to in
the past. These old beliefs have served you well, and helped you get to
this moment.
As you begin bouncing back from bankruptcy, I encourage you to
re-read this chapter often. Take a few moments every day to read a
few paragraphs. Visit my website and subscribe to my monthly
newsletter at www.ArtOfAbundance.com or listen to my podcast. In
this newsletter, you‘ll receive additional support and guidance to help
you on your journey.
Take advantage of the offer to download the Healing Your
Relationship With Money Workbook which you can order online or by
mail. It‘s a $79 investment that will pay off big dividends. Fill out the
workbook, send it to me, and begin to implement the Personalized
Prosperity Success Strategy I send back to you. I also highly
recommend that you take advantage of the coupon you get back for a
50% discount on a prosperity coaching session with me. Hundreds of
clients have come to me for a single coaching session and had their
lives transformed. For some people, that one session is all they need
to go to the next level they are comfortable with.
Other clients (including many of the professionals I coach), choose
to have me coach them on an on-going basis because they want to
continually raise the bar in their lives, personally and professionally.
Either way, I hope you‘ll use all the resources and tools I‘m giving you
to your best advantage to create the life you truly desire.
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1. Determine what really caused you to go bankrupt.
2. Honor the choices you made in the past.
3. Determine what it is you want to create in your life.
4. Check to see if your actions are in alignment with what you say you
want to create in your life.
5. Look at where you‘re not 100% honest about money issues.
6. Acknowledge your fears about money.
7. Start making financial decisions from a place of power.
8. Start taking 100% responsibility for the state of your finances.
9. Keep moving forward toward your financial independence without
judging.
10. Consider using the Heal Your Relationship With Money Workbook to
find out your true money beliefs.
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CHAPTER 3
Getting Rid of Your Remaining Debt
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Chances are, before you declared bankruptcy you were making
minimum payments on a number of debts. If you have recently
declared bankruptcy, and you are waiting for your bankruptcy to be
discharged, use the money that you once put toward these bills to
prepay for household items instead. For example, stock up on
essential items, buy new shoes for the kids, or prepay the utilities.
Once your debts are discharged – whether through Chapter 7 or
Chapter 13 – use my DebtBuster Strategy to easily deal with your
remaining debts so you can start improving your financial situation
today. To create your DebtBuster Strategy, first add up how much
you were paying on your debts before your bankruptcy.
Now that you no longer have to pay these debts, you can write a
check to yourself for half that amount – or even one-tenth of that
amount – and send it directly to your savings account. If you don‘t
already have a savings account, put down this book right now, go to
your bank and open a savings account! You won‘t ever miss the
money if you start setting it aside now.
Each month, write yourself a check and deposit it into your savings
account. It‘s okay to start small, but I strongly suggest that you make
your check out for at least $25 every month, so you can quickly see
your account balance grow. Deposit just $25 a month and within four
months you will have saved $100.
If the temptation to take the money out of your savings account is
too great, visit your bank teller and ask to buy U.S. Savings Bonds.
You can buy these bonds for as little as $25 each (for a $50 bond).
Most banks will set up an automatic plan for you, buying your bonds
automatically each month by taking money out of your checking
account. Many employers will do the same, or will let you put your
money into a credit union savings account, directly from your
paycheck. Just make sure you don‘t have an ATM or debit card on this
account. This way, you won‘t be tempted to withdraw the money or
spend it whenever you‘re a little short on cash or your checking
account balance is low.
Before you dismiss these simple savings strategies because you
already know how to save money, ask yourself: Are your savings still
growing or did you spend them? There is a method to my madness,
even if in the past you set aside hundreds of dollars a month and
tapped into your savings again and again to pay bills.
For now, no matter what comes your way, don‘t touch this money.
Keep letting it grow. When it reaches $500, or another meaningful
milestone for your income, congratulate yourself. At just $25/month,
you can save $500 in under two years. At $50 a month, you can save
$500 in just 10 months. And, of course, at $250 a month, you can save
$500 in two months. The savings you are building right now will come
in handy when you‘re ready to start rebuilding your credit.
Why should you set this money aside? Because you‘ll need it to
make sure that you‘re using credit in a way that is not causing you to
be over-extended again. Remember: being over-extended means that
you‘re carrying a balance on your credit card. I‘m not saying all credit
card balances are bad, though. Sometimes there‘s a great reason to
carry a credit card balance. For example, you may choose to carry a
balance because the creditor is offering a zero interest period for six
months. So, instead of taking the money out of your savings account,
where it‘s earning interest, you use the creditor‘s money interest free
during the zero interest period, then pay the balance off in full.
Most people take advantage of zero-interest offers hoping that
they‘ll have an increase in income. They hope they will be able to
somehow pay the bill in full before the interest rate jumps to 15%25%. Or they hope they will receive another zero-interest rate offer in
time to move the balance from the current zero-interest rate card to
the new zero-interest rate card.
There‘s something wrong with these scenarios, though. Each one
depends on some event happening outside of your control. If you
already have that money set aside safely in a savings account, then at
the end of each month – or at the end of the zero-interest rate period
– you can easily and effortlessly pay that credit card off in full. See
how great that would feel? Your savings account will also protect you
when those ―unexpected‖ emergencies pop up, while you‘re paying
down any remaining bills. We‘ll talk more about this in a bit.
WHAT IF A CREDITOR TRIES TO COLLECT A DISCHARGED DEBT
Be on the lookout for any letters from creditors whose debts were
discharged under your bankruptcy. Sometimes computer-generated
letters cross in the mail with the discharge papers, and you can clear
up the misunderstanding with a single phone call. Other times,
however, a creditor may attempt to collect on a discharged debt or
repossess merchandise that they gave up any security interest in.
Any attempt to collect on a discharged debt, or to repossess
merchandise more than 60 days after your discharge date – if the
creditor didn‘t contact you in an attempt to have you reaffirm the debt
– violates the Bankruptcy Protection Act. If a creditor attempts to
collect a discharged debt, send this letter:
(Date)
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:
GETTING RID OF YOUR REMAINING DEBT
[Creditor’s Name]
[Address]
[City, State, Zip]
Dear Sir/Madam:
On [date], I received a [letter or phone call] from you attempting
to collect on the above referenced debt.
On [date of discharge], this account was discharged under
bankruptcy, [bankruptcy case number]. I trust that you will update
your records to show that this debt has been discharged under
bankruptcy and is no longer an outstanding debt. I also trust you will
notify all credit bureaus that this debt was discharged under
bankruptcy.
Enclosed are a copy of my final discharge papers and a copy of my
bankruptcy schedule showing your debt listed. As you know, any
attempt to collect on a discharged debt is in violation of both the Fair
Debt Collection Act and the Bankruptcy Protection Law.
Any further contact from you regarding collection of this debt will
be brought to the attention of the bankruptcy court as evidence of your
violation and I will exercise my right to bring suit against you and
recover damages of $1,000 or more for each incident, as is my right. I
thank you in advance for your help in clearing up this matter and I
trust that you will not attempt to collect this debt again.
Sincerely,
[Your Name]
cc: Federal Trade Commission
6th & Pennsylvania Avenue, NW
Washington, DC 20580
WHAT TO DO ABOUT BOUNCED CHECKS
If you bounced checks before your bankruptcy, there is a very good
chance that you will run into some difficulty trying to open up a new
checking account. That is because banks subscribe to special check
reporting services like ChexSystems, TeleCheck and the Shared Check
Authorization Network (SCAN) which help banks screen new
accounts. Any checks you might have bounced should have been
included in your bankruptcy. And they should be reported to the
check reporting service as having been discharged under bankruptcy.
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If you apply for a checking account and are turned down, ask the
banker for the name and number of the screening service they used.
You may receive this information automatically, in a letter from the
banker, but usually you get turned down in person, at the bank
branch.
Once you have the name and number of the screening service, call
and ask them to send you a listing of the checks or accounts that are
listed as outstanding. They will tell you the process for clearing your
record. Just like when you cleaned up your credit report, you will need
to show the screening service which checks were discharged under
bankruptcy. You will still have to make good on any checks you may
have forgotten to include in your bankruptcy, if you want to open a
checking account with that bank.
Once you are able to open a checking account, start your checks
with a higher number than the usual 101. Some businesses won‘t
accept checks with low numbers, which doesn‘t say anything about
your credit-worthiness, it simply says you just opened a new checking
account. Play it safe by starting your checks with a four digit number,
like 1550.
DO YOU PAY INCOME TAX ON DISCHARGED DEBT?
Unlike debts that are settled, where any amount forgiven by a
creditor in excess of $600 is considered ―taxable income,‖ you do not
pay income tax on debts that are discharged under your bankruptcy.
Some people get confused about this, so let me set the record straight.
If a creditor or a mortgage lender sends you a 1099C and you
discharged the debt under your bankruptcy rather than reaching a
settlement reduction with your creditor, your creditor has made an
honest mistake.
Don‘t ignore the notice, though, or you will wind up with a great
big IRS headache. To avoid an IRS problem when you file your taxes,
attach a copy of the 1099C, a statement that says the debt was
discharged under bankruptcy, a copy of your ―Notice of
Commencement of Case‖ and a copy of your ―Order of Discharge‖ to
your tax return.
WHAT TO DO WITH DEBTS THAT WERE NOT DISCHARGED
You will probably have five different types of debt left once your
bankruptcy is discharged:
1. Debts you reaffirmed (agreed to keep paying) with a creditor,
such as your mortgage or your car loan.
2. Debts to friends or relatives you decided to repay.
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3. Taxes that weren’t discharged under your Chapter 7 bankruptcy. In most
cases, if you have taxes that are at least three years old and were filed
at least two years before bankruptcy, they can be included in your
bankruptcy. Otherwise, you‘ll have to repay any outstanding taxes
afterward.
4. Student loans. You may need to petition the bankruptcy court to
confirm that your student loans were actually discharged. In the past,
student loans were dischargeable if repayment would cause an undue
hardship on you, or if the loans had been in repayment for at least
seven years from the date your first payment became due, minus any
months the loan was in deferment or forbearance. The new
bankruptcy law makes all student loans non-dischargeable unless they
would cause an undue hardship. If you listed your student loans on
your bankruptcy schedule of creditors this does not necessarily mean
that they were actually discharged. Also, if you declared Chapter 13,
you will need to continue to repay any unpaid balance on your student
loans after your Chapter 13 repayment period ends.
5. Alimony, child support or back taxes. If you declared Chapter 13
bankruptcy, you may also still owe alimony, child support or back
taxes. If you still owe back taxes, talk with your accountant about
getting an Offer in Compromise from the IRS so you can continue
making payments under a repayment plan.
We will talk about how to pay off your larger debts, like your car
loan and mortgage when we get to Chapter 13. First though, I want
you to take a long hard look at any debts you have chosen to reaffirm
under your bankruptcy. The sooner you do this the better, especially if
you are newly bankruptcy.
TO REAFFIRM OR NOT TO REAFFIRM
I know firsthand how difficult it can be to decide whether or not
you should keep paying on items that you bought before your
bankruptcy; especially items that have special value to you. If you
decide to keep an item, you and your creditor enter into a signed
agreement known as a ―Reaffirmation Agreement.‖
You agree to continue to be responsible for the debt, and they agree
to let you keep your property or the credit card. In most cases, you
have to continue paying on the debt if you want to keep the item. If
you are able to stay current with your reaffirmed debts, and pay them
off completely, your reaffirmed debts will show up as excellent postbankruptcy credit references. Future creditors look very favorably on
these reaffirmed accounts – if you‘re able to pay them on time.
Future creditors will care more about your most recent one- to twoyear payment history than they will about your past payment history or
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your bankruptcy. If you‘re worried that money might be tight, then
you might be better off not reaffirming any unsecured debts. You can
rebuild your credit history better with a fresh start than if you‘re trying
to tread water paying off a debt that could have been discharged under
your bankruptcy.
If you haven‘t yet received your discharge order, you still have time
to change your mind about reaffirming and keeping those debts.
Bankruptcy is intended as a fresh start. Every debt you keep and
continue to pay on – because you‘re afraid of doing without, or you‘re
afraid of what might happen in an emergency, or you‘re afraid you
won‘t be able to get another car loan, and so on – is a debt that is
putting your future financial freedom and your credit score at risk.
You see, any debt you reaffirm is considered a renewal of your
personal liability. It is viewed as your agreement to take on this debt as
a new debt. You give up your right to discharge the debt under the
bankruptcy and you can be sued for nonpayment if you fall behind on
the debt.
Even if you keep a debt without a reaffirmation agreement, you‘re
not giving yourself a true chance at a fresh start. Don‘t allow yourself
to be fooled into thinking that what you‘re doing is getting a head start
on rebuilding your credit by keeping a credit card outside of your
bankruptcy even if it has a zero or low balance (I will talk more about
this in a minute!).
Over the years, I‘ve listened to many people agonize over whether
or not they should keep, or ―reaffirm,‖ debts that range from
computer equipment and couches to engagement rings and cars. You
may have agonized over decisions for similar items you bought before
your bankruptcy.
You‘re not alone if you reaffirm a debt. A recent survey report from
the National Consumer Law Center showed that more than 40% of
consumers intended to reaffirm a debt. Many of us confuse our selfworth with our ―stuff,‖ or we have a lot of emotional attachment to
items that mark rites of passages in our lives. You may be worried
about “What will the neighbors think if they see our furniture being hauled
away?” Or you may be very attached to your car, especially if it‘s the
first new car you‘ve ever owned. These are all perfectly natural feelings
to have. But you may need to make some hard decisions now about
whether or not continuing to pay for these items is the best thing for
you financially at this point. To make this decision easier on you, I‘ve
included my rule of thumb for reaffirming debts. You‘re usually better
off reaffirming a debt only if the item meets these two criteria:
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1. The item should be a necessity for daily living such as a vehicle or
necessary household appliance (washer, dryer, refrigerator, air
conditioner/heater).
2. The creditor must be willing to reaffirm for no more than the
actual value of the item, which may be considerably less than the
amount you still owe on the debt.
You will always be better off discharging every debt you can. Then
you can start to rebuild your finances and replace items one at a time,
buying them with cash. If you only reaffirm necessary items, you will
soon find that you actually have enough cash to replace the items you
gave up.
Rethink why you‘re keeping or reaffirming any debt and ask
yourself if it truly is in your best interest. Yes, they may come and take
out the big screen television or pull up the rugs, and they will most
likely come and repossess your car if you decide not to reaffirm a car
loan. But the destruction you will cause to your credit report and your
financial future by having a repossession or a late payment on your
credit report after your bankruptcy has been discharged will be even
more painful and long-lasting.
If you haven‘t filed your bankruptcy yet and you do decide to
reaffirm debts for other items, such as for a computer or a TV, don‘t
reaffirm the debt when you file your initial bankruptcy paperwork.
Instead, wait to see if the creditor shows up or if the debt gets
discharged under the bankruptcy. In most states, unless your creditor
repossesses the item, shows up at your creditors‘ hearing to have you
surrender the item, or submits a written reaffirmation agreement that
is signed by you or your lawyer or approved by the judge before your
discharge date, the debt will be discharged and the merchandise is
yours. In other cases, you will need to sign a statement saying that
you‘ve reaffirmed, redeemed or surrendered the item.
REDEEMING ITEMS INSTEAD OF REAFFIRMING
If a creditor shows up at your creditors‘ hearing, or places a claim
on the merchandise, they‘ll usually ask you to reaffirm the debt or
surrender the merchandise. But you actually have a third option,
which is to pay the value of the merchandise (usually less than the
amount of the debt). This is called ―redeeming.‖
If you stick to your guns and tell the creditor that they can either
receive the value of the item or have the merchandise back, chances
are that the creditor will back down and offer you a lower balance on
the debt in order to get some money back. At that point, it will be up
to you to decide whether you want to keep the item and pay the
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creditor the amount of money they‘re requesting, or turn over the
item.
I recommend against reaffirming secured debts whenever possible.
Reaffirmation is voluntary, not mandatory. The above strategy for
redeeming items is always a better strategy.
For example, one woman had bought a $300 television from Sears.
At her creditors‘ meeting, a Sears representative showed up and said,
“Reaffirm or we’ll repossess the TV.” She said, “Okay, repossess it.” That
wasn‘t what Sears wanted to hear. So the Sears representative said
again, “No, you don’t understand –you need to reaffirm or we’ll repossess.” The
woman said, “Well, it’s worth $150 to me, take it or leave it.” Sears took the
$150, she kept her television and everybody was happy.
Remember, if you reaffirm a debt, you are giving up your right to
discharge the debt under the bankruptcy protection act and you can be
sued for nonpayment if you later default on the debt.
If you‘re already behind on a debt or owe much more than the item
is worth (which is the case for many car loans, where the value of the
car is much less than the amount still owed), and you‘re thinking of
reaffirming the debt, I encourage you to think long and hard about
this before you do. When you reaffirm a debt you‘re already behind
on, you‘re playing catch-up at a time when you‘re supposed to be
giving yourself a fresh start. It is far better to give yourself a true fresh
start when you file your bankruptcy, so you are only paying the
current debts and expenses you have, not paying past due amounts.
Many people think that medical bills and past due amounts on
utilities can‘t be discharged, and must be reaffirmed. This is not true.
These debts can be discharged. When you include past due medical
bills in a bankruptcy, chances are that your health care provider will
require you to pay your portion of future charges up front, in full. Any
amount paid by your insurance will then be refunded to you by your
doctor‘s office.
WHAT TO DO IF YOU’VE ALREADY REAFFIRMED OTHER DEBTS
As my friend, Ken Dolan, likes to say, “shoulda, woulda, coulda.” If
you reaffirmed other debts, what‘s done is done and there‘s no reason
to beat yourself up for having reaffirmed debts you might have been
better off letting go. Remember our slogan for past money decisions:
It seemed like a good idea at the time.
Now, you may still have a few options available which you can use,
especially if money is still tight after your bankruptcy is discharged.
If your bankruptcy was discharged less than 60 days ago,
surrendering the item would probably be your best option. One
woman discovered that after declaring bankruptcy her family budget
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was still upside down, with more money going out than was coming
in. After looking over their budget, they discovered that if they
surrendered one of the cars, which had a reaffirmed loan, their budget
would even out.
You have 60 days from the date of your discharge to change your
mind about any debt you have reaffirmed. If you are still in this 60 day
period and you reaffirmed any debts, ask yourself: what’s the worst that
could happen if we got rid of this debt altogether? Then ask yourself: what’s the
worst that could happen if we were unable to pay this debt in the future? Chances
are both include ―losing‖ the item. Yet only defaulting on a
reaffirmation agreement will cause you to spend more money on the
debt, have increased financial stress and have a new black mark on
your credit report. Take the fresh start while it is still available to you.
Surrendering an item within 60 days of your bankruptcy is a pretty
easy action to take. Call your bankruptcy attorney or the trustee or
clerk for the bankruptcy court where you had your creditors‘ hearing
and tell them that you want to surrender an item that was reaffirmed
under your bankruptcy, because you‘ve realized that you really can‘t
afford to keep that debt. You will need to resubmit your revised
―Intention to Reaffirm‖ paperwork, which will cost you about $20.
Once you submit the revised ―Intention to Reaffirm‖ to the court,
call your lender and arrange a time to have the item picked up. Be sure
to get a signed and dated receipt when you turn over the item you‘re
surrendering. Read the papers carefully and do not sign any agreement
that would make you responsible for any future debt on this item.
Even if you declared bankruptcy years ago, you may still be able to
get out from under a reaffirmation agreement that you‘re paying on.
Any time you sign a reaffirmation agreement with a creditor, the
creditor must – by law – file their reaffirmation papers with the court.
The bankruptcy judge then reviews your case and determines
whether or not you can reasonably be expected to pay the reaffirmed
debt based on your current financial situation. Some creditors,
however, don‘t file their reaffirmation agreements with the court.
Either they can‘t be bothered to take the time, or they know you
probably can‘t afford to keep up with the payments. In that case, they
are attempting to get you to pay a debt that should have been
discharged under your bankruptcy. And they use your emotional
attachment to the item to pressure you into paying for an item that is
worth far less than what you owe.
If a creditor didn‘t sign or properly file your reaffirmation
agreement, you can petition the court to have the reaffirmation
thrown out. Call your attorney or the bankruptcy trustee at your
bankruptcy court for details on how to handle your specific case.
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If the reaffirmation agreement is thrown out, the judge will decide
whether or not you can keep the reaffirmed items or receive a refund
for the payments you have made so far. In some cases, people have
been able to keep the reaffirmed item and receive a refund for the
money they have already paid.
WHEN DOES IT PAY TO REAFFIRM A CREDIT CARD?
You may be tempted to give yourself a ―leg up‖ after bankruptcy by
reaffirming debt on a credit card. For department store cards, like
those issued by Sears or JC Penney, the items are secured by a
―security interest clause‖ in the small print on the credit card
application. By reaffirming the debt, you are agreeing to pay the
balance due on the secured item. This may or may not be a good
move, and you should again use my two guidelines above to decide if
reaffirming is right for you.
But what about a VISA®, MasterCard® or American Express®
card with a low balance remaining? Several things could happen if you
pay that balance off before your bankruptcy, or if you reaffirm the
debt outside of your bankruptcy. I firmly believe that you are always
better off letting go of all the credit cards. It is too easy to use them as
a crutch to buy things you can‘t pay cash for right now. Creditors play
into your fears, wanting you to believe that you need a credit card for
emergencies. And they have probably convinced you so thoroughly
that this is true, I bet you can come up with mounds of examples of
times when you would have been at a loss if you hadn‘t had a credit
card to rely on.
Credit card companies have done an excellent job of convincing us
– through their marketing efforts – that we need to have a credit card.
Anytime you think you must have a credit card, it‘s a warning sign that
you‘re using your credit as a way to finance a lifestyle that is above
your budget. When you fall into that trap, you wind up getting in debt
again, and creating the same cycle over again. That‘s why I still believe
a good secured credit card will serve you as well as, or even better
than, an unsecured card. We‘ll talk more about secured and unsecured
credit cards in Chapter 5. Many creditors have done away with their
secured cards, or have created secured cards that actually hurt you
financially.
If you firmly believe that you need to keep a credit card you already
have, you‘re actually better off reaffirming the debt on a low balance
card than you are paying off the balance before you file. Here‘s why: If
you reaffirm the debt, the creditor knows that you intend to pay off
this debt and they have prior knowledge of your bankruptcy. There is
one thing to watch out for, however, if you decide to reaffirm a credit
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:
card (whether or not it has a balance). Make sure your reaffirmation
agreement with the creditor clearly says that your account will remain
active, and will be rated as an active account. If the agreement says
you‘ll be ―eligible to apply‖ for credit after the debt is paid off, you‘re
better off not reaffirming the debt. In those cases, chances are good
that once you pay off the debt the creditor will cancel your credit card.
Reaffirming credit card debt can be expensive unless you are actively
working to pay off the debt. One man who came to me for help was
very frustrated after having reaffirmed a department store credit card.
The card had a $500 limit, so he reaffirmed the debt, even though the
card was almost completely maxed out.
The minimum payment on his card was $14 a month. The interest
rate was 21%. Every month, $8.50 of his $14 payment went to pay off
accumulated interest, and $5.50 went toward paying off the $500
balance. At this rate, assuming that he didn‘t charge anything else to
the credit card, it would take him 91 months – over seven and a half
years – to pay off that $500 credit card that he could have discharged
under his bankruptcy.
The only reason he kept the credit card was so that he would have a
positive credit reference on his credit report. Luckily, he came to me. I
recommended that he use the DebtBuster Strategy and increase his
monthly payment to $22.50. This way, he will pay off his bill in three
years instead.
WHAT IF YOU HAD A ZERO BALANCE ON A CREDIT CARD?
You don‘t have to list credit cards on your bankruptcy schedule if
they have no balance due. There‘s a pretty good chance that you can
use this creditor to rebuild your credit history. But there is also a good
chance that the creditor will close your account if they discover your
bankruptcy. In particular, if you have declared Chapter 13, your
creditors may close accounts that you have paid off. To reopen the
account, you will need your trustee‘s approval to pay that credit card
outside your Chapter 13 repayment plan.
The credit bureaus now sell creditors a monthly service which
provides them with the Social Security numbers of anyone who has
filed bankruptcy that month. The Equifax Bankruptcy Navigation Index,
Experian Bankruptcy Score and TransRisk Bankruptcy Score give creditors a
chance to compare each month‘s list against the Social Security
numbers of their cardholders. When creditors find an accountholder
who has recently declared bankruptcy, they will often cancel your
account without any warning. They do this to protect themselves
against losses, but there‘s nothing quite as embarrassing as taking the
boss out to lunch or attempting to buy something with a credit card
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you didn‘t include in your bankruptcy, only to discover that the
creditor has cancelled your card.
Also, some consumers have discovered that their creditors have
listed their account as ―discharged under bankruptcy‖ even though the
account wasn‘t included in the bankruptcy at all. If this happens to
you, especially if you worked hard and spent hundreds or thousands
of dollars paying off that debt, there is one strategy that might
convince the creditor to reopen your account.
Call the creditor‘s customer service department and get the phone
number for the corporate offices. Then call the corporate offices and
get the name and address for the Director of Consumer Affairs. Then
send this brief letter, certified, return receipt requested:
(Date)
[Director’s Name]
Director of Consumer Affairs
[Address]
[City, State, Zip Code]
Re: [Your account number]
Dear [Director’s Name]:
I have been a customer of yours since [date you opened the account
with them], with my account in good standing.
While I was forced to declare bankruptcy on [date of bankruptcy
discharge], I kept your account out of my bankruptcy, because I
valued my relationship with you and didn’t want to include your
company in my bankruptcy.
[Add a paragraph here stating the status of your account with
them, such as “my account was closed by your representatives on suchand-such date” or “my account is erroneously listed on my credit
report as having been discharged under bankruptcy, but that is not
correct.”]
Since I have been a customer of yours for [number of years you’ve
been a customer], I would really like to keep this account active and
am writing to ask that you reopen this account.
I understand that you may be reluctant to open an account for
someone with a recent bankruptcy on their credit report, however, I
believe you can minimize your risk if you make my credit limit be
[$500 or the current balance on the account, whichever is greater].
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:
I appreciate you taking a chance on a long-time customer who is
working to rebuild [his/her] credit and I trust that you will reinstate
my account within the next 30 days.
Sincerely,
[Your name]
This letter lets your creditor see that you‘re offering good faith, and
they aren‘t taking any undue risk.
No matter what decision you made regarding reaffirming a debt,
don‘t beat yourself up. Whatever decision you made was the best
decision for you at the time. Now, take whatever steps you can to
make sure your reaffirmation is helping you rebuild your credit. Check
your credit reports to see how the reaffirmed account is being
reported. It should show as being current, if you‘ve made all your
payments on time since your bankruptcy.
FALLING BEHIND ON REAFFIRMED DEBT
You‘re not alone if you had a creditor bully you into signing a
reaffirmation agreement, even when you didn‘t think it would be
possible for you to make the payments the creditor was asking for.
One woman shared her story:
We told our attorney that we wanted to reaffirm our two vehicles,
because we used both of them. We signed the reaffirmation
agreements with the banks, even through my husband had no job and
I was working but getting ready to go on disability because of my
pregnancy.
Not surprisingly, this woman and her husband fell behind on their
reaffirmation agreements. If you find you are having a hard time
keeping up with your reaffirmation payments, first see if you can
cancel the agreement, or if there is a chance the creditor didn‘t
properly file your reaffirmation papers with the court.
If neither option is available to you, look at the strategies in Chapter
12 to see what changes you can make in your spending plan to get
caught up. Once you‘ve exhausted all other options, you may have no
other choice but to surrender the item you reaffirmed. If you are faced
with this prospect, call the creditor and see if they will take the item
back in exchange for complete forgiveness of the debt. This is highly
unlikely, but it is worth asking. If the creditor won‘t take the item
back, see if you can sell the item and work out a repayment agreement
for the balance of the debt. Another way this works is that the creditor
might repossess the item, sell it at auction and charge you the balance
of the debt. This is the last resort, though, because the repossession
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will show up as a big black ―post-bankruptcy‖ mark on your credit
reports, so exhaust all other options first.
Once you have paid off a good chunk of the debt by selling the
item you reaffirmed, you may get a little breathing room if you ask the
creditor to spread out the remaining balance so your monthly payment
is half of what it was under the reaffirmation agreement. Don‘t worry
if the creditor balks. Just stick to your guns and let them know that
this lower amount is all you can pay each month, and force them to
work with you. You have the power in this situation, not the creditor.
As a general rule, you will get more money selling the item yourself
and applying that money toward paying off the debt.
More than likely, you may wind up with a small black mark on your
credit report from falling behind on your payments under the
reaffirmation agreement. It‘s not the best thing in the world to have
one or two 30-day or 60-day late notation on your credit report after
your bankruptcy. But it would be far worse to have a 120-day
notation, a history of 30-day late payments or a repossession on your
credit report. You are far better off cutting your losses, getting rid of
the item and working to repay the debt on a schedule you can afford,
so that you can start getting financially secure again.
Look through the debts you have reaffirmed and see if you should
cancel your reaffirmation agreement, return the item, or accelerate
repayment with the DebtBuster Strategy. Write down each debt you
have reaffirmed and explore your options. You could save yourself
hundreds of dollars in interest – and countless hours of lost sleep.
If you‘re in a Chapter 13 bankruptcy repayment plan and have fallen
behind on your bankruptcy payments or on a debt that wasn‘t
included in the bankruptcy, talk with your bankruptcy attorney and see
what your options are for modifying your bankruptcy.
Now, let‘s move forward and concentrate on eliminating any other
remaining debts which were not dischargeable under your Chapter 7,
debts you chose to reaffirm or debts not included in your Chapter 13
repayment plan.
PAYING OFF ANY REMAINING DEBT
Now that you are putting a portion of the money you were
spending on bills into a savings account, what should you do with the
rest of the money? Pay off your remaining bills in a systematic way
that doesn‘t leave you cash strapped.
Don‘t just apply your extra cash haphazardly toward one bill or
another, and don‘t postpone setting up the savings account in order to
get out of debt faster. Instead, use the following DebtBuster
Strategy. You will not only eliminate your debts quicker, but you will
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:
also pay less interest. Start by placing all your remaining debts on the
table and I‘ll show you how to bounce back from bankruptcy and
break the debt cycle – for good.
PUTTING THE DEBTBUSTER STRATEGY TO WORK FOR YOU
You will find a sample DebtBuster Strategy Sheet on page 83.
Feel free to make a copy of this page to use as a worksheet. On your
DebtBuster Strategy Sheet, list all of your outstanding debts, their
balances, and the interest rates they charge under Columns A, B and
C. Divide the amount you owe on that bill by 12. Write down that
amount on your list under Column D. Next, write down the amount
of your monthly finance charge under Column E. Add your principal
payment (D) and your monthly finance charge (E) together and enter
this amount in Column F. This is the amount you need to pay every
month if you want to pay off that debt in full in one year.
For example, say your balance on your first debt is $1,200. Divided
by 12, your principal payment would be $100. If you are paying 20%
interest, you are paying a $20 finance charge every month. Your
combined monthly payment (principal and finance charge) would be
$120 for this debt, if you want to pay off your debt in one year.
NEED MORE TIME TO PAY DOWN YOUR DEBTS?
Don‘t worry if you can‘t pay these amounts all at once. You may
have more debt left after your bankruptcy than can reasonably be paid
off in one year. That‘s okay. This is where the last column of the
DebtBuster Strategy comes into play. You can start to pay down
your balances faster by paying the minimum monthly payments listed
on your bills plus the interest that was added to this month‘s bill. Add
these amounts and enter the total in Column G.
For example, let‘s say that your minimum monthly payment is $30,
and your interest payment is $20. If you can, pay $50 this month: the
$30 minimum plus the $20 interest that accrued. If you do, your entire
minimum monthly payment is principal because you have paid the
interest separately. And next month, your balance will actually be $30
lower, instead of just $10 lower. Remember to pay that same amount
each month ($50 in this example), even if the creditor lowers your
minimum monthly payment amount. Creditors lower your minimum
payment so they can keep getting you to pay them more interest.
Still too much to pay? Start smaller then, by just paying the
minimum monthly payment, which you can enter into Column H. Pay
the minimum payments on all you other debts and put all the extra
money you can toward paying the debt with the highest interest rate
first. For example, if your minimum monthly payment is $80 on the
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debt with the highest interest rate, then pay $80, plus anything extra
you can that month. You will find solid strategies for ―finding‖ the
hidden money in your budget in Chapter 12.
When your first debt is paid off, reward yourself with a gift, in that
amount, then keep paying the same $80 toward your bills. This time,
take the $80 you were paying for the now paid-off debt and put it
toward the debt with the next highest interest rate. This $80 will be in
addition to the minimum monthly payment you are already making on
that debt. This will help you pay off your debt faster.
There is a great debate over which debts you should pay off first:
the ones with the highest interest rate or the ones with the lowest
balance. My recommendation? Use the strategy that suits you best.
PAYING THE HIGHEST INTEREST RATE BILLS FIRST
If you want to reduce the amount of interest that you pay out each
month, start by paying off your high-interest-rate cards first. Your
department store cards and gas cards are probably the place to start
since they generally carry very high interest rates. I looked at the
bottom of my Fashion Bug bill one month years ago and noticed that
they had listed the ―Corresponding Annual Rate‖ at 2.9% but also had
the ―Annual Percentage Rate‖ listed as 85.8%! When I asked about it,
the creditor told me that this was the rate they can charge you when
your account becomes delinquent. No wonder people have to declare
bankruptcy!
Once you pay your expensive department store and gas card bills,
you will free up even more cash to pay your other bills. Pay the
minimum payment on your other bills (or $5-$10 on bills with no
minimum payment) each month. Paying off the bill with the highest
interest rate will save you the most money in the long run, which is
why it is the method I recommend using.
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DEBTBUSTER STRATEGY
A
Debt Owed To:
B
Balance Remaining
1. ABC Credit Card
$1,200.00
2.
3.
4.
5.
6.
7.
8.
9.
10.
C
Interest
Rate
20%; $240/yr
D
1/12th
Principal
$100.00
E
Monthly
Interest
$20.00
F
1 Yr. Monthly
Payment*
$120.00
G
Req. +
Intrst.
$50
H
Req.
Pymt.
$30
PAYING THE SMALLEST BALANCE BILLS FIRST
Psychologically, however, you may feel better if you pay off your
bills with the smallest balances first. Some people like to see physical
proof of their progress, which you certainly get when you can hold up
a bill and say, ―another one paid in full!‖ If this is the case for you,
pick the bill with the smallest balance and pay that one off first. If you
have several bills with the same small balance due, pay the small bill
with the highest interest rate first.
Once you pay off a bill, keep using that money to pay down, or
accelerate, the payoff of your other bills. Add the amount you had
been paying on that bill to the amount you send to one of your
remaining creditors, preferably the creditor with the next highest
interest rate. For example, if you pay $35 a month on your dentist‘s
bill, once it‘s paid off you can start paying an extra $35 on your
student loan. This causes a waterfall effect, helping you pay off your
other bills even quicker. Within a year, chances are very good that
you‘ll be well on your way to a debt-fee life and back on track again.
This only works, however, if you cut up your credit cards or stick
them in the deep freeze. You can‘t get out of debt if you are adding
more debt to the load.
Look at the DebtBuster Strategy Sheet on page 83 for a minute.
As you can see, one way to keep track of the amount you‘re paying
toward your debts is to write that amount in the bottom column of
the table. Try to always pay at least that total amount toward your
debts each month, no matter what.
Resist the temptation to spend the ―extra, found money‖ on new
stuff until your old debts are paid off. You don‘t have to deny yourself
completely, though. You might want to reward yourself the month
after you pay off one debt by getting something special for yourself
that costs half of what you were paying on that bill each month. This
way, every time you retire another debt, you get to gift yourself with
something of increasing value. Even better, brainstorm and find a free
way to reward yourself and stick that extra money in your savings for
something really special – like an ―all expenses already paid‖ vacation!
There is another reason it is important to keep track of how much
you originally spend each month toward your debts. As your balances
drop, credit card companies reduce your required minimum payments.
Don‘t veer from your strategy and start paying the new minimum
monthly payment listed on your bill. Continue to pay at least the
amount that is listed in the bottom column of your DebtBuster
Strategy Sheet to make sure you continue to pay down your debts in
a steady, systematic way.
If you‘re currently behind on any of your debts, start by putting
every extra penny toward getting the past due bills caught up, before
paying anything toward the interest.
:
If you want to set up your DebtBuster Strategy on the computer I
recommend using Quicken, Excel or another spreadsheet type
program. List your credit cards one by one on the computer, with the
highest interest rate debt at the top and the lowest interest rate debt at
the bottom (or the lowest balance to the highest balance, depending n
which method you prefer using). This way you always know which
debt should get any extra money each month. Once you pay off the
highest interest rate debt, delete it and start paying more toward the
next highest interest rate debt that is still on the list.
I know there will be times when you will really want to buy
something. And you can buy these items – for cash –using the savings
that you have started to build up. Make a commitment to yourself not
to use credit right now. Instead, get used to creating new, healthier
financial habits. I guarantee that if you put off your purchases for one
year, and follow the DebtBuster Strategy, you will find yourself in
great shape financially, building up your savings, out of debt, and able
to pay cash for everything you want to buy.
You can even use the DebtBuster Strategy in reverse. Simply put
an item you want to purchase on the list, with the amount that item
will cost. Each month, set into savings a portion of the purchase price.
When your DebtBuster Strategy table shows that you‘ve saved the
purchase, price, go out and buy it for cash. You‘ll never again pay
another late fee, penalty or a penny in interest if you adopt this
strategy for your purchases.
REPAYING YOUR STUDENT LOANS
Chances are, as I said earlier, your student loans probably were not
discharged under your bankruptcy. If you declared Chapter 7, or if
you still owe money on student loans that you were repaying under a
Chapter 13 bankruptcy, you will eventually have to work out a
repayment schedule, or your student loans will continue to be listed as
delinquent on your credit reports (if you were behind on them before
your bankruptcy). Once you make your final payment under a Chapter
13 bankruptcy repayment plan, your student loan lender will take over
payments from your trustee until the debt is paid in full.
If you declared Chapter 7, immediately contact your student loan
lender to verify whether or not your loans were discharged. When you
are approached with a payment schedule, offer to pay half of what
they say you must pay each month, and work your way up to a
monthly payment you can afford.
If you have defaulted on your student loans, and they weren‘t
discharged under your bankruptcy (remember, just because you listed
them on your bankruptcy schedule doesn‘t make them dischargeable!),
contact your lender as soon as possible. Remember, the sooner you
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start creating a positive credit history for your remaining debts, the
better off you‘ll be in the long run if you decide to finance a car or
home purchase.
Don‘t panic if the student loan lender demands payment in full or a
monthly amount that is more than you can afford. Instead, write a
letter to the lender and tell them exactly how much you believe you
can reasonably afford to pay each month. Here‘s a sample letter you
can use:
(Date)
[Student Loan Lender]
[Address]
[City, State, Zip]
Re: [Your Social Security number and/or Loan Number]
Dear Sir/Madam:
I have recently discovered that the above-referenced loan was not
discharged under my bankruptcy dated [date of your discharge]. At
this time, I am able to pay [amount you KNOW you can pay each
month] per month toward this debt.
I would like to work out a repayment plan with you directly so
that I can get this loan paid in full. I trust this payment amount is
satisfactory. Please send me a payment booklet so I can provide a
payment slip with each payment I submit. As an act of good faith, I
have enclosed a check in the amount of [amount you KNOW you can
pay each month], as my first payment on this loan. I appreciate your
help in getting this loan repaid.
Sincerely,
[Your Name]
Remember: Your student loan lender wants their money any way
they can get it. They will happily set up a repayment plan that will
work for you.
CONSOLIDATING YOUR STUDENT LOANS
Another way to bring your student loans up-to-date is to
consolidate them under one of the federal student loan consolidation
programs. If you‘ve defaulted on your student loans, and the
Department of Education holds your loans, call 800/621-3115 to see
what your options might be for consolidation. This isn‘t the most
friendly automated system (the computer voice needs customer
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:
service school!), but you will eventually get your questions answered if
you provide the information requested.
There are two federal programs that can help you consolidate your
loans: the Loan Consolidation Center which handles the William D.
Ford Federal Direct Consolidation Loan Program (800/557-7392);
and the Network Consolidation Center, which handles the Salle Mae
Loan Consolidation Program (800/338-5000). Once you consolidate
your loans, you can never again defer them. So, if you‘re thinking of
going back to school anytime soon, you may not want to consolidate
your student loans.
Chances are good that you can get a lower interest rate from these
consolidation programs than you‘re paying now. However, if the
interest rate is higher on any of your current student loans, you can
choose not to consolidate that loan, so you don‘t wind up paying extra
interest.
The interest rate on the Ford consolidation program is capped and
can only be adjusted annually. The variable rate they charge can never
exceed 8.25% if you took out the loan, or 9% if you‘re a parent and
the loan is a PLUS loan.
If you‘re interested in consolidating your student loans, call these
organizations and request information from them and find out which
of your loans qualify for which program. They‘ll each send you a
brochure explaining their programs. The Ford program offers four
different repayment options:
1. Income Contingent Repayment Plan. If you borrowed the money as a
student, you can use this option where your monthly payment is based
on your annual income, the number of people in your family and your
loan amount. Your payments go up or down with your income, and
you have up to 25 years to repay your loans. After 25 years, any
balance is forgiven, although it may be taxable.
2. Standard Repayment Plan. Under this plan you‘ll pay a fixed amount
of at least $50 a month for up to 10 years. Note that the key phrase
here is ―up to.‖ There is no guarantee that you will get the whole 10
years to repay your loan. Ford calculates your actual payment amount
and repayment plan according to your loan amount, so you may need
to go back and forth with them several times to get a payment you can
actually afford.
3. Extended Repayment Plan. This plan gives you 12-30 years to repay
your student loans, which is the repayment plan I would recommend.
You will pay at least $50 a month, but your payment will definitely be
less than it would be under the Standard Repayment Plan. You can
always pay extra each month, when you have extra cash. This will help
you save on the interest that you‘ll be paying over the years.
4. Graduated Repayment Plan. Like the Extended Repayment Plan, this
plan gives you 12-30 years to repay your loan. However, your payment
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starts out low and gradually increases every two year. Since there‘s no
guarantee that your income will continue to increase, I‘d recommend
going with the Extended Repayment Plan instead.
When you get the brochure from the student loan consolidator, fill
out the coupon to request an application and an estimate of how
much your monthly payment might be under their program. They‘ll
do the calculations and send you an estimate of what your payments
would be under each repayment plan. If you‘re approved, you would
then have only one payment to make each month for all the student
loans you consolidated.
WORK WITH THE NATURAL EBB AND FLOW OF MONEY
As you take each step forward, getting back on your financial feet
one step at a time, you will find your cash flow growing month after
month. Yes, you may have temporary setbacks every now and then.
This is a normal ebb and flow of money. This is why you have started
setting aside some savings. Do not despair. Use your savings to even
out the ebb and flow. Anytime your financial situation begins to look
bleak, remind yourself of your abundance and your prosperity. Sit
quietly for twenty minutes and review your finances. As you do so, ask
yourself these four questions:
1. Are you doing everything you can to rebuild your financial
future?
2. Is there anything you are doing – any place you are spending
money – where you can cut back, temporarily, today, to get your cash
flow back on track?
3. What one action can you take today to improve your financial
situation?
4. Where are you not acting with 100% integrity in your financial
life, because of a fear of not having enough or the fear of losing
something?
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:
1. Stock up on perishable household goods, buy necessary items
you‘ve held off on or prepay utilities.
2. Set up a systematic savings plan and start saving some of the money
you were paying creditors, so you can build a cash reserve.
3. Make sure no creditors are trying to collect discharged debts.
4. Make sure any outstanding bounced checks were discharged or are
paid.
5. Pay attention to any 1099C tax forms you receive from discharged
debts and put them with your tax papers to file this year.
6. Reconsider any reaffirmations and change any reaffirmation
agreements you can no longer afford.
7. Create a ―do-able‖ repayment plan for any other remaining debts
using the DebtBuster Strategy.
8. Consolidate any student loans that were not discharged under your
bankruptcy.
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CHAPTER 4
Breaking the Debt Cycle — For Good!
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Once your credit reports are in shape, and you‘ve worked out a
strategy to repay your existing debts, you‘re almost ready to start
rebuilding your credit. But first, you need to make sure you‘re
rebuilding your credit for the right reason.
You‘re not alone if you view credit as a lifeline to getting access to
the things you want in life. But credit can be a heavy anchor of new
debt if you‘re not careful. I started to rebuild my credit with the best
intentions, but I found myself with nearly $1,500 in debt on a credit
card, five years after my bankruptcy.
Luckily, by studying and researching everything I could about credit,
debt and prosperity, I finally became a more credit-savvy consumer.
And you can too, if you use the tips in this chapter as guidelines for
your financial future.
HOW TO BECOME A CREDIT-SAVVY CONSUMER
Being credit-savvy isn‘t as hard as you might think. There are some
simple rules for credit that will help you make the best decisions
possible. Knowing this information — and following these rules —
will help you be a better credit user:
1. Check all offers for credit that you receive to see what bank is listed as the
issuing bank. Real credit cards are issued by banks. All credit card
applications must clearly state the name of the issuing bank. Any
offers that don‘t clearly state this information are scams, which don‘t
offer real credit cards. I fell for one of these scams myself, shortly
after I declared bankruptcy.
2. Always compare the interest rates being charged on different
credit cards so you know how much interest you‘ll be paying if you
wind up carrying a balance. Department store and catalog credit cards
have higher interest rates. You‘ll almost always be better off using a
bank credit card (VISA® or MasterCard®) than a store credit card.
3. Avoid “Buy Now, Pay Later” offers, which can be very expensive. Many of
us take advantage of ―buy now, pay later‖ offers because we believe
we‘ll have more money coming in when it comes time to pay off the
bill. But, often, that‘s not the case. Many of the ―buy now, pay later‖
offers don‘t charge interest as long as you pay the balance in full
before the no-payment period ends. But if you don‘t pay the bill off in
full by that date, you‘ll wind up being charged all the back interest.
These offers only make good financial sense if you divide the bill by
the number of months in the ―no-interest‖ period, start making those
equal payments right away and pay off the bill in full before the no-
payment period ends. This way, you can buy the item over a few
months, without paying any interest. If all you do is make the
minimum monthly payment that the creditor says is due, you‘ll wind
up getting hit with the large interest bill.
4. Always read the fine print. Starting today, take time to read the fine
print of any credit applications, as well as any information that alerts
you to changes in the way your creditors do business with you.
Creditors will often send you statements alerting you to changes in
your agreement, which will go into effect if you don‘t tell them that
you object. This is how creditors ―suddenly‖ raise your interest rate
without warning, for example. They do give us warning, but many of
us don‘t ever read the warnings we receive. Whenever you receive
something from a creditor, read it carefully. For information you
receive about changes to current credit cards or for new credit card
applications, always ask yourself three important questions:
• What interest rate will I be charged? If the interest rate is too
outrageous, call the creditor and complain. If they refuse to lower the
interest rate, do yourself a big favor and close the account, pay off the
debt and use a credit card from a company that actually values your
business.
• How long is the grace period before the charges I make start accruing interest?
You should have at least 25 days to pay off your bills before you start
being charged interest. With a 25 day grace period, you‘ll actually
receive 15 credit card statements during the year. Many creditors are
now switching to a 20-day grace period. This means that you‘ll actually
receive 18 or 19 credit card statements during the year – which can
really mess up your family finances if you have budgeted for one
credit card payment a month.
• What other fees and penalties could I be charged? Know how much you‘ll
have to pay if you go over your credit limit, how much you‘ll pay if
your payment is late or if you bounce a check. If you‘re ever not clear
on something you read, or have more questions, call the creditor and
ask. Make sure all your questions are answered, and you‘re
comfortable before you buy.
5. Always check to see what the current interest rate is on anything you buy on
credit. The interest rate that is included in the material you receive with
new credit card applications is often out of date, usually by a year or
more. Be sure you know what the current interest rate is before you sign
on the dotted line, and beware of teaser rates that jump up after six
months. If you can‘t figure out the current interest rate from the
material you‘ve read, call the creditor‘s customer service representative
and ask. Be sure you know exactly what the interest rate can be raised
to if you are ever late with your payment – and how long that higher
interest rate remains in place once you start making your payments on
time again. Some creditors will lower your interest rate after two or
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BREAKING THE DEBT CYCLE – FOR GOOD!
three payments; others make you pay the higher interest rate for a year
or more.
6. Exercise your right to change your mind about credit purchases. If you buy
a big ticket item on credit (such as financing new windows), you have
three business days from the day you sign the contract in which you
can cancel your contract and get any deposit back.
7. Set aside the money for household credit purchases before you buy. Of all the
ground rules for using credit, this one is probably the hardest one to
follow. We‘ve all been in the position where we‘ve had to make an
emergency purchase on credit. We‘ve also all been in the position
where we‘ve bought something on credit for enjoyment (a vacation, a
gift), and we didn‘t have the money set aside to pay for it. As a creditsavvy consumer, it‘s important to remember that you don‘t want to
add new debt to your current expenses. If you want to buy something
on credit for enjoyment, find out what it will cost to buy what you
want and then set aside the money each month to achieve your goal. If
you have an emergency, charge what you need to charge, then don‘t
charge anything else until your balance is paid off.
Stopping any additional credit purchases — no matter how big or
small — may seem harsh, but there‘s a method behind my madness.
When I talk with people who are deep in debt, I can easily trace their
credit card problems back, using some simple detective work. Looking
at their credit card statements, I can point to the first month they
carried a balance after months or years of paying the balance off in
full. Usually, some emergency occurred that caused them to buy
something they didn‘t have the money for at the time. Tickets to visit
a sick parent, a new household appliance and car repairs top the list.
Digging a little deeper, I can look at their statements over a few more
months, until the sizable monthly payment they were making suddenly
turned into the minimum payments. That‘s when the second
emergency hit, but by then they had racked up more debt than they
could pay off in a few months‘ time.
8. Don’t believe any sales pitch that says “You have to buy now or you can’t get
it at this great price.” I grew up surrounded by a family-owned business
and I learned one important lesson: You can always buy what you
want at the ―super sale‖ price. Nine times out of ten, that great low
price is still available, ―just for you.‖ Why? Because they want your
business. Even if they won‘t sell it to you at the price they were
offering, you can always get it somewhere else. Don‘t give in to the
pressure that you have to ―buy now or pay more later!‖ Never let
anyone bully you into believing that you have to buy anything right
now.
9. Use layaway or prepayment plans instead of credit. Credit-savvy
consumers know all too well that the best way to use credit sometimes
is to not use it at all. Many stores went back to the tradition of layaway
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that was created years ago, but the trend is now shifting back to credit
again. Walmart, for instance, ended their 44-year layaway program
before the 2006 Holiday Season. With layaway, you put down a
deposit and continue to pay toward your purchase — without
incurring any interest charges. When you make your final payment, the
store lets you have your merchandise.
Many other national and regional retailers still offer 30-day layaway
programs, including Sears, T.J Maxx, A.J. Wright and Burlington Coat
Factory. Jostens, the manufacturers of class rings, offers a five-month
layaway payment plan for high school and college class rings and
Kmart offers a 60-day layaway program for merchandise. Encourage
the stores where you shop to offer or continue to offer layaway
programs, so we can all break the debt cycle – for good!
10. Steer away from “monthly payment options” for goods and services you buy,
and make your purchases based on the total price. It‘s always easier to buy
something for ―just three easy payments of $9.95‖ than it is to buy
something for $25.95. But payment plans come with a price. That
same item you could pay for in one payment of $25.95 will cost you
$29.85 — nearly 15% more!
***
As you can see, it takes very little time to become a credit-savvy
consumer — but the knowledge you gain could save you hundreds,
even thousands of dollars. First master some of the ins and outs of
credit. Then start exploring some of the ways you can completely
break the debt cycle that is causing you to always worry about money.
To help you get started, I‘ve included some tips for breaking the debt
cycle. These tips are excerpted from my book Break the Debt Cycle
— For Good!. Many of the ten tips you‘re about to read are based on
sound prosperity principles. I encourage you to try all the ones you
can today. Each month, stretch your comfort zone just a little, adding
a new tip or two. You‘ll be pleasantly surprised to discover that these
tips can actually help you break the debt cycle once and for all. Using
these tips, you not only become debt-free, but you can develop a
whole new way of thinking about money and credit and debt.
While you‘re paying off your remaining debts and building up a
savings account to pay for things you normally would charge on a
credit card (see Chapter 3), you have a few months to put these tips to
work for you. You can become debt-free and stay debt-free if you
follow these practical and metaphysical tips.
Bottom line, money is energy. Nothing less, nothing more. It does
not have any power to control our actions — only our thoughts
control our actions. Our thoughts about money usually fall in one of
three stages. At the bottom is where you‘ll find most of us. This is
where we spend our energy and time worrying about and talking about
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money problems. Where we spend most of our time saying things like
“I’m not going to have enough money to...”
You can take the first step toward breaking the debt cycle by
elevating your thinking. You can start elevating your thinking to the
next stage by setting goals for yourself. This second stage is where we
spend energy and time saying things like, “I want to achieve this goal I’ve
set, BUT I’ve got these money problems...” If you‘re already at this stage,
congratulate yourself. You‘re one step closer to permanent prosperity
already.
You‘ll reach the third and highest stage once you make a committed
effort to put the following ten tips to use in your life. When you‘ve
reached this stage, you‘ll find yourself saying things like, “I have this
goal, and it may be a very tiny goal, but it is my goal, and this is the next step I’ll
take to make this goal a reality.”
For example, let‘s say you‘re worried right now about meeting this
month‘s mortgage or rent payment. Your goal is to come up with
enough money to pay the mortgage or rent by the date it‘s due. You‘re
on your way. Several of the tips below will immediately generate cash
on hand to help you make your goal a reality. Other tips will help you
build a foundation underneath you so more cash will come to you.
TEN TIPS FOR BREAKING THE DEBT CYCLE — FOR GOOD!
I encourage you to start putting these ten tips to use in your life
TODAY. Work toward progress, not perfection. Don‘t beat yourself
up if you can‘t do everything at once. Take it a step at a time and keep
moving forward. Above all else, know that YOU ARE
PROSPEROUS!
1. Free up the trapped prosperity in your life. Release things that take up
―space‖ in your life, including friends who sap your energy and
provide nothing in return. Books, clothes, food — what are you
stockpiling that you don‘t use? Look at everything you haven‘t used in
over a year and find a way to sell it, give it away or trade it in. Grab
four empty boxes. Label them ―Keep,‖ ―Trash,‖ ―Charity,‖ and
―Hold.‖ Then take one drawer, one shelf, one box at a time. Set a
timer for 15 minutes and go to it. When the timer goes off,
immediately take the Trash box out to the trash. Put the Charity box
into your car so it can go to charity immediately. Put everything in the
Keep box where it belongs. Finally, stick the Hold box in a nearby
closet. After you have de-cluttered your house, go back to the Hold
boxes and decide where these items actually belong: Keep, Trash, or
Charity.
2. Pay what you can now. If you have debts to pay, and you have
savings, don‘t avoid paying your debts and say, ―I‘ll pay these debts
later, when I have more money, so I don‘t have to touch my savings.‖
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Free up a small portion of that money; put it into the universe. You
can‘t get a flow of money coming in to you unless you have a flow of
money going out. Pay at least a small amount today. Even if you can‘t
pay the whole bill right now, pay something toward your debts each
month.
3. Release people from their debts to you. If you have lent money in the
past, or extended credit, and you know that the chances for you ever
getting that money back are remote, release the borrowers from their
debts to you. Call or write them and say, “I want you to know that I’ve
decided to consider this money a gift to you. I am freeing you from any obligation to
repay this money, ever, and I hope you’ll accept this gift with all my love, and do
the same for someone who owes you money.” You then make it possible for
that money or more to come to you.
4. See the highest good for everyone. When you‘re in a situation where you
think, ―they‘re going to try to rip me off,‖ affirm ―I see the highest
good for both of us.‖ Then know this person will do right by you.
5. Give thanks for your debts. When you pay your debts, hold them one
by one in your hand and give thanks for whatever that debt
represents. ―Thank you for cable television, which enables us as a
family to watch movies together at home.‖ ―Thank you for this dental
bill, which took away the pain in my mouth.‖ ―Thank you for this
mortgage, which lets us live in this home we love.‖
6. Don’t brag about what you plan to accomplish or your prosperity. Instead,
imagine it as accomplished, and go about your daily business, putting
the stepping stones in place for your pathway to your goal. Then, once
you‘ve accomplished your goal, get quiet and give thanks for your
abundance. And give back to those who have helped you achieve your
prosperity.
7. Don’t let pride stand in the way of your prosperity. You can be your own
worst enemy if you refuse to accept your prosperity in whatever form
it takes. As you practice the laws of prosperity, people around you will
suddenly start giving you things. Don‘t refuse these gifts as charity or
acts of pity. They are the first evidence that your prosperous thinking
is paying off. Joyfully accept these gifts. Stop yourself before you say,
“Oh you shouldn’t have.” “This is too expensive.” “I couldn’t possibly accept.”
Practice accepting gifts graciously. “Bless your heart!” “You’re an angel!”
“Thank you.”
8. Be patient with yourself as you learn prosperity skills. Don‘t be like the
farmer who planted corn, then cut off all the tassels that appeared,
because he was looking to grow EARS of corn, not tassels. Don‘t
dismiss the results you get as weeds. Know that whatever grows in
your life is for your highest good.
9. Look for the lesson in experiences. When a ―negative‖ happens to us,
it‘s usually a nudge to help us chose a better direction for our lives, for
our growth. Don‘t waste your time and energy bemoaning an event.
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Stop and center yourself and figure out what you were meant to learn,
how this event will help you achieve your goals. Don‘t ask, “Why did
this happen to me?” Ask, “What am I going to do about it?”
10. Let go of prejudices. Don‘t spend time and energy worrying about
others, or how others perceive you. Remember the old taunt, “I’m
rubber and you’re glue. Whatever you say bounces off me and sticks on you?” The
same goes for positive thoughts and words. Don‘t set yourself above
anyone else, or love others ―in spite of ‖ their actions. Learn to love
everyone unconditionally and that love will flow back to you
abundantly.
You can be your own worst enemy in your search for abundance or
you can be the best guide you‘ve ever had. The choice is entirely up to
you! If you want to explore prosperity issues more, there are two
books by prosperity guru Catherine Ponder that I highly recommend
as great ―starter reading‖ for any prosperity thinking. They are
Prosperity Secrets of the Ages and Open Your Mind to Receive.
And if you want to practice being grateful for things you receive, and
create greater abundance in your life, I also recommend my book,
Giving Thanks: The Art of Tithing (to which Catherine Ponder
wrote the Foreword!).
USE AFFIRMATIONS TO RELEASE PROSPERITY IN YOUR LIFE
Affirmations are positive statements, said either aloud or to
yourself, that can help you turn the negative thoughts we all have
about money into positive thoughts about money. I had read
Catherine Ponder‘s writings for several years, but I kept hitting a block
in my prosperity along the way, a plateau.
Then I read Open Your Mind to Receive and I discovered just
how easily I sabotaged my own prosperity by saying or thinking things
like ―you shouldn‘t have‖ or ―I don‘t take charity‖ when people would
do nice things for me. Or chalking it up to ―luck‖ instead of to my
inner spiritual strength when good things happen. It was amazing to
see what a difference occurred when I started using this simple
affirmation: I AM OPEN AND RECEPTIVE TO RECEIVING MY
HIGHEST GOOD NOW. Here‘s another affirmation that will help
you when life seems to be getting out of control: DESPITE ANY
APPEARANCES TO THE CONTRARY, I NOW HAVE
ENOUGH TIME, ENERGY, MONEY AND WISDOM TO
ACCOMPLISH ALL THAT I DESIRE.
And one more, for those days when you feel as if nothing you do
will ever be enough: I AM ENOUGH, I HAVE ENOUGH, I DO
ENOUGH!
Last, but not least: I FREELY ACCEPT AND OFFER
ABUNDANCE AND THERE IS ALWAYS ENOUGH! I‘ve found
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that if I take two minutes to sit and stare at the water, or a ticking
clock, or whatever, and slow my breathing down and focus on my
heartbeat, for the rest of my day I have all the time I need. This quiet
time also gives me a chance to slow down the chatter in my brain so I
can focus on what I really want to accomplish.
I encourage you to start using these affirmations in your life. Pick
one and repeat it to yourself whenever you start to feel worried about
your financial situation. You will soon find your money worries
becoming fewer and fewer.
SHOULD YOU REPAY DISCHARGED DEBTS?
You may be tempted, once you get back on your financial feet, to
attempt to ―make good‖ on the debts you discharged under
bankruptcy. This is a natural reaction, but not necessarily the best
action to take. Your account has already been written off by the
creditor as a business loss. As a result, the creditor has closed your
account, and it would create a paper nightmare to find a way to post a
payment to your account.
A better course of action might be to donate the money you would
have paid creditors. There are always worthy causes that could benefit
from your desire to repay your debts. Of course, if you win the lottery
and can make a lump sum payment to your creditors, do what you feel
is right for you.
Finally, let‘s look at how you can make your thoughts about money
even more productive, using a technique I call ―GoalGetting™.‖
USE GOALGETTING™ TO CHANGE YOUR MONEY THOUGHTS
What we learn about money is often heavily rooted in how we were
raised around money. My parents never talked about money — but
they often argued about it. For many years I always thought of money
as something very taboo. I‘ve since learned that we can change the
habits we learned from our parents, just as we can change any other
habit. So let‘s get started changing the way you think about money.
The first step in changing the way you think about money is to
develop the habit of GoalGetting™. Many of us set goals, but few of
us actually achieve our goals. In trying to learn why this was so, I
discovered that few of us break down our goals into manageable steps.
These small steps — something you do today toward achieving one of
your goals — make the difference between setting and actually getting,
or achieving, your goal. Sit down in a quiet place and think about what
is most important to you. What do you want for yourself and your
family? Where do you want to be? Start by figuring out what you want
and work backwards. Columnist George Will made the observation
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that, ―Europeans shop for what they want. Americans shop to
DISCOVER what they want.‖ So we Americans wind up spending
much more money than we want to, trying to discover what we want.
What do you really want? What are your desires? Make a list for
yourself of what things you really want: to pay off a $500 dental bill; to
buy plane tickets to see your sister; to buy gardening supplies to start
seeds indoors; to spend three weeks in Paris. Those have been a few
of my past goals. What do you really want?
Think about your goals, the things you want to be, do or experience
in your life. Is there a special function or date coming up that you
want to buy something for? Then set a goal, a concrete goal, to make
what you want a reality. Get out a notebook and grab a pen or pencil.
This won‘t be painful at all, I promise! There are only six things you
need to write down:
1. The goal you want to achieve. My goal is:
________________________________________________
2. The date you want to complete your goal by. When do you want this to
happen? Do you want to take your family to Disneyworld six months
from now? I want to achieve my goal by this date:
________________. It‘s important to set a deadline, and to make it as
realistic as possible. Sometimes deadlines will have to be flexible, as
you‘ll see in just a minute.
3. How much money do you need to make your goal a reality? This number
may be far different once you start taking steps toward meeting your
goals. In fact, you may find that your goal is far less expensive — and
far more realistic — once you actually know the true costs for
particular items or events. Don‘t just estimate the costs. Do your
research. What will it cost to go to Disneyworld? How much would
airfare be? Rental car? The cost of driving yourself? Hotel or
campground? On-site lodging or offsite? Tickets to the theme parks?
Food and souvenirs? I need this much money to make my goal a
reality: $___________.
4. How much do you have set aside right now that could go toward this goal?
Don‘t be discouraged if the answer is zero. All you need to know is
what point you‘re starting from, as of today, to make your goal a
reality. I have this much saved up: $______.
5. How much do you still need to make your goal a reality? I still need this
much money $_______. (Start with the amount in #3 and subtract the
amount in #4.)
6. How many paychecks (or weeks, if you get money in spurts) are there between
now and when I want to achieve my goal? I have this many weeks or
paychecks before my goal: _________. Now, divide the amount in #5
by the number in #6 to see how much you need to pay toward this
―bill‖ each week or each paycheck so you can make your goal a reality.
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Let‘s say that you want to take your family to Disneyworld six
months from now. You know that airfare is going to run you $200 a
person if you can get a good fare. There are four of you, so that‘s
$800. Expect to pay $1,000 for passes to all the theme parks, $300 for
the car rental, $1,000 for the hotel, $1,200 for food and souvenirs and
an extra $500 for unexpected expenses. That‘s $4,800. Divided by six
months, that‘s $800 a month you‘ll need to save to make your goal a
reality. Eek!
Saving $800 a month for your fantasy vacation might not leave
anything left to pay your daily bills. Before you throw up your hands
and decide that taking the family to Disneyworld isn‘t a reality, let‘s
explore your options. First, you could postpone the trip for another
year. That way, you have 18 months (or 78 weeks) to save $4,800, at a
rate of $266 per month. More reasonable? Broken down by week,
that‘s just $61.54 a week.
Another option would be to see where you can pare down the trip
expenses to reduce the amount you need to save each month. Could
you drive instead of fly? What would gas, plus a tune-up, plus ―road
food‖ cost? If you would rather fly and you‘ll be only going to Disney
theme parks, you could save money by not getting a rental car.
Everything at Disney is easily accessible through trams and buses. You
could also pare down your food bill by making a reservation for a
hotel that has a kitchenette, and offers rooms that are like miniapartments. Residence Inn (800/331-3131) is one good option. Or you
could rent a week at a timeshare for a lower cost. One of the best
timeshare discount rental companies is TRIWEST (800/341-4801).
Every day, get out your goal sheet and decide what one step you can
take to make that goal a reality. Each night, at dinner, sit at the table
and talk about what you want to be doing, what your goals are, what
you did today to make progress toward reaching at least one of those
goals. Give thanks and share your gratitude for what you have in your
lives and for everything that is about to appear. Almost magically,
what you desire will appear — as long as you take at least one step,
every day, toward getting your goal.
USING THE GOALGETTER™ SHEET TO YOUR BEST ADVANTAGE
The bottom line is: Your goals won‘t come to you. You have to go
out and get them, taking one step at a time, one action at a time to
make your goals appear in your life. Others will comment on your
―instant success‖ and how easy things come to you once you start
using the GoalGetter™ Sheet.
The quickest and easiest way to achieve your dreams is to write
them down. Make a list of the goals you want to achieve in your life.
Then, each week, look over your goals. Decide which three goals you
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want to make progress on this week. Write down the action you‘ll take
on that goal.
Keep your actions down to three a week at first. I don‘t want you to
get so gung-ho that you burn yourself out before you can achieve any
of your goals. Three actions a week will get you started. Whether
you‘re trying to achieve a short-term goal for this month, or a longterm goal for years from now, the GoalGetter™ Sheet on page 103
will help you get there.
To get you started, use the GoalGetter™ Sheet to write down your
top twelve goals. Then decide what one step you can take today
toward achieving one of your goals. Then pick two other steps you
can take this week toward your goals.
GET YOUR WHOLE FAMILY INVOLVED IN GOALGETTING™
The quickest and easiest way to get your whole family involved in
GoalGetting™ is to make sure that one of the goals you‘re trying to
achieve is a family goal. Make a game out of seeing where you can
save money. Sit down and set out a family goal. Maybe you have
always wanted to go see the Grand Canyon, or go to Disneyworld, or
have season tickets to the WNBA.
Whatever your goal is, make sure it‘s a goal that everyone is excited
about. Use the questions above to help you figure out how much it
will cost you to achieve your goal. Then work together to free up the
money in your everyday expenses, to start setting money aside to
achieve your goal.
You can designate half the money you save toward debt repayment
and half toward your goal, if you still have debt to repay. This way,
you make progress in getting out of debt and you make progress
toward achieving your family goal!
You‘ll be amazed at how quickly your kids — and you — realize
that you don‘t really want the things that are ―impulse buys.‖
Especially if you sit down together and say, “Let’s see...we can have these
extra premium channels on cable, for instance, or we can put $15 in our dream
jar.”
Be sure to stick pictures of what you want for your goal on the
outside of the jar, so you can daydream about achieving your goal!
Once you‘re comfortable with using the GoalGetter™ Sheet, and
once you‘ve gotten into the habit of doing at least three things a week
toward your goals, gradually increase your pace until you‘re doing one
action toward one of your goals every day. Every day, ask yourself,
“What one thing can I do toward one of my goals today?” Then do that one
thing. If you do more than one thing that day, great, but make sure
that you do at least one thing every day.
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One way to discipline yourself, so you don‘t get burned out, is to
force yourself to only do one thing a day toward your goals for 21
days. By then, you‘ll probably be going bonkers that you can‘t make
more progress — but you‘ll also be in the habit of looking to see how
each action you take today is helping you achieve your future goals.
For an effortlessly way to jolt your GoalGetting™ into high gear, I
recommend getting the 21 Days to a More Abundant Life recorded
workshop (2-CDs and a workbook) or How to Create
Supercharged Intentions that Effortlessly Manifest (CD). Both
are available at www.artofabundance.com.
All the strategies I‘ve told you about in these first four chapters will
help you get your credit history into shape – and help you keep it
there. If overspending is a continuing problem for you, I urge you to
take a look at the resources in Chapter 12. Your financial well-being is
at stake here, so don‘t be shy about asking for help. I don‘t want all
your hard work so far to be ruined because of old money habits.
Once your credit history is up-to-date, and you‘re caught up on
your bills, it‘s time to start putting new, positive credit information in
front of your old, negative information. Let‘s get to it. I know you can
do it!
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GoalGetter™ Sheet
My Goals Are…
Example: Be financially
independent in three years.
1.
Action for This
Goal this Week
Call 800-507-9244 and order 21
Days to a More Abundant Life
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
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1. Make a commitment to yourself to follow the rules that credit-savvy
consumers use. Once you start ―acting-as-if ‖ you‘re a credit-savvy
consumer, you‘ll soon discover that you‘ve actually become a creditsavvy consumer.
2. Use one of the Ten Tips for Breaking the Debt Cycle — For
Good! today. Keep using that tip every day and every few days add
another tip until you‘re using all ten tips every day.
3. Start saying one of the affirmations in this chapter — or an
affirmation you‘ve created for yourself — every day, any time you find
yourself worrying about money.
4. Write down your goals for every areas of your life.
5. Break one of your goals into manageable financial chunks, so you
can start to make it a reality.
6. Use the GoalGetter Sheet to write down and keep track of the
daily action you can take toward achieving one of your goals.
7. Visit www.ArtOfAbundance.com and see if you can give yourself a
jumpstart with 21 Days to a More Abundant Life workshop (2-CDs
and a workbook) or How to Create Supercharged Intentions that
Effortlessly Manifest (CD).
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CHAPTER 5
Selecting the Best Credit Card
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Are you worried that you‘ll never, ever get a credit card again after
your bankruptcy? Or are you glad to be rid of credit cards forever, and
swear that you‘ll never touch another piece of credit card plastic as
long as you live? You‘re not alone, no matter how you feel about
credit cards. Credit cards offer you a very valuable way to rebuild your
credit history after bankruptcy. By rebuilding your credit history, you
can qualify for the same low interest rates on car loans and mortgages
as other consumers do.
Shortly after I declared bankruptcy, I received a generous offer
from a company to rebuild my credit and get a new credit card.
Imagine the relief I felt. For about $50, I could qualify for a VISA® or
MasterCard®. But here‘s what really was being offered. For my $50, I
received a plastic ―Universal‖ credit card, which was accompanied by
a catalog of overpriced merchandise. In order to qualify for a
MasterCard® or VISA®, I first had to ―charge‖ a total of $3,000 on
my ―Universal‖ credit card. The company charged a hefty interest rate
– about 17% back then. I bought merchandise from their catalog at an
incredible markup, and even paid a sizable $80 ―annual fee‖ a year
later. Finally, I became ―eligible‖ for a VISA® or MasterCard®. My
eligibility consisted of a list of companies that offered secured credit
cards. What a scam!
How could I have so easily fallen for such a scam? I was desperate
to rebuild my credit, that‘s how. And this company came to me, to
―help‖ me after bankruptcy. Beware of companies that send you
literature on getting a new credit card right after bankruptcy, including
companies that promise ―offshore credit cards.‖ These companies are
frauds. These companies are either complete cons or merchandising
companies in business to get your money. Don‘t give your money to
them. If a credit card offer sounds too good to be true, it is. Run the
other way as fast as you can. If you get a telephone call, letter or
postcard offering you a credit card you ―can‘t be turned down for,‖
call your local Better Business Bureau, State Attorney General‘s office
and/or your consumer affairs office for the company‘s history.
Chances are you will discover some pretty nasty problems that the
company‘s representative or literature didn‘t share with you. Read the
fine print in any literature or forms.
One popular merchandising card is offered by USA Platinum
through CMG (Commonwealth Marketing Group). They bill
themselves as a ―Home Shopping Charge/Purchasing Program.‖ This
program is also offered under the name All American Gold and USA
Gold Card. In the tiny print, they let you know that this credit card is
good for all purchases of our merchandise. And if you take the time to
read the terms and conditions, the second line clearly states ―THIS IS
NOT A VISA® NOR A MASTERCARD®. The cost to become a
―member‖ or enroll in these different plans ranges from $79.95 $149.95. And the credit line is only good for their overpriced
merchandise. Sure, their shopping website (usashoppingclub.com) has
name brand merchandise. But their prices are much higher than you
would pay anywhere else. And, while they say they subscribe to
TransUnion, they also say they reserve the right not to report your
payment history to the credit bureau. They lure you in with the 0%
interest rate and the ―guaranteed‖ $5,000- $7,500 credit limit. And
your payments are automatically deducted from your checking
account each month, which puts them in charge of your financial
future, not you.
There are a lot of these companies out there, trying to prey on your
fears about never being able to have a credit card after you‘ve declared
bankruptcy. Three such offers are the U.S. Charge Card from
ShopSmart, Inc. (which was listed as a defendant in an ―Advance-Fee
Loan Fraud Crackdown‖), the RESOURCE Card from Financial
Services Network, and MONEYCARD from the financial division of
CMM (which was being marketed over the Internet).
Your first hint that the MONEYCARD is not a real credit card,
even though it touts a $1,000 unsecured credit line, is a fact which
they state right up front: Bank Affiliation: NONE. All genuine credit
cards are affiliated with an issuing bank. Don‘t give any company
money for a credit card unless you know what bank is issuing the card
and you‘ve checked with the Better Business Bureau to make sure the
bank is legitimate. Many companies create names that sound like
familiar bank names – and are designed to confuse you into thinking
they are a bank so you won‘t check on them.
To get the MONEYCARD, you need to pay an up-front
membership fee of $149.95. They try to suck you in with promises of
cash advances on your card, and they tell you that one of your
―membership benefits‖ is that you will be ―processed for an
unsecured VISA® or MasterCard® with a credit line of up to $1,000.‖
In an aside, in teeny type, they tell you that the ―processing‖ you get is
simply this: They give you an application from Ocean Independent Bank
or Cross Country Bank for one of their unsecured credit cards. This
wouldn‘t be so laughable if Cross Country and Ocean Independent offered
a halfway decent credit card, but both cards charge a $100 application
fee and a $50 annual fee. To add insult to injury, Cross Country and
Ocean Independent don‘t even give you a grace period on their cards, and
you‘ll only qualify for a credit line of $350, not the $1,000
MONEYCARD teases you with.
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SELECTING THE BEST CREDIT CARD
The RESOURCE Card also really made me laugh. The interest rate
they charge is ―based on your personal situation,‖ which you know
means ―it will be really high.‖ How high? Well, the computer message
on the 800-number won‘t tell you, and you can‘t get a live person to
talk to you. You have to pay the $48 membership fee before you can
even find out what the interest rate is. Thanks, but no thanks! Don‘t
give any company money for a credit card unless they tell you their
interest rate in writing. The RESOURCE Card computer message also
tells you that you can get your own ―collateralized MasterCard®‖ –
even if you have poor credit. What is a ―collateralized MasterCard®?‖
It‘s a fancy name for a secured credit card. What you get from
RESOURCE is a list of secured credit cards, and you already have the
best of them, the only ones that actually help you rebuild your credit,
right here in this book.
Beware also of ―guaranteed‖ credit card offers, especially those that
require you to pay a fee, usually $100 or more. Think about it for a
second: Why would you pay some stranger $100 for something that
your gut tells you is too good to be true? Because you want to rebuild
your credit, that‘s why. And these guys know that you‘re worried
about the negative affect your bankruptcy will have on your ability to
get credit. That‘s why they prey on newly bankrupt folks. Companies
make these offers sound like the $100 or more you pay them is the
deposit for a secured credit card. But what you‘ll really get is a list of
credit card companies who offer secured credit cards – the same list
you can get on-line at www.bankrate.com for FREE. Instead of
sending that $100 to a company that makes grand promises to you,
write out the $100 check and put it in a savings account instead.
Learn from my mistake, please. I fell for one of the ―merchandising
card‖ scams, I paid over $3,000 for a list that you – anyone actually –
can get for free now. And I‘m including detailed information on the
very best credit cards in this book, so you get even more value. If you
decide to look at any credit cards on the list that I don‘t recommend,
be sure to run the cards through the tests in this chapter to make sure
that you‘re getting the best credit card for you. Before I dive into the
details on the best way to select a new credit card, I urge you to get
only one credit card for your personal use. If you need to keep business
expenses separate, then two credit cards are the most you will need.
There really is no need to have more than two credit cards. One
credit card with a small credit limit will do wonders to help you
rebuild your credit history. Keep this one card, and over time, as you
pay your bill in full each month, the creditor will raise your credit limit.
Once they raise your credit limit, I encourage you to continue to
charge only what you can afford to pay off in full each month.
Otherwise, creditors will think that you‘re repeating the same debt
cycle again. A really great rule of thumb to follow is to charge only
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30% of your total credit limit, and pay your bill off in full each month.
If your credit limit is $300, for example, don‘t charge more than $100
on the card. This shows future creditors that you‘re able to handle
credit responsibly and are not viewing it as an extension of your
income. You DO NOT need to carry a balance on your credit card or
pay interest to build up your credit score.
Speaking from experience, too much available credit after
bankruptcy might not be a wise idea. The debt can creep up on you
faster than you know. Luckily, if you find yourself in trouble down the
road, after the creditor has increased your credit limit, you can get
back on track quickly, especially if you select a good secured credit
card. With one simple phone call and a follow-up letter, you can
reduce your credit card debt by the amount of your security deposit.
Simply ask to have the account closed and use the security deposit to
pay down the balance you owe on the card. Especially if you‘re like
me, and ran up credit card debt in the past, this is a nice safety valve.
SHOPPING FOR THE BEST SECURED CREDIT CARD
A secured credit card looks and acts like a regular MasterCard® or
VISA®. The only difference? You deposit money as collateral for
your credit line rather than having the company extend you credit.
The money is yours and is deposited in a savings account where it
earns interest like any other savings account. You can enjoy all the
benefits of a regular MasterCard® or VISA®, including the greatest
luxury of all: re-establishing your credit history. As long as you handle
your credit responsibly – by not overspending and by paying what you
owe on time every month – your credit report will shine brighter and
brighter every month. Within two years you may find that you‘ve got
sparkling credit, an unsecured credit card, and your deposit back, plus
interest.
But before I throw more credit card gobbledy-gook at you, it‘s
important to know a few credit card terms. You‘ll find them in every
credit card application.
Adjusted Balance. This is the best way a creditor can calculate your
finance charges. Unfortunately, it‘s not the most common way. (See
Average Daily Balance, below). With this method, your creditor subtracts
any payments you made from the balance you owed at the end of the
previous billing period. Your creditor does not include any new
purchases. In addition, your creditor may not include unpaid finance
charges when they calculate your adjusted balance.
Annual Fee. Every year you own your credit card, you may pay a fee
to the issuing bank for having your account. Annual fees hover
around $35, but can jump as high as $80. Occasionally, you‘ll find a
bank that charges no annual fee, but that‘s not necessarily a good
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thing. You may end up paying an extra high interest rate or extra
transaction fees instead. Likewise, a higher annual fee could be offset
by no transaction fees and no cash advance fees.
Average Daily Balance. This is how most credit cards calculate your
finance charge. Every day, your credit card issuer will total the
beginning balance on your account and subtract any payments
credited to your account that day. The creditor may also add new
purchases and cash advances to the balance. These daily balances are
then added up and divided by the number of days in the billing cycle
to arrive at the ―average daily balance.‖
Credit Limit, Line of Credit, or Credit Line. This is the maximum you
can charge to your credit card. For a secured credit card your credit
limit equals, or is a percentage of, your savings. The best cards offer a
credit line of 100%-200% of your security deposit. You can find
secured cards with larger limits, but make sure you can afford both the
security deposit that a large credit limit requires and the bills you can
wrack up.
Exceeding Your Credit Limit Fee. Going over your credit limit can cost
you. Some banks charge you if you exceed your credit limit, some
don‘t. These costs can range from $5 to $35.
Grace Period. Your grace period is the number of days (usually 25-30
days) you have to repay your balance without paying an additional
finance charge. Some banks expect you to pay immediately; they give
you no grace period. Most others will give you a grace period to repay
your purchases, but none to repay your cash advances. Grace periods
for cash advances are harder to find (they‘re listed as ―no cash
advance fee‖).
Interest Rate. If you don‘t pay off your balance each month, you‘ll be
charged a percentage of the balance remaining on your account. A low
interest rate is best for you if you don‘t think you‘ll pay your balance
in full at the end of each month. The interest, or finance charge, is the
cost you pay for using the bank‘s money to make your purchases now.
As long as your credit card has a grace period, and you pay off your
balance in full each month, you won‘t have to pay any interest on your
purchases. The interest rate is called the “Annual Percentage Rate.”
Late Payment Fee. Pay late and you‘ll be charged an additional $10$25 each month as a late payment fee.
Minimum Deposit. This is the least amount of money that the credit
card‘s issuing bank requires you to deposit into a savings account to
secure your credit limit. You won‘t be able to touch this money until
you close your account or switch to an unsecured card. Choose a
minimum deposit you can afford.
Transaction Fee. Every time you use your credit card‘s special
features, like withdrawing money from an ATM, you‘ll be charged a
transaction fee. These fees vary.
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WHAT’S THE BEST CREDIT CARD FOR YOU?
Credit cards come in all flavors, including secured and unsecured
cards. Some charge high annual fees, some charge interest rates
varying from moderate to outrageous and some allow no grace period
while others allow 25-30 days. So how do you find the best credit card
for you? For starters, you need to know what‘s important to you in a
card.
 Do you want a low interest rate?
 Do you want a low annual fee?
 Do you need a high credit limit (because you have large
monthly expenses that need to be charged, for an expense
account, for example)?
 Do you want to earn interest on your savings if you‘re using
a secured card?
The best credit card will depend on what you want out of the card.
No matter what factors are most important to you, please make sure
that your credit card (secured or unsecured) meets these criteria:
1. Offers a grace period of at least 25 days. Many creditors used to offer
30 day grace periods, which means you received a statement and paid
your bill generally once a month. Then creditors shortened the grace
period to 25 days – which means you have 14 bills each year. Now,
many creditors have gone to a 20 day grace period (or billing cycle),
which means you will receive 18 bills for your credit card each year.
Most of us budget our credit card bills based on how much we pay
them each month, which is how we ―suddenly‖ find ourselves unable
to pay a bill in full, or unable to pay even the minimum payments.
Read the fine print and make sure your grace period is at least 25 days.
2. Gives you the best possible interest rate. Credit cards calculate their
interest rates in one of four ways:
 A flat interest rate. Usually this will seem pretty steep, or the
fine print will tell you that the flat interest rate is guaranteed
only for six months or so. A 17%-21% flat interest rate is
pretty standard.
 The federal discount rate plus a set flat rate. You can find the
federal discount rate by looking in any copy of The Wall
Street Journal under the heading ―Money Rates‖ in the ―C‖
section of the paper or on-line at
http://www.frbdiscountwindow.org/index.cfm. The federal
discount rate is listed as ―primary credit rate.‖ The federal
discount rate is the rate the Federal Reserve Banks charge
your bank. Currently, this rate is 6.25%. So a card that
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charges the federal discount rate plus 5% charges just 11% –
a fabulous discount rate!
 The prime rate plus a set flat rate. You can find the prime rate in
the same place as you find the federal discount rate – under
―Money Rates‖ in The Wall Street Journal. The prime rate
is listed as ―bank prime loan‖ and can also be found on-line
at www.bankrate.com/brm/ratewatch/leading-rates.asp. The
prime rate is the rate the nation‘s 30 largest banks charge
corporations when they borrow money. The current rate is
8.25%. So a card that charges the prime rate plus 13.50%
actually has a rate of 21.75%. Ouch!
 The London Interbank Offered Rate (LIBOR) plus a flat rate. The
LIBOR is also published in the ―Money Rate‖ section of
The Wall Street Journal. The LIBOR is listed as
―Eurodollar deposits (London).‖ You can also find the
LIBOR on-line at
http://www.bankrate.com/brm/ratehm.asp. The LIBOR is
the average rate the five major London banks charge other
banks. There are four different LIBOR rates. Credit card
issuers commonly use the three month rate which is currently
5.36%. So a card that charges the LIBOR plus 5.5% actually
has a rate of 10.86% – not bad at all!
SECURED CREDIT CARDS TO AVOID
There are a wide variety of secured credit cards available, yet very
few of them get my recommendation these days. Some card issuers
don‘t make the grade because they don‘t accept people with a
bankruptcy on their file, don‘t have a grace period or their grace
period is 20 days. That means that every three weeks you‘re going to
be getting a bill from them, which increases the chances of you having
a late payment. For this reason, I encourage you to steer away from
Bank of America, Bank of Smithtown, Emigrant Savings Bank, First National
Bank of Chester County, HSBC Bank (except for the card offered
through their affiliate, Orchard Bank), Malvern Federal Savings Bank,
New Millennium Bank, U.S. Bank and Wells Fargo Bank.
New Millennium Bank, for instance offers a Secured Gold Visa® or
MasterCard® and a Secured Platinum Visa® or MasterCard®. These
cards look real enticing, until you discover that they offer no grace
period so you pay interest (19.5%) on your purchases from the day
you make the purchase, even if you pay the balance off in full each
month.
I also recommend avoiding any secured card that offers you a credit
line that is less than the amount you have on deposit with them. It‘s
your money and you should be able to access it if you want to. That‘s
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why Golden 1 Credit Union is off the list. They require you to have oneand-one-half times the amount of your credit limit on deposit (you
need $150 on deposit to have $100 in available credit).
THE ONLY SECURED CREDIT CARDS WORTH YOUR TIME
Currently there are only two credit card companies that offer
secured credit cards that make the grade with me. These are the
Secured MasterCard® offered by Amalgamated Bank of Chicago
and HSBC’s Orchard Bank Secured MasterCard®.
Amalgamated Bank of Chicago Secured Standard and Secured
Gold MasterCard® (800/723-0303, PO Box A3979, Chicago, IL
60690). There is no application fee for this secured credit card, your
payment history is reported to the three major credit bureaus, the card
is NOT reported as secured, and you get a 25 day grace period. The
annual fee is $50, and the late charge fee ($25) and over-the-limit fee
($20) are fairly reasonable. The Standard card comes with a 16.25%
variable rate and the Gold card has a 12.75% variable rate. Your credit
limit is equal to 100% of your security deposit. The minimum deposit
amount is $500. The maximum deposit amount is $4,500.
HSBC Orchard Bank Secured MasterCard® (800/245-9280).
My only complaint with HSBC is that if you attempt to apply on-line
you can‘t even see the complete terms and conditions (including what
your actual interest rate and credit limit will be) until you fill out their
―pre-approval‖ inquiry. This gives the creditor the right to access your
credit file for a pre-inquiry before you even decide whether or not
you‘re actually interested in the card. Chances are pretty good that you
have received an unsolicited application (or 100‘s of them!) from
HSBC/Orchard Bank. They are very aggressive in marketing to newlybankrupt consumers. If you haven‘t already received an application,
call and ask them to mail you one. Do not apply on-line or you won‘t
be able to find out your interest rate and credit limit without having an
inquiry on your credit report.
There is no application fee for the Orchard Secured MasterCard®,
your payment history is reported to all four major credit bureaus, the
card is NOT reported as secured, and you get a 25 day grace period.
The annual fee is $35, but the late charge fee ($35) and over-the-limit
fee ($30) are a bit steep. The card comes with a 14.9% variable rate
(although they advertise rates as low as 8.9%, chances of getting that
rate with a fresh bankruptcy are pretty slim).
Unlike Amalgamated, which has the same variable interest rate for
purchases and cash advances, the cash advance rate for Orchard is a
whopping 25.15%. Your credit limit is equal to 100% of your security
deposit. The minimum deposit amount is $200. The maximum deposit
amount is $15,000. I would only recommend this secured card if you
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know you will need access to a large monthly credit line for an
expense account.
Both of these cards are available in all states, and are offered to the
general public. HSBC/Orchard Bank currently pays 0.25% interest on
your security deposit.
OTHER SECURED CARDS TO CONSIDER
Some credit unions also offer decent secured cards. Most of these
report the card as secured or don‘t report your payment history to the
major credit bureaus, which means they aren‘t actually doing anything
to rebuild your credit, except within the credit union. If you‘re
planning on buying a car or home and would like to take advantage of
the great rates offered by a credit union, then getting a secured credit
card through your credit union may be a wise financial move, even if
they don‘t report your card‘s payment history. Don‘t belong to or
qualify for a credit union? Not to worry! GTE offers an option where
anyone can become a member of their credit union. Check it out!
Here are a few other credit unions who offer secured credit cards
with 25 day grace periods, fair interest rates and decent fees. None of
them charge an application fee.
Digital Credit Union (www.dcu.org; P.O. Box 9130
Marlborough, MA 01752-9130; 800/328-8797 or 508/263-6700).
Anyone who works for or retired from one of the hundreds of
member corporations, lives in certain communities in Massachusetts
or Georgia or who belongs to one of a handful of local or national
associations is eligible to be a member. Digital offers two secured
Visa® cards (Classic and Gold), with a prime rate plus 3% interest rate
(currently 11.25%); no annual fee. Minimum credit limit is $500. The
late payment fee and over-the-limit fees are a bit steep at $30 each.
GTE Federal Credit Union (www.gtefcu.org; Member Services,
PO Box 172539, Tampa, FL 33672-0539; 888/871-2690). In a
wonderful case of the big guy helping out the little guy, GTE, which
was originally founded as an employee-only credit union, has
branched out to help more than 1300 other companies who weren‘t
large enough to support their own credit union. Also, anyone who
lives, works, worships or attends school in certain zip codes in New
Orleans, Northern Florida and Tampa are eligible to be members.
And there is even greater news. Anyone can join the GTE FCU by
joining their non-profit educational club, CUSavers. The membership
fee is a one-time, non-refundable $10. Can‘t beat it! If you‘re not
eligible to join any other credit union, $10 will get you membership in
this one – and bring you all the benefits of membership, including
access to their wonderful secured credit card. They offer a secured
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Visa®, with a low fixed rate of 12.9%; no annual fee. Minimum
security deposit: $500.
NY Municipal Credit Union (www.nymcu.org; P.O. Box 3205,
Church Street Station, New York City NY 10007; 800/481-7338).
Anyone who works for the city of New York, or is a federal or NY
state employee who lives in one of the boroughs, or is a health care
professional (private or public in the entire state and others, including
employees in certain other private industries are eligible to be
members. Check with the Business Development Department to see if
you qualify as a member. They offer a secured Visa®, with a 10.9%
fixed interest rate (15.9% for cash advances); no annual fee. Minimum
credit limit is $300; maximum is $5,000.
Orange County Teachers Federal Credit Union
(www.octfcu.org; P.O. Box 11547, Santa Ana, CA 92711-1547;
800/462-8328). Members generally are employed in the education
industry in a handful of Southern California counties. Check their
membership qualifications to see if you are eligible. They offer a
secured Visa®, with a 13.9% interest rate; no annual fee. Security
deposit amount: $1 to $5,000. They offer automatic approval if you
are requesting a card with a credit limit of less than $1,000. The only
drawback: there is no grace period on cash advances, balance transfers
or convenience checks.
Suncoast Schools Federal Credit Union (www.suncoastfcu.org;
PO Box 11904, Tampa, FL 33680; 800/999-5887). Members generally
are employed in the education industry or work for a variety of
companies in the west central area of Florida. Check the membership
qualifications to see if you‘re eligible. They offer a secured Visa®, with
a 14.5% interest rate; no annual fee. Minimum credit limit is $500;
maximum is $2,000. Their $15 late payment fee and over-the-limit fee
are the most consumer-friendly I‘ve seen in years!
ARE CREDIT BUILDER PLANS WORTHWHILE?
Unlike most other creditors, credit bureaus often go the extra mile
to help you get back on financial track. One program, the Credit Builder
Program, is offered by the Illinois-based USA One National Credit
Union (www.USAOneCU.com; 4749 Lincoln Mall Drive, Suite 101,
Matteson, IL 60443; 708-679-9500). You must be a member to use
their program, and membership is limited to residents within a 12.5
mile radius of Homewood, Illinois; those who work for one of the 400
Select Employer Groups (SEGs); or people who work or live in a
select group of other nearby towns, including Chicago. You can also
become a member if you have a family member who belongs,
regardless of where you live.
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Under the Credit Builder Program, you apply for a ―loan‖ of $1,000 to
$5,000 with a repayment plan of one, two or three years. When you‘re
approved for the ―loan,‖ the money isn‘t given to you. Instead, it‘s
placed in a savings account until the ―loan‖ is paid off in full. After
you‘ve been in the plan for 90 days, and made your payments on time,
you receive a VISA® Blue credit card, with a $500 unsecured credit
line.
Here are the pros and cons as I see them. First, let‘s look at the
drawbacks. Under this program, you pay 10.9% to 11.9% interest to
basically put money into a savings account each month over a period
of one to three years. If you miss a monthly payment because your
financial situation changes, you will wind up putting a black mark on
your credit reports after bankruptcy. And you don‘t have access to
your ―savings‖ until the entire loan amount is repaid. Once you
receive your credit card and begin to use it, you‘ll also have that
monthly payment to make. In essence, you‘ll quickly have two debt
payments each month.
Instead, you could sock $80 a month into a savings account and
have the money available when you need it without taking on any new
debt. If you‘re looking to rapidly rebuild your credit rating, however,
there may be some benefits to this program.
For instance, you get to start putting a positive credit reference on
your credit reports (two once you receive the credit card). You begin
to quickly set aside money in savings every month, which you cannot
access until the loan amount is paid in full (sometimes a benefit and a
drawback are the same thing!).
If you do decide to use this program, the most efficient and
effective way to rebuild your credit is to borrow $1,000 (the lowest
amount) for 24 months. The interest rate is the same on a 12-month
or 24-month loan. A 12-month loan will cost you $88.35 a month to
repay; a 24-month loan will cost you $43.56 a month. By taking out
the 24-month loan, you are only obligated to make a $43.56 payment
each month. What I recommend, however, is to pay as much as you
can each month, preferably $88.35. This way, the loan amount will be
paid off within a year and if there‘s ever a month where cash is tight,
you can drop back down to the lower $43.56 payment amount and
still protect your new credit rating.
MAKE SURE YOUR CREDIT CARD HELPS YOU REBUILD YOUR CREDIT
Since your goal is to re-establish your credit, I encourage you to
read this chapter thoroughly so that you can easily identify the one
credit card that you feel would be best for you. Then apply for that
one card. Don‘t apply for several cards at once or you will get a bunch
of new inquiries on your credit report. Too many inquiries raise a red
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flag with creditors and can lower your credit score. Above all else, if
your goal is to rebuild your credit history, make sure that the credit
card company issuing your card meets these two rules:
1. The issuing bank reports your payment history every month to at least the
three major credit bureaus. If your credit card payments aren‘t reported
regularly to Equifax, Experian, TransUnion (and hopefully Innovis),
then you‘re wasting your time with this credit card. When you‘re ready
to take out a car loan or a mortgage, you want your good payment
history to shine through. The only exception I make is for secured
credit cards that are issued by your credit union. If you‘re planning on
financing your car and home through the credit union, they will see
your good payment history from your credit card account, regardless
of whether or not that history is reported to the credit bureaus.
2. The issuing bank must keep your secured status confidential if you’re getting
a secured credit card. Only you and the bank should know that your
credit card is secured by your savings, not the credit bureaus. A
secured credit card can only help you re-establish credit if the credit
bureau does not know your savings act as collateral for your credit.
When a bank lists a credit card as secured on your credit report, it
means that other creditors immediately know that the card is not really
issued as a credit – it‘s secured by your collateral, your security
deposit. This won‘t help you build a positive credit history, so make
sure that the secured card you selected is NOT listed as secured on
your credit reports. Again, if you‘re going to be applying for all your
credit through your credit union, it matters less how they report your
secured credit card.
These two conditions won‘t jump out at you on all applications,
because they may not be there. Banks aren‘t required to tell you, so
make sure you ask. In addition, banks often change their policies. For
instance, when I first wrote Bounce Back From Bankruptcy,
Orchard Bank was one of my top picks for secured credit cards. Then
they stopped reporting your account to the credit bureaus until the
card was converted to an unsecured account. They soon realized that
reporting your card to the credit bureaus was much more profitable
than losing all the new accounts and so now they‘re back on the list
again. Even Amalgamated used to be on the ―steer away from‖ list. And
many of my previous favorite secured cards no longer make the grade
– or are no longer offered as ‗secured‘ cards!
FINDING THE BEST SECURED CREDIT CARD ON YOUR OWN
Banks are always merging, and credit card offers are always
changing. That‘s why I want to make sure you have all the information
you need to determine whether or not a secured credit card offer is in
your best interest. Start by using the grace period, interest rate and the
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way your payments are reported (secured or unsecured), as your first
three screening tools. Then check with your bank or credit union to
see if they offer a secured credit card that meets the above criteria. If
they don‘t, then look at the secured credit cards that are currently
being offered. I recommend going on-line to www.bankrate.com.
They have always been ahead of the crowd when it comes to the most
updated information, even back when they were AOL Moneywhiz and I
was one of their financial experts!). See which of the secured credit
card offers meet the above criteria and then check them against any of
these following options that are most important to you.
1. Matching credit limit increases. Some cards will increase your credit
line by twice the amount you deposit, once you‘ve proven that you‘re
a good credit risk. For example if you deposit $500, your actual credit
line increase may be $1,000. Use this feature sparingly, and only if you
can pay that entire credit limit off in full each month.
2. Ability to switch to an unsecured card. Some cards, after one or two
years, will give you back your security deposit so that you can invest it
elsewhere. This is a wonderful option. Orchard Bank‘s card converts
to unsecured after just 12 months of on-time payments.
3. A gradually lower interest rate. Some cards, after a few years of good
credit history, will lower the interest rate you‘re charged. Of course, if
you get a lower rate card to begin with, there‘s less allure to this
feature.
4. A high yield on your deposit. Secured credit cards pay different yields
on the money in your secured savings account. Some pay as little as
0.25%, while others, especially credit unions, pay higher rates. The
days of earning 7% on your savings may be gone for now, but you can
still earn 1.24% at Orange County, for example. Don‘t just jump at the
highest yielding savings account or the lowest interest rate card.
Instead, subtract what you‘re being paid from what you‘re being
charged to get your net interest rate. For example: a card charging you
8.9% and paying you 0.25% actually has a net interest rate of 7.65%.
And a card charging you 11.5% and paying you 2.5% actually charges
a net interest rate of 9%. However, don‘t just automatically assume
that a higher yield on your deposit means you‘re going to pay a higher
net interest rate. Do the math for yourself. For example, a card that
charges you 10.9% and pays you 4% actually has a net interest rate of
6.9%. And be sure to take into consideration whether or not each
interest rate is fixed or variable. A fixed rate that gives you a slightly
higher net interest rate now may actually save you money in the long
run if your interest rate goes up.
When you find the best card for you, call the toll-free number to
request an application. It may be enticing to apply on-line, but this is a
great time to learn how to be patient and proactive with your finances.
You should receive your application within two weeks, if not a few
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days. Read all the fine print and ask questions if you are not sure what
the information means. Fill out all spaces on the application. Blank
areas will delay processing or disqualify you completely. If you have a
co-applicant, his or her information must also be complete, and don‘t
forget to sign the application. Sometimes, you‘ll have to sign in several
places.
Most banks will let you deposit your money using a personal check,
cashier‘s check or money order, whatever suits you. Personal checks
generally take an extra two weeks to clear, so if you need a credit card
quickly, you‘re better off using a cashier‘s check or money order. Most
banks also have a few general requirements for all secured credit
applicants. Before bombarding your credit report with inquiries, check
to see if you qualify. The requirements are a lot less strict than they
used to be. You will usually need to:
 Be at least 18 years old
 Have a phone in your home
 Reside in the United States
Other than that, your bankruptcy won‘t count against you, as long
as your debts have been discharged, and you have no outstanding liens
against you.
NEED A HIGHER LIMIT ON YOUR SECURED CREDIT CARD
When you need to increase your credit limit on your secured card,
you don‘t have to make additional deposits to your savings account.
Instead, you can ―prepay‖ your credit card bill. Your credit limit will
still be the same, but you will have a credit on your card, making it
possible for you to actually purchase more with your credit card. For
example, say you have a secured credit card with a $200 credit line and
you need to charge $450 worth of travel expenses this month. If you
prepay $250 to your card, and your balance is zero, you would have a
credit line of $200, plus a credit to your account of $250. This gives
you a total of $450 worth of available credit this month. You‘re not
actually increasing your credit limit, but you are actually increasing
your ability to make purchases this month.
ARE PRE-PAID CREDIT CARDS AS GOOD AS SECURED CARDS?
There aren‘t any pre-paid cards that I recommend. Most of these
cards have basically taken payday loans to a new level. For instance,
Platinum Benefit Group (PBG) offers an overnight cash advance against
your next paycheck without a credit check. They won‘t tell you the
interest rate on the pay day loan, though. In fact, they don‘t tell you
anything about their fees until you‘ve already ―become‖ a member,
which involves filling out a simple on-line form. Once your
membership is approved, you‘re hit with a $89.95 non-refundable
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membership fee and a $14.95 monthly membership fee. PBG entices
people with their ―$500 Unsecured Credit Card Offer‖ headline. In
the fine print, they explain how by using your Prepaid MasterCard®
(which costs you $0.25 per transaction, and $0.80 every time you add
money to the card), and remaining a Platinum Benefit Group member
(which costs you $14.95 a month), every 90 days you will be
considered for a MasterCard® issued by Amalgamated Bank of
Chicago. In 90 days, you will have paid PBG $44.85 in monthly fees
and $89.95 for the membership fee. After paying $134.80, you would
then get ―the privilege‖ of applying for a card that you can apply for
right now. Save that $134.80 and put it toward your secured credit
card deposit with Amalgamated instead.
Avoid the rip-off of the Platinum Benefit Group and other prepaid
―credit‖ cards. They‘re deadbeat debit cards in my opinion. They prey
on your fear that you won‘t get a credit card, cost you an outrageous
amount of your hard-earned money and don‘t do anything to help you
get back on track after bankruptcy.
Having one of these cards will do nothing to help rebuild your credit
rating, which is fine if you truly will never, ever want to buy anything
(including a house or car) on credit. Even though these cards have a
MasterCard® or Visa® logo on them, they are debit cards.
Unlike your friendly bank debit cards, though, pre-paid credit cards
charge you a fee for everything from adding money to your account,
to checking on your balance and they charge you a monthly fee which
averages $4.95. That‘s a $59.40 annual fee. The only nice thing about
these cards is that you will never, ever pay any interest.
The least offensive of the pre-paid cards is Evolution, which is
offered by MetaBank. If you have Direct Deposit, and want to add a
set amount each pay period to your Evolution card, there is no charge.
Otherwise, it costs you $5 every time you want to add money to the
balance. This card, however, is a debit card and is NOT reported to
your credit bureaus. Evolution also sports one of the lowest
application fees ($19.95) and monthly fee ($2.49) of any of the prepaid cards. The big advantage this card has over other pre-paid cards
is that it doesn‘t show that it‘s a debit card on the card itself, so you
can usually use it to reserve a rental car.
If you want the convenience of a pre-paid credit card without the
high fees with no annual fee, I recommend getting a PayPal Premier
account at www.paypal.com. After your account has been active for
60 days, you will be eligible to get a PayPal Debit MasterCard®.
The available credit on your PayPal Debit MasterCard® is equal to
your PayPal balance, but you can link your checking account to the
card. This way you can access money in your checking account, up to
a pre-set limit that you select (and which you can change if you know
you‘re going to have a larger expense you want to charge with your
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debit card). The convenience of the PayPal Debit MasterCard® is that
you‘re charged no annual fee, no interest, no late fees, no overdraft
fees and no monthly fees.
There is no fee for adding money from your checking account to
increase your PayPal balance. Nor is there any fee for taking out
money (except for whatever an ATM charges). There‘s no fee for
transactions. There is a fee for receiving funds from other people,
however. The highest amount is 2.9% of the transaction amount, plus
a $0.30 transaction fee. So if someone sends you $100, for example,
your fee would be $2.90 plus $0.30, or $3.20. If someone sends you a
single deposit of $500, your fee would be $14.50, plus the $0.30
transaction fee, or $14.80. So it‘s a bit pricey if you‘re having other
people deposit money, but it‘s a great bargain if you‘re depositing
money from your own checking account.
A PayPal Debit MasterCard® is treated like a regular credit card for
reserving and paying for rental cars, which makes them a genuine
bonus over your regular bank debit card. Again, the biggest drawback
is that this card doesn‘t do anything to rebuild your credit because
your transactions are not reported to the credit bureaus.
CAN YOU GET AN UNSECURED CREDIT CARD AFTER BANKRUPTCY?
Your immediate reaction to my suggestion to get a secured credit
card might be ―Why should I get a secured card instead of an
unsecured card, when I‘m getting offers for unsecured credit cards left
and right?‖ Secured credit cards have gotten a bad rap, because most
don‘t help you rebuild your credit history. That‘s why I am always very
selective in researching the credit cards I include in this book – to
make sure that all the cards listed in this book are working for you and
not against you. When you use one of the secured credit cards I‘ve
listed in this book, no one else will know that the credit card is
secured except you. Financially, secured credit cards offer you a better
deal than any of the unsecured cards you‘re likely to run into after
your bankruptcy.
Below, I‘ve listed a few of the unsecured cards to avoid at all costs,
and the reasons why they‘re bad for you.
X First Bank of Delaware’s Continental Finance MasterCard®. This card
charges you a low $49 annual fee, which sounds real nice. But they
also charge you a one-time account set-up fee of $99 plus a one-time
program participation fee of $89, and an annual account maintenance
fee of $120 ($10 a month). By the time you get your card, with the
initial $300 credit limit, all you have available on your card is $53. And
you‘re paying interest on any of the $247 you don‘t pay off in full
immediately. And I didn‘t even mention the 19.92% interest rate they
charge.
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Another First Bank of Delaware card to avoid is the Tribute
MasterCard®, which has a whopping $150 annual fee, an account
opening fee of $29 and a monthly maintenance fee of $6.50, which
comes to an additional $78 per year. Your initial credit limit is $300.
So, even if you never charge a thing for one full year, you‘ll be paying
out $257 (and $228 every year from then on), just for the ―privilege‖
of having a credit card.
X First Premier Bank, Platinum Card. This card charges you a $29 set
up fee, a $95 program fee, a $48 annual fee and a $6 monthly
participation fee (another $78 a year). Your initial credit line will be
$250. Subtracting all the fees, you‘re being charged that entire $250
and paying interest on that amount, until you pay the entire $250 off in
full. And you haven‘t bought a single thing! At least with a $250
deposit in a secured credit card account you get your $250 back at the
end of it all.
There are even more reasons I completely dislike First Premier
Bank‘s cards. Anytime your account is reviewed and your credit limit
is increased, they charge you another $25 for the privilege –even if
your credit limit is only going up by $100! They also charge you $3.95
to access your account through the Internet. They charge you $11 if
you pay your bill through an automatic draft. And if you request to
make your automatic payment over the phone or Internet, they tack
on an additional $7 each time. Getting out of this nightmare is just as
pricy. If you close your account and it has a balance of more than $20,
they charge you $3 a month! First Premier Bank also issues these
other so-called ―unsecured‖ cards, so watch for offers from these
cards: Centennial MasterCard®, Centennial Gold MasterCard®, and First
Premier Bank Gold MasterCard®.
X Capital One’s Clear “E-Duction” MasterCard®. This card seems
pretty user-friendly. There‘s a low $29 annual fee and the card is
offered at 0% interest. Whenever you charge something to your Clear
credit card, the amount of the charge is automatically deducted from
your paycheck over a two month period, interest free. This works
great if make a one-time charge, for something like a $200 car repair.
If you‘re paid every two weeks, then $50 would be taken out of each
of your next four paychecks. So far, so good.
Imagine, though, that your car repair costs $800. Now you‘re having
$200 taken out of each paycheck. Depending on how much you earn,
that‘s a pretty hefty chunk of your paycheck. And what if you charge
other items during that two month period? Before you know it, a large
portion of your paycheck may be gone before you even see your pay
stub. As a result, you may find yourself struggling to pay your regular
bills. And if your minimum payment due winds up being higher than
your paycheck, the friendly 0% interest jumps to 14%. The rate jumps
to 25.99% if you try and take control of your finances by closing your
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account or removing your authorization to have your payments
automatically deducted from your paychecks. The same thing happens
if you leave your job. A card like this, in my mind, isn‘t much better
for you than a payday loan, even if it does report your payment history
to the credit bureaus.
DO-IT-YOURSELF CHECKLIST FOR SELECTING A GOOD CREDIT CARD
As I mentioned earlier in this book, I really didn‘t want to have to
write a fourth edition of Bounce Back From Bankruptcy. I finally
decided that if I was going to take the time to write a fourth edition, I
was going to include every essential detail I could think of to empower
you to take control of your finances – and make it so I would never
have to write this book again. To accomplish this, I‘m including all the
in-depth research techniques I use to analyze credit card offers so you
can do the same for yourself.
First, call the creditor‘s 800-number and ask:
1. Can I get your credit card (secured or unsecured) if I‘ve gone
bankrupt? If yes, then continue to question 2. They may say,
―yes, but it has to be so many years old,‖ etc. Get all the
details they tell you so you can decide for yourself whether
this card is one you want to have.
2. If it‘s not a bank you‘re talking to, ask who the issuing bank
is. If there is no issuing bank, it‘s not a real credit card. Be
sure to verify the name of the issuing bank with the Federal
Trade Commission.
3. What‘s the grace period on your card? If it‘s less than 25
days, cross them off your list.
4. Are my credit card payments reported to all major credit
bureaus (at least three of the four!). If not, cross them off the
list.
5. If it‘s a secured card, ask: Is your card reported to the credit
bureaus as secured or unsecured? If it‘s reported as secured,
cross them off the list. If they report as secured for a period
of time and then report as unsecured, make a note so you
can decide for yourself if that‘s acceptable to you.
6. If it‘s a secured card, ask: Is my credit limit equal to my
security deposit, more than my security deposit or less than
my security deposit? The credit limit should be equal to or
more than the amount they‘re holding as a security deposit
from you.
For cards that pass the above six tests, be sure to ask these
questions:
1. What are the requirements I must meet to be eligible for
your card?
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2.
3.
4.
5.
6.
7.
What proof of income do you need? Do you offer a secured
card for self-employed people?
Can I get an application mailed to me?
Is your card available in my state?
If a security deposit is required, can I pay my deposit with a
personal check? If so, how long does it take to get the card?
If a security deposit is required, how long does it take to get
the card if I pay with a certified check or money order?
If a security deposit is required, is there any other faster way
to get my card? This could be an on-line application or a wire
transfer. Get all the details about what it costs, so you can
determine if this is an option that is valuable to you.
HOW MUCH CREDIT IS GOOD FOR YOU?
Now is the time to create some new credit habits. You don‘t need a
big credit line to buy the things you want now. Instead, you‘re learning
how to plan for the purchases you want to make, so that you can have
what you want when you want to, without adding any new revolving debt.
For me, I knew that I wouldn‘t be able to pay off more than $1,600
over a two month period, so $1,600 in available credit met my needs.
How much credit do you need? You‘ll be surprised at how little credit
you‘ll actually need, and you don‘t need to carry a balance from month
to month in order to put new, positive credit information on your
credit report. So be conservative when you estimate how much credit
you‘ll need. I don‘t want you getting in debt over your head again, just
as you‘re starting to get back on your feet.
Be especially on guard for any ―pre-approved offers‖ for credit that
show up in your mailbox. These days, ―pre-approved‖ only means
that you passed their first screening test, which is usually that you had
an address. The fine print will tell you that they‘ll still check your
credit report before you qualify. This only winds up putting a bunch
of inquiries on your credit report, which future creditors will see as a
sign that you‘re desperate to get your hands on more credit.
One way to avoid these temptations is to let the credit bureaus
know that you do not want them selling your name to credit card
companies or other lenders. To get your name removed from these
mailing lists, send this letter:
(Date)
Equifax Options
P.O. Box 740123
Dear Sir/Madam:
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I am writing to request that you remove my name from the
mailing lists you provide to credit card companies and lenders.
Enclosed is the information you need to verify my request:
 Your complete name
 Your full address
 Your Social Security number
I understand that you will remove my name from your mailing
lists and that you will share my request with Experian and
TransUnion, so that my name will be removed from their mailing
lists as well.
Sincerely,
[Your name]
IS A DEBIT CARD RIGHT FOR YOU?
If you need access to larger amounts of money throughout the
month, you might want to look into getting a debit card. You can
easily get a ―debit‖ or ―check‖ card from your bank that looks and
acts like a credit card when you buy products or services. Most debit
cards give you the convenience of a credit card while helping you
create (and maintain) the discipline of spending only the cash you
have, because the money is drawn out of your checking account.
When you receive your debit card, it will usually have a VISA® or
MasterCard® logo on it and look exactly like a regular VISA® or
MasterCard® credit card. The only difference is that, on some cards,
the card says ―check card‖ or ―debit card‖ above the logo. Some debit
cards have this notation; others don‘t.
You can use your debit card anywhere they take MasterCard® or
VISA® (including the Olympics, as I can personally attest!). Instead of
the money being taken out of your credit limit on a credit card, where
you have to pay it back with interest, the purchases you make using
your debit card are subtracted directly from your checking or savings
account.
With a debit card, you can order goods and services over the
telephone, order concert tickets, and eat at restaurants without having
to carry a lot of cash around with you. You can even purchase airline
tickets, and stay at hotels without having to leave a deposit or prepay.
About the only difference with debit cards right now is that many
rental car companies won‘t accept them. And, of course, you have to
have the money in your account at the time of purchase.
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Generally, you will not need a credit check to get a debit card.
However, if you bounced more than two checks in the past year, you
may need to get special permission from your bank to have a debit
card.
One way to avoid bounced checks is to see if your bank offers a
―savings sweep‖ where they automatically move money from your
savings to your checking to cover checks that come in.
HOW EXACTLY DO DEBIT CARDS WORK?
As far as the merchant is concerned, a debit card looks and acts just
like a credit card when you go to buy something. The main way credit
cards and debit cards differ is how you actually pay for your
purchases.
With a credit card, a merchant checks to see if you have enough
credit available on your card to buy what you want to buy. Then they
charge that purchase amount to your credit card account and bill you
at the end of each month. You then pay for all your purchases and
bring your debt back down to zero, or you pay for part of your
purchases and carry the balance, and a finance charge, on your next
month‘s statement.
With a debit card, however, a merchant checks to see if you have
enough available on your card to buy what you want to buy. But
instead of the computer checking on your available credit line, the
computer checks to see how much money is available in your
checking account.
The money is then subtracted from your checking account
immediately, or within three business days, just as if you had paid for
it by check. Your card‘s limit is your checking account balance.
But remember: The amount the bank says you have and the amount
you really have available to ―charge‖ against, may be different if you
wrote checks that haven‘t cleared your account yet, or if you‘ve taken
money out of your account with an ATM card, or made other
purchases with the card that haven‘t cleared. These days, modern
technology has allowed banks to put ―holds‖ on amounts that a
merchant is attempting to collect from your account. This allows
businesses to verify or ―authorize‖ payment from you (confirming
that you have that amount available) before it is actually removed
from your account. This protects you from getting hit with fees for
insufficient funds.
Many businesses allow you to choose between ―debit‖ and ―credit‖
purchases with your debit card. The merchant gets charged less if you
use the card as a ―debit‖ which is why that‘s the automatic default.
Nearly all banks, however, charge you a fee (anywhere from $1 to $3)
every time you use your card as a ―debit‖ card. Since banks make
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more money from the business if they are processing a ―credit‖
transaction, banks now offer incentives like ―reward points‖ to give
you another reason not to use the card as a ―debit.‖ I encourage you
to use the card as a credit card, whenever possible.
Another plus to debit cards, is that unlike credit cards, when you
use your debit card to make ―credit‖ purchases, you don‘t pay any
finance charges. In my experience, it‘s generally better to use your
debit card as a ―credit‖ card whenever possible.
THE DOWNSIDE TO DEBIT CARDS
Debit cards are a great tool to use when you‘re worried about
running up debt again. However, a debit card will not help you rebuild
your credit. In most cases, you will need to have at least one credit
card listed on your credit report to rebuild your credit to the point
where creditors will be willing to offer you a mortgage or car loan in
the future.
You can safely use a good secured credit card, or one of the
recommended unsecured credit cards, along with your debit card if
you like. Get one of the recommended secured or unsecured cards
and always pay the balance off every month. Charge only items that
you would normally buy that month with the cash that you have on
hand. I also encourage you to immediately pay for the item that you
have charged.
For example, say you‘re buying a gift for someone and you planned
on spending $50. Take your $50 check and send it to the credit card
company as a payment the same day you buy the item using the charge
card. Yes, it may be a bit more inconvenient to pay for each item you
charge by mailing in a check. What it does, however, is insure that
you‘re buying things you can actually pay for today – which will insure
that you never again get stuck in the debt cycle that led to your
bankruptcy. Write out the check to the credit card company in the
exact amount you paid for the item, just like you would if you were
paying for the item with a check. This way, you never have to worry
about buying things on credit that you can‘t afford right now – while
you‘re rebuilding your credit.
If you decide you want to use a debit card in addition to a secured
credit card, make sure you can answer these questions:
1. Does the debit card report my payment history to the credit bureaus? Most
debit cards don‘t report your payment history to the credit bureaus.
You‘re not rebuilding your credit history because the money is
automatically taken out of your checking account, like an ATM card
that‘s used to buy things at the Point of Service (P.O.S.) If you want
the convenience of using plastic and the security of using cash from
your checking account rather than going into debt with a credit card,
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then using a debit card won‘t cause a problem. If you‘re trying to
rebuild your credit, a debit card won‘t help you create a positive credit
reference – but it may help keep you from creating a negative credit
history!
2. What protection do I have if my debit card is stolen? With a credit card,
even a secured credit card, you‘re usually only responsible for the first
$50 charged to your card when it‘s been reported stolen. With a debit
card, you may or may not have the same protection. Most banks
recognize that people like the security of knowing that their checking
account is protected if their debit card is stolen, so they are now
offering this protection. Be sure to ask, and make sure you‘re
comfortable with the answer you get, before you get a debit card. With
Bank of America, for example, if your card is lost or stolen, and you
report it within 60 days, you are reimbursed for any unauthorized card
transactions during that period.
3. What protection do I have if I go “over my limit” with my debit card? Like
an ATM card, the balance listed on your debit card may differ from
the money you actually have available in your checking account. You
may have written checks on your account that haven‘t yet cleared your
bank, and the available balance on your debit card could be more than
is in your checking account, if you take these checks into account.
Which means you could run the risk of bouncing checks. That‘s one
reason why I only recommend debit cards (and even using your card
at the ATM!) if you‘re really good at balancing your checkbook and
always know how much is available in your account. Otherwise,
bounced check fees could eat you alive. One protection against this, of
course, is if your bank offers an automatic ―savings sweep‖ where
money from your savings account is automatically moved into your
checking account (for a small fee of around $2 a transaction) to cover
any checks or debits that exceed the balance in your checking account.
4. Will my debit card protect me if I have a dispute with a merchant when I buy
something? Be sure you read the fine print on your debit card
application. With a ―credit‖ card, your credit card issuer will dispute
any merchandise problem for you. This is a ―chargeback right‖ that
you have as a credit card user. Not all debit cards offer this protection.
Wachovia is one major bank that allows you to make a debit card
dispute whenever you have a dispute over a charge that appears on
your debit card. First Chicago, before it was bought by Banc One
(now Chase), was a bank that went out of its way to help consumers
who had a problem with something they bought on their debit card.
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READY TO GET A DEBIT CARD?
Make sure you read the fine print if you‘re interested in getting a
particular debit card. And don‘t sign anything until you get answers to
these five questions:
1. Is there any monthly or annual fee, and if so, how much is it? Some banks,
like Bank of America now offer ―airline reward‖ debit cards that
entice you with the opportunity to get frequent flyer miles, at a price
tag of $30 a year. Do the math and see how much you‘ll have to spend
in a year to get a free airline ticket. If it matches the amount you
actually ―charge‖ with your debit card each month, then the $30
annual fee may be worth it to you.
2. How much will I be charged for using the card to get cash at another bank’s
ATM? This varies from no fee to as much as $5 a transaction. Make
sure you‘re comfortable with the answer you receive. And remember:
You‘re paying to withdraw your own money. It‘s one thing for the
―other‖ bank to charge you for the convenience of using their
machine – but it‘s another thing entirely for your bank to penalize you
if you use another bank‘s ATM.
3. How much will I be charged every time I buy something, either
as a VISA®/MasterCard® purchase or as a Point-Of-Service, ATM
purchase? Many times, you won‘t be charged anything to use your
debit card as a credit card, but you will be charged if you buy
something with your debit card as an ATM transaction, where you
enter in your PIN (personal identification number). When in doubt,
use your debit card as a credit card, where your signature is required.
4. What are my daily limits for charging or withdrawing cash with my debit
card? This is very important, especially if you want to use your card
when you‘re traveling. Most banks limit the amount you can withdraw
each day using your debit card as an ATM card, usually to around
$300 a day. If you use your debit card as a credit card, you can often
charge as much as you have available in your account, unless your
bank has a daily limit on charges as well. Double check so you don‘t
get an unexpected surprise. Years ago, I was having work done on my
Land Rover and when I went to pay the bill, which was slightly more
than $1200, the charge was declined, even though I had more than
enough money in the bank. Luckily, I reached my bank just before
closing time and they were able to raise my daily limit for that day so I
wasn‘t stranded!
5. When will deposits be credited to my account for my debit card, and when will
charges be subtracted? Have you ever noticed that money generally goes
out of your account faster than it gets deposited into your account? Be
sure you know how long it will take for deposits to clear so you‘ll
know exactly when the money you deposit will actually be available for
your use.
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If you get a debit card, save all your receipts and check them against
your bank statements every month. Also, remember to subtract the
transaction and any fees directly from your checkbook on the day you
use your debit card. This will help you avoid bouncing checks.
THREE TIPS FOR KEEPING YOUR CREDIT CARD BILLS UNDER CONTROL
Controlling your credit card spending is going to be easier than you
think. I had really bad spending habits before I declared bankruptcy
(my credit cards were always maxed out), but I managed to stay out of
debt after my bankruptcy by getting a secured credit card with a $500
limit. Then I followed these tips:
1. Only charge what you can pay off this month. You don‘t need a giant
credit line to get by. Start yourself of with a $200 - $500 limit to test
out what you can afford. You can‘t fall into enormous debt with a
$500 credit limit. And you can usually pay off this amount in a few
months in a pinch. If you find that one month you can‘t completely
pay off your bill, do yourself an enormous favor and stick your credit
card in the freezer in a plastic bag filled with water and don‘t use it for
anything until you get the bill paid off in full!
2. Pay off your credit card bill as soon as it arrives. This is one credit
reference you don‘t ever want to show up late on your credit report,
for several reasons. First, with the new laws that allow creditors to
raise your interest rate, being late even once can be extremely
expensive. Second, being late will give you a post-bankruptcy black
mark on your credit report which tells creditors that you are still a bad
credit risk. With the grace periods getting shorter and shorter on credit
cards (unless you pick one of my recommended 25 day or better grace
period cards!), if you wait to pay a credit card bill, you may find
yourself with two bills due at the same time! Don‘t risk misplacing the
bill. Pay it right away.
3. Prepay your credit card bill. Every holiday season, or before a
vacation, I used to send in an extra few hundred dollars so the money
I spent was already credited to my charge card – keeping me out of
debt.
Using these strategies, you will find that you can easily stay out of
debt almost effortlessly.
GETTING A GASOLINE CREDIT CARD
Here‘s a strategy you can use to get a gas station credit card after
you‘ve declared bankruptcy. This strategy is similar to the one you use
to get a secured credit card – except your money will be invested in
stock instead of in a bank savings account. This strategy lets you get a
credit card that rebuilds your credit and become a stock investor,
building your investment portfolio at the same time. The secret is to
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choose a gas company that has stations near where you live and work,
and to choose a company that is a sound investment. I recommend
buying shares from companies that let you buy your stock directly
through their direct purchase and dividend reinvestment programs
(DRIPs). This way you bypass the broker‘s commission (usually saving
yourself $25-$50).
Major companies that offer direct purchase of their stocks include
Chevron (the parent company for Unocal and Texaco), ExxonMobil,
Sunoco and BP.
Chevron (www.Chevron.com; Mellon Investor Services, 480
Washington Blvd., 27th Floor, Newport Office Center VII, Jersey
City, NJ 07310; 800/368-8357) requires you to buy at least $250 worth
of stock unless you enroll in their automatic investment plan and
invest at last $50 per month. You pay a 5-cent investment fee per
share, and $2 of your monthly investment ($4 if you pay by check
rather than electronically) will go toward a service fee. Your initial fee
is $10 whether you purchase electronically or with a check.
Reinvesting your dividends will cost you 5% (up to $3.00). Selling any
shares will cost you $15 for the transaction and 10-cents a share.
ExxonMobil (www.ExxonMobil.com; ExxonMobil Shareholder
Services, c/o Computershare, P.O. Box 43008, Providence, RI 029403008; 800/252-1800), like Chevron, requires you to buy at least $250
worth of ExxonMobil stock unless you enroll in their automatic
investment plan and invest at last $50 per month. Exxon/Mobil is
pretty investor-friendly and charges no initial set-up fee, automatic
investment fee or dividend reinvestment fee. When you are ready to
sell, you will be charged $15 for each transaction and 12-cents for
every share sold.
Sunoco (www.sunocoinc.com; Computershare Trust Company, N.A.,
P.O. Box 43069, Shareholder Services, Providence, RI 02940-3069;
800/888-8494) offers the same minimum investment deal ($250 or
$50 a month in their automatic investment plan). They are a bit more
―fee-happy‖ though. They charge a $10 initial set-up fee, $5 if you
make a cash purchase, $2 a month to make automatic investments,
and 3-cents a share for every purchase. You do get a break on the
dividend reinvestment fee (the company pays it!). Expect to pay $15
and 12-cents per share anytime you decide to sell Sunoco stock.
BP (www.bp.com; BP Shareholder Services, 4101 Winfield Road 3W, Warrenville, IL 60555; 800/638-5672), which also owns Amoco,
requires a $250 minimum. Once you invest the minimum amount, you
can enroll in their automatic investment plan for as little as $50 a
month. The company pays all investment fees except for when you‘re
ready to sell, which will cost you $15 for the transaction and 12-cents
per share.
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In essence, you will be securing your credit card with your stock
certificate. Once you decide which company will give you the best deal
(the safest stock and the most nearby locations for gas), you can buy
your stock from the company and in a few months they will send you
an application for a gas credit card.
For the first year or so that you have the gas credit card, you will be
required to pay off your balance in full each month, which will help
you keep from charging more than you can pay off each month.
Eventually, the gas company will entice you to carry a balance from
month to month. If you ever find yourself carrying a balance, even for
one month, promise me that you will put the credit card away until
you get the balance paid off – these gas company cards usually charge
21% or (higher) interest, which will eat you alive.
Another thing to beware: Gasoline companies have turned their
bills into mini mail order catalogs with high priced merchandise that
you can pay for in ―installments.‖ But what the company doesn‘t tell
you is that they will post the entire balance due on your bill the first
month, and you pay interest each month on the outstanding balance.
Some ―installment!‖ And this is on top of the high price of the
merchandise and their 20-something percent interest rate. Save your
money. If you see an item in their catalog that you ―must have,‖ shop
around. Chances are that other catalogs or warehouse stores will have
the same item you‘re looking for, at a much lower cost.
CHECKING THE SAFETY OF A GAS COMPANY’S STOCK
Investment advisors that I respect and admire, like Richard Band
and Ken and Daria Dolan always recommend that you check the
safety of a stock before you buy. When you‘re selecting a gasoline
company, there are a few basic criteria you should look at to measure
the stock‘s safety and its growth potential. This way you can tilt the
odds of finding a strong company in your favor.
1. Is the company an industry leader or does it have the potential to
be a leader?
2. Does the company have consistently increasing sales and profits?
3. Does the company have 30% or less of its capital tied up in debt?
4. Has the company had an annual return of 10% or more for the
past 5 years?
Because investments rise and fall, it‘s important that you check
these items out for yourself, or through a trusted investment advisor
for any stock you‘re thinking of buying. One of the most respected
resources is Morningstar (www.Morningstar.com). You can find all the
above information at Morningstar about any stock you‘re interested in
purchasing.
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START INVESTING YOUR MONEY SO IT KEEPS GROWING
When you are ready to get a gasoline credit card, call the toll-free
number listed for the company you‘re interested in, or visit the
Investor Relations link on their website. If you call, tell the
representative that you want to join their dividend reinvestment plan. Don‘t
say you want to apply for a credit card. (You will wind up getting
transferred to the credit card division if you do, and you are more
likely to get turned down when you apply.) In a few days, you will
receive an information packet with details on how to purchase shares
of stock directly from the company. If you go on-line to the
company‘s shareholder services, you can enroll and begin investing
right away.
I bought my stock from Texaco, which is now a part of Chevron. The
company met all the criteria for a solid growth stock: It was paying a
yield of over 6%; and there were several Texaco stations near my
house. When I got my information packet, I filled out the form
showing how I wanted my name listed as a stockholder and sent it
back with my $250 ―deposit‖ investment. The company then enrolled
me in their DRIP and bought me $250 worth of Texaco stock. Each
time Texaco declared a dividend, they posted this amount to my
account, the same way your bank posts interest on your savings
accounts statement. Only with a DRIP, the company uses your
dividend payment to buy you more shares of the company‘s stock, so
you own even more shares.
Four to six months after I enrolled in the Texaco DRIP, I received a
credit card application extending an invitation for me to apply for a
Texaco gas card. I filled out the application and sent it back in. My
credit card arrived in the mail six weeks later.
One reader who put this advice to work found it to be very
profitable. He started out by opening a dividend reinvestment account
with Exxon before its merger with Mobil. Within six months, he
received a pre-approved credit card application. He had been using his
credit card for several months before he wrote me to share his
success. He not only made the initial $250 investment with Exxon, but
he also dollar-cost averages into Exxon, buying shares each month. In
his own words, this has proven to be a very good investment! When
he made his first investment, Exxon shares were trading at $82 a share.
When he wrote to me, ExxonMobil shares were up to $100, and he was
reinvesting the dividends too, which as he said, are quite generous.
The stock has already split once since he bought it as well.
Take advantage of this opportunity to improve your credit and start
building an investment portfolio with a healthy gasoline stock from a
company whose gas stations you frequently use and then start looking
at other stocks that might be good investments. You‘ll be glad you
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did. Anytime you want, you can add more money to your DRIP
account – and continue to build your stock holdings. There‘s no easier
way to safely enter the stock market and rebuild your credit at the
same time.
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1. Review the different terms you need to know in order to find the
best credit card.
2. Decide what is most important to you in a credit card: a low interest
rate, a longer grace period, a low annual fee, etc.
3. Double check to make sure any secured credit card you‘re interested
in reports your payment history, but doesn’t report the card as secured.
4. Call two to three different credit card issuers from this chapter and
get applications from each. Read all the fine print and decide which
card you want to apply for.
5. Fill out and send in your application, along with your security
deposit check if it is a secured card.
6. Write Equifax and request to be taken off the mailing list for future
credit card offers.
7. Decide if a debit card would be a better option for most of the
purchases you‘ll be ―charging.‖
8. Examine your debit card application carefully to make sure it‘s a
good debit card.
9. Apply for a ―secured‖ gasoline credit card and start investing in
your financial future.
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CHAPTER 6
Buying a Car After Bankruptcy
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
When you are ready to buy a new car, there are a few strategies you
can use to buy your car without credit — plus a few strategies that will
help you get a car loan that actually is in alignment with your goals to
have financial independence and financial security. Once again, I
know these techniques work because I‘ve used them myself or have
seen others use them successfully.
NEED A CAR BEFORE YOUR CREDIT REPORT IS COMPLETELY
CLEANED UP OR WHILE YOU’RE STILL IN CHAPTER 13?
If you need a car before your credit report is completely cleaned up,
or if you‘re still making payments on your Chapter 13 bankruptcy,
your best bet is to pay cash for your new car, unless you want to
spend hundreds of extra dollars in interest and run the risk of being
late on a car payment. Now‘s the time to be creating a firm financial
foundation, remember? So keep your focus on that.
When I talk about buying a car for cash, I‘m not talking about
having to dole out tens of thousands of dollars. I‘m talking about
shopping around for a reasonably-priced, reliable, previously-loved
car.
Most of us buy our cars based on outer appearances. We want the
sunroof, the power windows, the CD-changer, the alloy wheels and so
on. We approach car shopping sort of the way we approach dating.
We are attracted to what‘s on the outside – and sometimes we
overlook some pretty major ―internal‖ flaws because the car looks like
what we want. You‘re not looking for the car of your dreams right
now. Instead, focus your attention on a car that has the attributes to
provide good, reliable transportation.
Don‘t allow yourself to get distracted by the bells and whistles, or
you may wind up with a pretty used car that costs you thousands of
dollars in unexpected repairs. Focus your attention on what the owner
tells you about the mechanical parts of the car. Does the car have a
new battery, tires, brakes, muffler, alternator, distributor, carburetor or
radiator, for example? The inner workings are what you want to pay
attention to.
Yes, your car might not be the best looking one on the block. But if
it gets you from point A to point B every day, without you having to
make payments each month, then you‘re at a big financial advantage
over the guy down the street who is paying month after month for the
privilege of buying a Lexus or BMW. The time will come when you
will be able to pay cash for the car you truly desire, if you‘re willing to
make a few changes in the way you approach buying a car now.
Look for private sales in your area. Start by shopping the classifieds,
college billboards and, places like that. Online, www.craigslist.com is a
great free resource for finding people who are selling cars in your area.
Pay particular attention to ads that say ―ugly but reliable,‖ and ―wellmaintained.‖ When you look at the car, be sure to ask if the seller has
the maintenance records. Review the maintenance records to see what
service has been done on the car and when repairs were made.
If you‘re still making payments under your Chapter 13 bankruptcy,
you will need to get the trustee‘s permission before you buy a car.
Chances are good, however, that the trustee will work with you to fit
the car into your budget. Start small. You should be able to buy a
decent car for $1,000-$3,000, but be sure to have any car inspected by
a trusted mechanic before you buy it.
When I declared bankruptcy, my car had been sold at auction after
being impounded for unpaid parking tickets. My car loan was listed on
my bankruptcy, which made it virtually impossible for me to get a car
loan right after my bankruptcy. Instead, I bought a 1982 Honda Civic
hatchback. This car had been in two fender benders, was rusty but
reliable, and cost me $200. The owner was selling it because she lived
in the city, had just bought a new BMW and didn‘t have room to park
two cars.
I drove that Civic for five years and put a total of $1,000 into it for
a new clutch, muffler and brakes. I never had a car payment and I
used that extra money each month to pay off debts that weren‘t
included in my bankruptcy. Grand total, I spent $1,200 on my car over
five years. I then sold the car in 1991 to a college student for $500
(150% more than what I paid for the car). My total cost came to $700
— or $140 a year.
I then bought a 1980 Toyota Corona for $250 and pocketed the
extra $250. Two years later, however, I needed a car that I could drive
clients around in for my employer. By this time, I‘d carefully rebuilt
my credit. I had been using a secured credit card for five years. I had a
gasoline credit card from Texaco. Now I could apply for a car loan.
I was looking to buy a Toyota Camry. So I sat down to make a list
of all the reasons I wanted a Toyota Camry. I listed what features I
wanted the car to have, what feelings I thought having the car would
give me, and why I wanted that car in particular. When I examined
why I wanted the Camry, I discovered that it really boiled down to
wanting others to see how successful I was at the time. And then I
realized that what I really wanted was a 4-door, mid-size sedan with
power windows, power steering and a leather interior. These were the
things that were important to me. And I wanted to buy a car that was
two to three years old, so I wouldn‘t be paying for the depreciation
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BUYING A CAR AFTER BANKRUPTCY
that comes when you buy a new car. I went to the car dealer I‘d been
working with and explained what I was looking for and asked him to
keep those features in mind. Everything that came onto his lot either
had manual windows, or fabric seats, and so on. He even had me look
at a 1997 Dodge Neon with only 4,000 miles on it. I drove it, but
realized it didn‘t give me the feeling I was looking for.
Then he tossed me the keys for a car that had just come onto the
lot, a 1995 Chrysler Cirrus. At that point I‘d never even heard of a
Cirrus before. I drove it and fell in love with it. It had all the features I
had desired. And it was less than the 1997 Dodge Neon. A few weeks
after I bought the Cirrus, I saw a television commercial where they
touted the fact that the Chrysler Cirrus was made on the same
assembly line as the Toyota Camry, ranked higher than the Camry and
cost thousands of dollars less. The key is to focus on the essence of
what you want and work from there.
READY TO FINANCE A CAR?
Before you jump at an offer for a new car loan, let‘s start by looking
at what you feel will truly fit into your goals over the next three to five
years (depending on how long of a car loan you get). Ask yourself
these questions, and be as honest as you can:
 How much car debt do you want to take on?
 How much is the car you want to buy?
 How much can you put down on a vehicle and what amount
will that make your monthly payments?
 What are your other monthly expenses?
 Is the amount you‘re spending on this car (total amount, not
the monthly payment), what you really want to spend that
amount of money on?
 How much does this leave you for savings for your future
goals, and for your daily living expenses and unexpected
expenses?
Back in 2000, a client of mine leased an Isuzu Rodeo for three
years. When her lease was expiring, she wanted to turn it in and buy a
Ford Explorer, which would have cost her $30,000. I suggested that
she make it her three year goal to own an Explorer, and gave her a
financially savvy strategy to accomplish this goal.
Her lease payment for the Rodeo was $380 a month and the
residual value, if she wanted to buy the Rodeo, was $6,000. My
recommendation was to purchase the Rodeo by financing the residual
value with a three year loan. Her monthly payment would be reduced
to $180. I suggested that she continue to pay the full $380 each
month. By doing so, she was able to pay off the three year loan in 18
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months. She continued to pay that same monthly payment into her
savings account for the remaining 18 months.
At the end of the three years, she owned the Rodeo outright and
had $6,840 in savings that she could put toward the Explorer. She
decided to get a two year old Explorer, with all the bells and whistles
she wanted. The cost, by then, was $22,000. She put down $7,000,
traded in her Rodeo for $4,000 and financed the remaining $11,000
over five years, at 6%. Her new monthly payment: $212. Of course,
she continues to pay $380 toward the car payment each month – and
will have this loan paid off in 30 months. If she continues to make the
$380 monthly payment into her savings for the rest of the five years,
she will own the Explorer outright and have $11,400 in savings to put
toward her next car. Within a decade she will have gone from being
bankrupt to being able to buy a car with cash. And you can too!
HOW TO FIND A DECENT CAR LOAN
Many newly-bankrupt consumers believe that they will not be able
to get a car loan with an interest rate lower than 10%. In fact, nearly
half the people surveyed in a consumer bankruptcy education project
survey conducted by the National Consumer Law Center (NCLC)
believed they would have to pay an interest rate of 18% or higher for
an auto loan. There is another way. Credit unions offer their members
excellent interest rates on car loans, as long as your bankruptcy is at
least one year old and your payment record after bankruptcy is clean.
You can join a credit union regardless of where you live. Some
states offer special programs that make any resident eligible for credit
union membership. North Carolina residents, for example, can join
the North Carolina Consumer Council (NCCC) for $36, which is the
price of a two-year membership. You are then immediately eligible to
join Members Credit Union. Even if you don‘t renew your NCCC
membership (which is $10 a year after the initial two years), you
remain a member of MCU.
The easiest way to find a credit union you are eligible for is to go to
www.joinacu.org. This website offers a credit union match-up service
called CU Matchup. You fill out the form, which asks you to list
which state you live in, your employer or occupation, any school you
or your family members attend or graduated from, plus your city,
county and zip code. You can also include your ethnic background,
religious affiliation and any organization or association memberships,
which will help match you with specific credit unions that you may be
eligible to join. Often, simply being a resident of a county makes you
eligible to join the credit union in your area. Go to the websites or call
the credit unions listed in your search results and find out which listed
credit union you qualify for and what services they offer.
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Some states don‘t participate in the CU Matchup program. If your
state doesn‘t participate, call the phone number or visit the website for
your state‘s Credit Union League. Many state websites have their own
search engines. Your best bet is to call your state‘s Credit Union
League directly to find out what credit unions you might be eligible to
join.
If you can‘t find a credit union you‘re eligible for, don‘t despair.
Anyone can become a member of the GTE Federal Credit Union
(www.gtefcu.org). As I mentioned earlier, anyone can join the GTE
FCU by joining their non-profit educational club, CUSavers. The
membership fee is a one-time, non-refundable $10. Can‘t beat it! If
you‘re not eligible to join any other credit union, $10 will get you
membership in this one – and bring you all the benefits of
membership, including access to their secured credit card and auto
loans (currently 6.49%). GTE FCU also has a very good on-line
financial educational resource center.
TIPS FOR FINANCING WITH A CREDIT UNION
There are a few things to watch for if you decide to approach a
credit union for auto financing. Many credit unions are now offering
―indirect lending‖ which is actually a form of dealer financing. If you
don‘t have to go to the credit union to get your loan, chances are,
you‘re being offered an indirect loan. The drawback with these loans is
that you wind up paying an origination fee or dealer fee as part of your
loan – which is a fancy word for a commission that the dealership gets
for processing your loan. When in doubt, call your credit union and
ask, “Is the dealer fee paid by me or the credit union?” If they don‘t know, or
say it is paid by you, head down to the credit union and do your
paperwork there instead of paying hundreds of dollars extra to have
the car dealer fill out the paperwork.
READY TO GET A CAR LOAN?
Before I approached a lender for my first car loan after bankruptcy,
I needed to figure out which car I wanted. A late model car with low
repairs was a must. And I knew I didn‘t want to buy a brand new car,
because the value depreciates the minute you drive off the lot. And I
didn‘t want to get saddled with a car loan that went on for years and
years. I decided to stick with a car that I could comfortably pay off in
two years. That meant I could afford a $6,000 car loan.
Looking through Consumers Reports, I narrowed my choices down to
two cars: a 1988 Honda Accord LXi and a 1988 Toyota Corolla. The
local classifieds showed that these cars were selling for about $7,000.
Next, I got the word out that I was looking for these two cars. I told
all my friends, neighbors, family members and coworkers.
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I told them to tell all their friends, neighbors, family members and
coworkers. Within a few weeks someone got back to me about a
doctor who was thinking of selling his car — a 1988 Honda Accord
LXi Coupe. I really had my heart set on a 4-door sedan, but I went to
look at the car. It was garage-kept, had been well-maintained and only
had 40,000 miles on it. He wanted $7,000 — about $150 less than the
blue book value.
So, I went to see my banker. That‘s when the real fun started. When
I applied for my car loan, I was completely upfront with the loan
officer about my past bankruptcy. Everything was going smoothly
until the loan officer got my credit report, which showed an unpaid
lien from a landlord I‘d had five years before. I had no idea that a
judgment had been made against me. So I also had no idea that this
negative information was on my credit report.
I had to call the landlord‘s attorney to find out how much I owed
($93). Then I had to go pay this money and get a receipt. Then I had
to take the receipt to the courthouse to prove the lien had been
satisfied. The courthouse gave me a certificate of release, which I took
to my loan officer, and finally I got my car loan.
Also, that student loan with the computer glitch showed up on my
credit report. Needless to say, the loan officer was ready to turn down
my loan based on the information in my credit report. When I finally
requested my credit report, I saw what my creditors had been seeing:
really bad debts — even though I had been diligently making
payments after declaring bankruptcy. Was I ever miffed!
I finally got a letter from the student loan lender stating that my
student loan account was current and that the problem was a
computer error. But I could have lost my shot at the car if the seller
hadn‘t been a ―friend of a friend.‖ This is why I recommend making
sure you know what‘s on your credit report before you talk to any
potential lender.
As I said above, the best lender to start with is a credit union. The
second best lender is your banker, not the dealer‘s finance department.
When you see your banker, be very up-front about your bankruptcy.
Show your banker how you‘ve worked to rebuild your credit. Your
bankruptcy will not matter to the banker, once it is two years old.
What will matter most to the banker is your most recent payment
history for the last year or so. As long as you‘ve taken steps to rebuild
your credit after your bankruptcy, you‘ll be in a good position to get a
decent interest rate on your car loan.
Ask your banker for a three-year car loan for 90% of the car‘s cost.
Chances are you‘ll get a loan for 80%, and that it will be a two-year
loan, but it‘s worth trying for the best loan possible. With a two-year
loan, your banker is hedging her bet. If you default on the loan, the car
will still be worth enough for the bank to recoup its expenses. So
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don‘t be offended if your banker isn‘t willing to go out on a limb to
help you get a loan. The banking industry is in pretty bad shape these
days and they‘re being stingy with loans.
You can sometimes sway your banker by opening up a 30- day
Certificate of Deposit (CD) for $500 or so. Opening a CD is also a
nice gesture to thank your banker when you finally get your car loan
— especially if you wind up getting your loan from a bank that you
don‘t normally do business with, as I did. For every $1,000 you can
put down, expect to be able to finance $6,000. For a two year loan,
you‘re looking at a monthly payment of around $270. If you can get a
three-year loan, you‘ll be looking at a payment of closer to $180.
SHOULD YOU GET A CO-SIGNER?
You may find you need to finance a car before lenders are ready to
give you one on your own. I‘m still a big advocate for paying cash for
a car you can afford before taking on new debt right after your
bankruptcy is discharged. If your job requires long distance travel and
you need a very reliable car quickly, you may need a co-signer.
Once your bankruptcy has been discharged two years, you may take
steps to get a car loan in your name alone, without a co-signer. Sit
down with the lender who holds the note on the current car you have
(or the dealer who arranged the financing for you). Bring with you a
notarized letter from your co-signer, stating that you‘ve been the one
making the payments since the beginning of the note, and a copy of
your credit report to show your payments have always been on time.
Tell the lender you‘d like to trade in the current car, and get a
different car, and that you‘re looking for financing. Ask, ―What
amount would you qualify me for?‖ Chances are you can get a good
deal on a car loan for 80% of the car‘s value, with a repayment period
of two to three years. Make sure the car fits into your budget, and that
you can comfortably repay that amount during that period of time. If
you know exactly how much you can afford to pay toward the car loan
each month, ask, “How much could I borrow to make sure I’m not paying more
than $xxx a month?” Don‘t let the lender extend the number of years
on the car loan or you will wind up paying too much for the car.
THE BEST WAY TO BUY A CAR FROM A DEALER
If you do buy your car from a dealer, keep the focus on the
purchase price you want to pay for the car, not on how much you can
afford to pay each month. For example, tell a dealer that you‘re
looking to buy a car that‘s two to three years old and that you want to
spend no more than $7,000 on the car. The dealer wants you to
commit to as large a monthly payment as you can afford in order to
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get the most interest out of you they can. They will constantly try to
get you to commit to a monthly amount.
Instead of putting the dealer in charge of your finances, put yourself
in charge. Start by calculating how much car you can afford to pay off
in two years. If you can afford to spend $250 a month on a car
payment, then you can afford to finance $6,000 over two years. You
don‘t want to tell the dealer you can spend $250 a month because the
dealer will want to hook you up with a $250 payment for 48 months,
financing $12,000 instead of $6,000.
A good dealer will work with you to buy the car you want to buy at
the price you want to pay. A good dealer will stop trying to sell you on
the ―low monthly payment‖ as soon as they see that you are serious
about wanting to spend no more than the price you‘ve determined.
Put down as much as you can afford to put down toward the total
price of the car. This will help you get a better deal on the interest
rate, but as you‘ll see in a minute, the interest rate you‘re charged isn‘t
as important as the fact that you‘re about to get another piece of good
credit on your credit report.
Once you pay off any bills that weren‘t discharged in your
bankruptcy, and you‘ve driven around in your reliable clunker for a
year, putting aside money toward your down payment, you‘re ready to
go out and get that $7,000-$10,000 car. Go to the dealer and pick out
the car you want, preferably a two- to three-year old model.
Take your time deciding what car you want, and be flexible. My
former spouse and I wandered around for over a year using just one
car and getting up early to arrange car schedules, which wasn‘t always
easy, given that we were located 20-45 minutes from everything. The
right car will appear while you‘re saving the money to pay for it.
We decided to write down the specifics of what we needed in a car,
and we were flexible with any other options that happened to be
included. My criteria were: a well-maintained, 4-door sedan with cruise
control, tilt steering wheel, AM-FM cassette stereo and power
windows. Of course, I‘d have loved for the car to have a leather
interior, sunroof, power locks and a CD player. But I put down the
basics, so others would know what type of car I wanted.
I wanted a 4-door car so it would be easy to get a car seat in and
out. I wanted cruise control so my leg wouldn‘t fall asleep while I was
driving long distances. I wanted a tilt steering wheel to make it easier
for a pregnant lady to get behind the wheel. I wanted a cassette player,
so I could listen to my favorite books on tape and motivational tapes.
And finally, I wanted power windows so I didn‘t have to break my
arm at the toll plazas.
What criteria are important to you? Put them down on a piece of
paper where you can look at them throughout the day (your bathroom
mirror is a great location). And tell everyone you know what you‘re
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looking for in a car, so they‘ll keep you in mind when they come
across cars for sale that meet your criteria.
Don‘t limit yourself by stating the specific make and model you
want. The car I had in mind was a Toyota Camry. But I was open to
whatever cars I could find that met the criteria I had listed. What I
wound up buying was a car I had never heard of before. I bought a
Chrysler Cirrus, which was made on the same assembly line as the
Toyota Camry, but cost $13,000 less!
Once you know what you want in a car, check out the blue book
trade in and dealer prices for different cars that fit your criteria. Your
local library will probably have reference books that will give you the
information you‘re looking for. Also, you can go on-line to either
http://www.kbb.com (Kelley Blue Book values) or
http://www.edmunds.com (Edmunds car values). Both sites break
down costs for various cars. Let your fingers do the walking until
you‘ve narrowed down your search to several cars in the price range
you want, that meet the criteria you have set. Then check each car‘s
reliability using Consumer Reports.
Once you‘ve done your homework, you‘re ready to actually buy
your car. Go see the dealer, remembering to tell him or her how much
you want to spend for the car. In our example, we‘re using $10,000 as
our target price. Put down as large a deposit as you can afford. The
more you can put down, the better your interest rate will be and the
lower your monthly payment will be.
After you‘ve agreed upon a car and a price, tell the dealer how much
you can put down and that you want to finance the balance. If you can
put down $3,000, finance the remaining $7,000. But don‘t finance the
loan over two years. Instead, ask to have a 48-month loan so your car
payment is around $180 (I‘m using a 10% interest rate here). While
you might be able to afford a higher car payment, the trick is to not
get yourself trapped into paying a higher monthly payment.
Instead, go ahead and pay $250 a month toward your car if you
want. You‘ll have the $7,000 loan paid off in 33 months if you do. Or
pay $300 a month and pay off the car in a little over two years. Your
financial situation could change in an instant, and I don‘t want you
saddled with a huge debt burden. Instead, use that extra money each
month to build up your savings and to buy some of the items you
want that you used to charge each month. Above all else, promise me
that you won‘t do business with ―Bad Credit, No Problem‖ dealers.
These dealers will sell you an overpriced car and stick you with a highinterest car loan.
If you qualify for a loan at the interest rates they charge, chances are
very good that you can get a car loan (with a lower interest rate) on
your own. Don‘t let any dealer bully you into thinking that you
automatically have to pay a higher interest rate. And don‘t talk yourself
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into taking the higher-interest dealer financing just because the car you
are most interested in at the moment doesn‘t meet the better lender‘s
required criteria. Allowing ourselves to take financial matters
personally is one of the big ways people wind up overpaying for big
ticket items like cars and houses.
Be particularly careful about trading in a car and getting another car
with a car loan if your present car is worth less than your current car
loan. This is known as being ―upside down‖ on your car loan. When
you are upside down on a car loan, lenders will usually ―roll over‖ the
balance you owe into your new car loan. When you add the
outstanding debt from your old car to the new car loan amount, you
are even further upside down the minute you drive off the dealer‘s lot.
Finally, when you‘re ready to insure your car, make sure you take
out collision insurance until your car loan is paid off. This way, if
anything happens to your car (like it gets totaled), you aren‘t stuck
paying a car loan on a car that is a pile of junkyard tin.
Keep the deductible as high as you can afford and your insurance
premiums will be cheaper. I started out with a $100 deductible. Once I
had saved $250, I raised the deductible to $250, then $500 and so on
until I had $1,000 in savings and my deductible was $1,000.
If you have to, create a completely separate savings account
specifically for your insurance deductibles. This way, you‘ll never have
to worry about where the money will come from to meet your
deductible.
WHAT IF YOU ALREADY HAVE A HIGH-INTEREST CAR LOAN
You‘re not alone if you have already gotten a new car after
bankruptcy — at a high interest rate. I talked with a man on-line once
who had gotten a car loan with a 24% interest rate! If this has
happened to you, there may be a way for you to get out from under
this high interest rate.
First, if your car is less than two years old, you might have some
luck refinancing the loan at a lower interest rate. Start by going to your
credit union or bank, or several area banks, and seeing if they offer
refinancing for recently purchased cars. Use the sample letter below to
get you started.
If you can‘t find a bank that will lower your interest, then go back to
the original lender. Don‘t settle for talking to someone at the front of
the office.
Ask to speak to someone in authority, or, if you prefer, write a letter
to the president of the company explaining that you would like them
to lower the interest rate or you will have to sell the car.
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:
(Date)
[President’s Name]
[Name of Lender]
[Address]
[City, Sate, Zip Code]
RE: [Your automobile loan number]
Dear [President’s Name]:
On [date you purchased your car] I obtained a car loan from you
to finance the purchase of a [type of car, year, make and model]. The
interest rate which I was given was [percentage interest rate], which is
outrageously high. This interest rate is so high, in fact, that I am faced
with a dilemma.
Either I convince you to reduce the interest rate to a more
reasonable rate of [indicate the rate you’d be willing to pay] or I will
be forced to sell my car.
I would like to continue my relationship with your company, but
I cannot continue to pay this outrageously high interest rate. I look
forward to hearing from you in the next 30 days to see if we can get
this interest rate lowered to [the rate you listed above].
Sincerely,
[Your Name]
With this letter, you put the ball in the lender‘s court. They will
most likely make you a counteroffer of an interest rate somewhere in
the middle of what you‘re asking for. If your current interest rate is
24%, and the going interest rate is 10%, ask for a 13% interest rate in
your letter. When the lender counteroffers, decide how high you really
want to go with the interest rate. The lender has three choices: Try
and get as much interest as they think they can get from you; go with
the 13% you asked for; or risk getting nothing from you because
you‘ve sold the car to get out from under their high interest rate (or
you have defaulted on the loan). Send your letter certified, return
receipt requested and keep a copy for your files.
LEASING A CAR —DON’T, UNLESS YOU HAVE NO OTHER CHOICE
Leasing deals might look good at first glance, but the fine print can
really sink you. I strongly recommend against leasing unless you‘re a
business owner and there‘s an incredible tax advantage to leasing
through your company. With a lease, your monthly payments may be
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quite attractive, but at the end of the lease you‘ll have paid out a great
deal of money without actually having bought anything. If you do
decide to lease, make sure you get a closed-end lease where you can
walk away from the car once the lease expires.
When you lease, you need to find out how much the dealer cost is
on the car you want to lease and how much the residual value is for a
two-year old or four-year old version (depending on the length of your
lease) of that same make and model. These figures will let you
calculate whether or not you‘re being charged a fair amount over the
life of your lease.
By subtracting the residual cost from the dealer cost, you‘ll know
how much you should be paying over the life of your lease. You can
get the dealer cost and a variety of other important information from
Consumer Reports’ New and Used Car Price Reports.
Reports for new cars cost $14 for the first one and $12 for any
additional reports you order at the same time. Used car reports are
$12. You can order on-line (www.ConsumerReports.org) or via phone
(800/888-8275) using a credit card. You will have online access to
your report for 30 days. Or you can get the report faxed to you within
three hours or mailed to you within five to seven business days.
You will need the make, model and exact style of the car you want.
You can get the residual value (the ―Blue Book value‖) of the make,
model and exact style of the car you want at the library or on-line. If
you want a two-year lease, get the residual value on a 2-year old car. If
you want a three-year lease, get the residual value on a 3-year old car.
For example, say you want a two year lease on a Toyota Camry.
Let‘s say the current dealer cost for the Camry is $30,000 (it‘s actually
lower so if you‘re thinking of leasing a Camry, please do your
research!) and the current value, or residual cost, for a two-year old
Camry is $24,000. To make sure you‘re not overpaying on your lease,
the total sum of your lease payment and any down payment you make
shouldn‘t exceed $6,000 ($30,000- $24,000).
If you‘re being offered a ―no-money down‖ two-year lease, then
your monthly payments should be no more than $250 per month
($6,000/24 months). If you make a standard down payment of $1,250,
then you would subtract that amount from the $6,000 before dividing
it by 24 payments. In this case, your monthly lease payments shouldn‘t
exceed $4,750, or $197.92 per month ($4,750/24 months).
Do the math for a three year and a four year lease as well, before you
see the dealer, so you‘re not trying to compare apples to oranges. For
a four year lease, let‘s say that the residual cost on a four-year old
Camry is $19,000. In this case, your total lease payments shouldn‘t
exceed $11,000 ($30,000 - $19,000). Divided by 48 months, your
monthly payments in this example would be $229.17 or less.
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The biggest mistake people make when they lease is trying to drive
more car than they can actually afford. If that‘s your main reason for
leasing, I urge you to reconsider and buy a car instead. You might not
be able to get the car of your dreams right now, but you‘ll be able to
get a car that will keep you rebuilding your financial security.
Remember to stick with a car you can afford. Once all your debts
are paid off, you can turn your sights on that sportster. For now
though, stick with an affordable car that will get you where you need
to be going. You‘ll get richer a whole lot faster if you rebuild your
finances without the extra stress and strain of high dollar car loan
payments.
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1. Pay cash for your next car, if possible, even if it means getting an
―ugly but reliable‖ car.
2. Get copies of your credit reports before you go see a car lender about
getting a car loan.
3. Get a co-signer if you need to get a better car right after bankruptcy,
then convert the car loan to your name or trade-in the car after two
years have passed.
4. Concentrate on the bottom line of how much total you can afford to
spend on a car, rather than on the monthly payment amount.
5. Negotiate with your car lender if you already have a high interest
rate car loan.
6. If you must lease, calculate the cost of leasing before you go see the
dealer.
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CHAPTER 7
Easing Your Job Fears After Bankruptcy
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By law, your employer can‘t fire you or discriminate against you
solely because you filed bankruptcy. In addition, if you‘re applying for
a job with the government, you can‘t be turned down for the job
simply because you went bankrupt.
CAN YOU LOSE YOUR JOB?
Your employer will probably never find out that you‘ve declared
bankruptcy. And if your employer does find out, either because you
need a security clearance or your employer needs to run a credit check,
your employer will probably support your decision to declare
bankruptcy.
That‘s because once you declare bankruptcy, your mind goes back
to getting your job done. In addition, declaring bankruptcy puts an
end to collection calls at the office, and your employer won‘t have to
set up and enforce garnishment of your wages, if your state allows
garnishment.
Your employer may have to put up with a few inconveniences when
you declare bankruptcy, including payroll deductions for Chapter 13
payments, allowing you time off for court appearances, as well as
attendance at budgeting and personal finance courses, which are
usually all held during business hours.
Even so, your employer cannot change your employment status just
because of your bankruptcy. An employer who tries to demote you or
fire you, because you need time off to attend court appearances or
classes, would be in violation of the anti-discrimination provisions of
the bankruptcy code. In addition, discrimination against any employee
for bankruptcy is expressly prohibited by Section 525 of the
bankruptcy code.
Most employers will support your decision to file bankruptcy,
because it represents a first step toward overcoming your financial
distress. In fact, some employers are actually paying the attorney fees
for their employees to get their employees‘ minds back on their jobs.
One woman I met on-line had been at her job for only a year and half.
She had this wonderful experience to share about her boss‘ reaction to
her bankruptcy:
My boss is actually helping me through the bankruptcy process.
Another manager in my office told him of my inability to buy
groceries and do laundry due to the high volume of bills I have. He
immediately called me into his office, sat me down and proceeded to
explain what declaring bankruptcy would do for my situation (risks
and benefits). He stated that my emotional and physical well being was
at stake. He also knows full well that these factors have a profound
impact on job performance. He even went so far as to call prominent
attorneys in this area looking for references and made an appointment
for me.
If you feel that you‘re being discriminated against or have been fired
because of your bankruptcy, I recommend that you contact a debtors‘
rights or employment attorney immediately.
FINDING A NEW JOB WITH A CREDIT CHECK
Nowadays, when you apply for a job, chances are good that your
potential employer will check your credit report as well as your
references. Luckily, having a bankruptcy on your credit report will
hurt your chances of landing a job less than having poor credit or a
history of poor credit.
There‘s no evidence that a good credit report is an indicator of
good job performance. And in most cases, you‘ll only need to worry
about what your credit report says if the job you‘re applying for
requires handling large amounts of money, or if you‘re going to be in a
sensitive position. That‘s because people with huge amounts of debt
are considered more susceptible to blackmail, bribery or theft. But
again, a bankruptcy makes you less susceptible, because you‘ve now
gotten rid of your debts.
Bottom line: One bankruptcy will not disqualify you as a candidate
at most companies. However, having a number of credit problems, or
lots of late payments or canceled credit cards could disqualify you,
which is why employers look a bit more favorably on a bankruptcy
than active, but poor, credit accounts.
To an employer, a good credit report tends to indicate that you have
a sense of responsibility and an ability to plan. More and more
employers are doing credit checks these days and they sometimes use
credit reports as a tie breaker. You‘ll have advance notice that the
employer is looking at your credit report because, by law, they can‘t
pull your credit report unless you‘ve signed a release giving them
permission to do so. If you think a job comes down to you and one
other person, I recommend being up-front about your past
bankruptcy.
The employer will appreciate your honesty and will take that into
consideration when looking at your credit report. Rehearse your
statement about why you declared bankruptcy and what you‘ve done
since to get yourself back on your feet again.
Put yourself in the employer‘s shoes for a minute. The biggest
concern an employer has is this: ―Will this person represent my
company well and not take advantage of me or mismanage my
company‘s money?‖
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EASING YOUR JOB FEARS AFTER BANKRUPTCY
If you are rejected for a job based on an item in your credit report,
the company must give you a copy of the report before they turn you
down. You can then check over the information to make sure that
what they‘re seeing is correct.
The fact is you can‘t control how future employers might view your
credit rating. So I encourage you to concentrate on what you can
control, which is putting your bankruptcy and your past credit
problems behind you. Future employers will be very grateful to see
that you‘ve dealt with these problems, since now your mind will be
focused on doing your job and not on fending off bill collectors!
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1. Be up-front with your employer about your bankruptcy, whenever
possible.
2. Use your bankruptcy as a strength when talking with future
employers.
3. Concentrate on putting your bankruptcy behind you and doing the
best job possible!
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CHAPTER 8
Rent the Apartment or
House You Want After Bankruptcy
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Are you currently renting an apartment or home? Chances are good
that your current landlord will never know that you declared
bankruptcy, as long as you didn‘t list your landlord in your
bankruptcy. However, if you‘re looking to relocate and need to rent a
home or apartment again, you can, even if you did list your current
landlord in your bankruptcy.
In this chapter, I‘ll walk you through, step-by-step, the strategies to
take to make sure that you get the apartment or house you want.
STRATEGIES TO GET THE RENTAL YOU WANT
Your best bet when you‘re ready to rent a new apartment or house
is to find one that is for rent through a private landlord. Your local
classified ads will offer your best opportunity for finding people who
want to rent out individual rental properties.
You can also ask friends who live in apartments for the name of the
owner of their building. That way, you have a good chance of
approaching the owner directly.
Since most apartment complexes now ask ―have you ever declared
bankruptcy‖ in their applications, I recommend being open and
honest about it. They‘re going to see your bankruptcy listed on your
credit report when they request a copy, so there‘s no reason to try and
hide it.
What are they looking for when they request your credit report?
They‘re looking for derogatory accounts — accounts that are past due
or have been chronically paid late. This gives them a good indication
of whether or not you‘re likely to pay your rent on time.
Many people who are turned down for apartments after declaring
bankruptcy haven‘t looked at their credit reports or updated them the
way you have (Chapter 1) to make sure the accounts that were
discharged under the bankruptcy are being correctly reported.
Most major apartment complexes have strict rules and won‘t rent an
apartment to anyone who has more than two bad accounts on their
credit report. Once your bankruptcy is discharged, you can start to
counteract the negative account information in three ways:
1. Updating your accounts to show they were discharged under your
bankruptcy;
2. Getting a good credit card that reports your payments to at least
three of the major credit bureaus; and
3. Getting a letter from your current landlord showing that you are
current on your payments.
TALKING WITH THE LANDLORD
When you go in person to apply for an apartment, come equipped
with your own personal credit references. Bring a copy of your credit
report, a recent paystub, reference letters from your employer, your
current landlord, etc., and a one or two paragraph explanation of why
you declared bankruptcy and what steps you‘ve taken since then to
start rebuilding your credit. Don‘t make excuses, just state the simple
facts.
Landlords are looking for reliable tenants who will pay their rent on
time and will respect their property. Offer to pay an extra month‘s
security deposit as a good faith gesture. This will often help you win
your case.
1. Search out private landlords whenever possible.
2. Update your credit reports before looking for a new place to rent.
3. Get a secured credit card for a positive credit reference.
4. Get references from your current landlord.
5. Offer to pay an extra month‘s security deposit.
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CHAPTER 9
How to Travel Without Credit
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Believe it or not, traveling without credit is actually very easy.
Hotels, motels and car rental agencies all offer ―creditless‖ options.
Most hotels and airlines will also accept debit cards, but more and
more rental car agencies won‘t accept debit cards. The key to traveling
without credit, in most cases, is to plan ahead. Make your reservations
10-30 days before you travel and you‘re guaranteed to be able to travel
without a credit card.
Even most prepaid credit cards (which I‘ve already mentioned are
huge financial drains, with high fees), can‘t be used to reserve a rental
car, with one exception. The Evolution card offered through
MetaBank doesn‘t show that it is a debit card on the card itself, so you
can usually use it to reserve a rental car. Luckily, the strategies in this
chapter will provide you with a variety of ―creditless‖ options so you
don‘t have to resort to a prepaid card.
In addition, as I mentioned in Chapter 5, Paypal offers a PayPal
Debit MasterCard® which is treated like a regular credit card when
you reserve a rental car, which gives this debit card a genuine edge
over your regular bank debit card, even though the money accessed by
this debit card could very well be coming out of the exact same
account!
HOW TO RESERVE A HOTEL ROOM WITHOUT A CREDIT CARD
Nowadays, most hotels and motels expect you to guarantee your
reservations with a credit or debit card, but most hotels also have
policies regarding ―creditless‖ travel that let you get around this
requirement. In general, you prepay for your entire stay or simply
prepay your deposit (usually one night‘s cost).
The best part of prepaying is that you can then travel without
carrying a lot of cash. If you don‘t prepay, I strongly recommend
picking up Travelers Cheques at your bank or local AAA office; I
don‘t want a lost or stolen wallet to ruin your trip.
To find out a particular chain‘s policy, call the hotel‘s toll-free 800
number. (You can get this number from directory assistance —
800/555-1212). Ask about the hotel‘s ―creditless‖ policy. Some hotels
have company-wide policies; others decide their policies hotel-byhotel. Here are the policies at the major chains:
Best Western (800/528-1238) Best Western has a Centralized
Prepayment Program that lets you prepay a cash deposit for one
night‘s stay, at any Best Western location, at least 14 days before your
intended stay. When you arrive at the Best Western where you are
planning to stay, you then pay any taxes owed for that night‘s stay.
Depending on the individual hotel, you can then pay for the rest of
your stay with a personal check or company check. Call the hotel
you‘re planning on staying at for their policy.
Choice Hotels International (800/221-2222) These hotels
include: Choice Hotels, Quality Inn, Comfort Inn, Sleep Inn, Rodeway
Inn, Econolodge and Friendship Inn. At Choice, individual hotels
make their own policies regarding ―creditless‖ travel. If you‘re using a
money order, you can pay your room deposit as late as the day before
you arrive. If you‘re paying with a personal check, you need to pay 10
days before you arrive. You can go to any hotel in the chain to pay the
deposit for your first night‘s stay. The hotel will even give you a
voucher that you can take with you if you‘ll be checking in late.
Hilton (800/445-8667) You can reserve a room at Hilton,
Hampton Inn or any of their affiliate hotel chains, and use a company
or personal check to pay for your first night‘s deposit. Your check
must be received within seven days after you make your reservation.
At some locations you can also arrange to prepay your entire stay. Call
the location where you‘ll be staying and ask the hotel‘s credit manager
for their specific policy.
Holiday Inn (800/465-4329) You can pay a deposit for your first
night‘s stay as long as your payment is received at least two days
before you arrive. You can pay with a money order or a company
check. If you‘re traveling on business, you can also guarantee your
room with your company‘s Holiday Inn corporate account number.
Call for more information on Holiday Inn‘s policies.
Hyatt (800/233-1234) At some Hyatt hotels, you can guarantee
your room by paying a deposit for the first night. You can pay your
deposit with either a company check or a personal check. Or if you
stay at a Hyatt at least once a year, you can join Hyatt‘s Gold Passport
program and guarantee your reservations without a credit card OR a
deposit! To enroll in the program, call 800/544-9288.
Marriott (800/228-9290) You can negotiate ―creditless‖ stays at
individual Marriott hotels. You‘ll need to pay a room deposit, either
for the first night‘s stay or your entire stay. How much you‘ll need to
deposit will depend on when and where you‘ll be traveling. You‘ll
need to pay with a money order or a company check, however.
Marriott doesn‘t accept personal checks. Make your Marriott
reservation 30 days before you‘re scheduled to arrive and make sure
your deposit is made within seven days after you make your
reservation. Otherwise, the hotel may reassign your room. Some
Marriotts will make late arrival reservations without a deposit. When
you travel on business, you can completely bypass the need for a
deposit by guaranteeing your room with a corporate credit card and
then paying cash for your room on arrival.
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Motel 6 (800/466-8356) Motel 6 offers the best options for
prepaying. You can prepay with cash at the Motel 6 closest to you —
no matter what Motel 6 location you will be staying at. Or you can
send a personal check to the motel location you‘ll actually be visiting.
Just make sure your check arrives at least 14 days before you do.
When you check in, you must pay any balance with cash or a money
order.
Other Hotel and Motel Chains Call the major chain you frequent
most and ask about their ―creditless‖ policy. Chances are you‘ll
discover that you can easily travel without a credit card. Now, let‘s see
how you can get a rental car without a credit card.
HOW TO RENT A CAR WITHOUT A CREDIT CARD
A few rental car companies will let you use a debit card (Budget and
some Value locations), but most won‘t accept debit cards. Almost
every rental car company, however, has a policy that will let you rent a
car without a credit card. One rental car company is much more
consumer-friendly than the rest and that‘s Alamo.
Alamo (800/327-9633) Alamo is my number one choice for car
rentals. Alamo was a very young company when I declared bankruptcy
and at that time they were building their business by catering to
―creditless‖ travelers and ―under-25‖ travelers who have had a hard
time renting cars.
Hands down Alamo was — and still is — the BEST rental company
for ―creditless‖ travel. When you travel without credit at Alamo, you
don‘t have to fill out any application form and you don‘t have to make
arrangements months ahead of time. To pay cash with Alamo, you
need to have an airline ticket with the same destination as an Alamo
office location, and you must make your arrangements at least 24
hours ahead of time. When you pick up your car, you‘ll need to have a
copy of your recent phone bill and a copy of your most recent
paycheck stub (or your tax identification number if you‘re selfemployed). You‘ll pay a deposit of $50 per day (or $200 for a week), in
addition to your estimated rental fee. That‘s all there is to it!
The Other Rental Car Companies Most rental companies also
require that you be at least 25 years old; have a telephone number
listed in your name (or a spouse‘s name); or be able to provide a
recent phone bill proving that your number is unlisted; and have been
employed at your current job for at least one year. The big kicker is
that you must have a clean credit report, showing that your
bankruptcy has been discharged and your accounts are up to-date.
In the past, many people have used debit cards, which take money
directly out of their checking accounts, to reserve and pay for rental
cars. But most rental car companies won‘t take debit cards any more.
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Luckily, there is a way to still get that rental car, even without a debit
or credit card.
To rent a car using cash, you‘ll need to fill out an application. The
rental company will check your credit, financial, personal and
employment references, so you‘ll need to have these names, addresses
and daytime phone numbers and a copy of your most recent phone
bill and pay stub with you so the rental car company can easily verify
your employment and phone number.
Expect to pay a processing fee of up to $50, plus your estimated
rental cost, plus an extra deposit of $100-$500. The deposit is a safety
net that covers your unexpected extras: over-the limit mileage,
gasoline or additional days you keep your car. You‘ll receive the
unused portion of your deposit back either the day you turn in your
car or within three weeks, depending on the company.
Unfortunately, no rental company accepts cash prepayments at all
its locations. Occasionally, you‘ll even run into credit happy locations,
like Avis in Los Angeles, that will run another credit check on you,
even if you already cash-qualified with the company.
Start making your ―creditless‖ car rental plans early on; 90 days
before you want to travel if you can, just to be safe. Sometimes the
approval process takes that long (sometimes it only takes a few days),
so it‘s better to be safe than sorry! Call the phone numbers listed
below to find out!
Avis (800/331-1212) If you‘ve never cash-qualified with Avis
before, start planning 90 days before your trip. The $15 application
process takes four to six weeks, but you should allow Avis an extra
three weeks to mail you your application. Once you get your ―Cash
Prepayment Identification Card,‖ you‘re good to go. When you‘re
ready to rent from Avis, you‘ll deposit $300 when you pick up your
rental car. If your rental is going to cost more than $300, you‘ll pay an
additional 40% of the total cost.
Your rental fee will come out of this deposit. Or if you end up
owing more, you‘ll pay the balance when you return. If you‘ll be
traveling for business, your company can set up a corporate account
with Avis. This way the rental bill goes directly to your employer and
you bypass their prepayment process. Check with your company‘s
payroll officer to see if your employer already has a corporate account.
In addition, Avis offers a great perk if you like to use a travel agent.
You can completely bypass their application process if you set up a
travel package through your travel agent. This way you pay for the
rental car, hotel and airfare in advance by simply writing a check to
your travel agent. Your travel agent will then give you vouchers for
your rental car and hotel. When you arrive at the counter, you give
them the voucher and away you go.
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Budget Rent A Car (800/527-0700) You may be one of the lucky
few travelers who are going somewhere Budget accepts cash. Call to
check with a customer service representative before you travel.
Dollar Rent-A-Car (800/327-7607) Some Dollar locations accept
cash; some don‘t. Their regulations, however, vary from city to city.
Call to see if you‘ll be traveling to a location that accepts cash.
Enterprise (800/261-7331) Some Enterprise locations accept cash;
others don‘t. Those that do require a copy of your license, proof of
insurance and a copy of a recent utility bill showing your address. You
will also need to pay a deposit; the amount varies depending on the
amount of your rental. Some Enterprise locations also accept debit
cards, so be sure to ask.
Hertz (800/654-3131) If you prefer to rent from a big agency, I‘d
recommend Hertz. You can rent a Hertz car through your travel agent
without jumping through all the application hoops. You pay the
estimated rental charges, plus a $100-$250 deposit. Your travel agent
then pays Hertz with a Miscellaneous Charge Order (MCO), which
acts like a check. If your travel agent isn‘t familiar with an MCO, ask
them to call Hertz at 800/331-2456, ext. 7.
If you don‘t use a travel agent, you‘ll need to get a ―Cash Deposit
Identification Card‖ which shows you‘re pre-approved to pay cash.
You‘ll pay a $15 one-time, non-refundable application fee. Once
you‘re approved, you get your card, which you can use at any Hertz
location to pay cash for any size car at any time. When you rent your
car, you pay a cash advance equal to the estimated rental charges, plus
an additional 50% deposit (or at least $100). When you return your
car, you‘ll get your deposit back, minus taxes and any additional
charges for extra days, mileage or gasoline. Any balance due can be
paid with cash, a money order, or a personal or corporate check.
National Car Rental (800/227-7368) You can pick up a cash
qualification form at any National office, or you can request one over
the telephone. After completing the form, mail it to the rental office at
your destination. They must receive the form at least two days before
you need your car. You‘ll pay a non-refundable $50 processing fee,
which will count toward your deposit if you‘re accepted. Having a
department store credit card or gasoline credit card will help you, so
apply for your gas card using the techniques in Chapter 5. With
National, you‘ll have to pay a minimum deposit of $250, or 150% of
your rental cost (for example, a $500 rental would require a $750
deposit). You‘ll receive a refund for the unused portion of your
deposit 7-10 days after you return your car.
Thrifty (800/367-2277) Some Thrifty locations accept cash
prepayment. Call and ask if the Thrifty at your destination accepts
cash. If it does, you can then call the location directly to apply.
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HOW TO BUY PLANE TICKETS WITHOUT A CREDIT CARD
You can order most plane tickets with debit cards. For years now,
USAirways (800/428-4322) has accepted payment over the phone
using an electronic check transfer. I look for many of the other airlines
to follow suit, offering electronic check payments over the phone, and
the Internet. Some major Internet travel sites already offer this option.
Ask about electronic check transfers when you call to get information
about upcoming flights. Have your checkbook handy when you make
your reservation. You‘ll need to provide the numbers across the
bottom of the check and the name of the bank the check is drawn on.
Void that check, tear it up, and record the cost of your airfare in your
check register. The airline will then send you a confirmation notice in
the mail showing that they took the money out of your checking
account. You‘ll get your tickets in the mail, or you can use ―electronic
ticketing‖ and pick them up the day you fly.
Another quick and easy way to pay by cash is to reserve your tickets
through a local travel agent. There‘s no cost to you and you can stop
by the agent‘s office and pay with your debit card, or with cash or a
check in most cases. Or you can make your reservations directly with
the airline and have the travel agent write up the ticket for you. You
usually must have the ticket written and paid for within 24 hours of
making the reservation. So, what are you waiting for? Grab your
suitcase and start packing. Now you can travel anywhere you want,
without worrying about needing a credit card. Bon Voyage!
1. Decide what hotel you want to stay at and follow their instructions
for ―creditless‖ travel.
2. Decide what rental car company you want to use and follow their
instructions for ―creditless‖ travel.
3. Decide which airline you want to fly and see if they offer electronic
check transfers, or book your plane tickets through a travel agent.
4. Get a Paypal debit card which is secured by the amount in your
Paypal account, and with backup funding from any bank account you
select.
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CHAPTER 10
How to Buy a Home After Bankruptcy
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Your next big financial move should be to buy a house if you don‘t
already have one. Your home is the one major asset that generally
appreciates or gains value over the years rather than depreciates or
loses value over the years.
Once your credit reports are updated, and you‘ve got a credit card
that‘s being reported to your credit bureaus (double check to make
sure!), then you can expect to be eligible for a decent interest rate on a
home mortgage within two years of your bankruptcy discharge date.
You can buy a home earlier than that, but it will usually cost you more
in the long run, unless you‘ve taken major steps to change your use of
and attitude toward your finances.
In general, if you‘re repaying your debts through a Chapter 13
bankruptcy, your trustee won‘t let you buy a home until you‘ve
finished your repayment plan. But there are exceptions. If you
currently have a home your trustee may allow you to sell your current
home, pay some of the equity toward your debts and use the
remaining equity as the down payment on a new home, which may or
may not be included in your repayment plan. Once you‘re ready to
buy a home, there are two steps for you to take.
1. Find out exactly what your current FICO scores are. This three digit
number is widely advertised as the one thing that determines whether
you are creditworthy or not. Creditors would like you to believe that
―you are your FICO score.‖ The truth is, there are ways to buy a home
regardless of your FICO score (including rent-to-own and owner-held
mortgages). However, it will be easier to buy any house if you have
taken certain steps to improve your FICO score first. There are many
factors that can raise or lower your FICO score, from month to
month. Potential mortgage lenders realize that each credit bureau uses
a different scoring method and each has a different scoring range.
Your creditworthiness will depend on the credit bureau that creditor
uses. To level the playing field, some creditors add up your three
scores, divide the total by three and use the resulting average FICO
score to determine your creditworthiness. Others simply select the
middle score as your FICO score.
In 2006, the three credit bureaus came together to find a way to
create a uniform scoring method that would be easily understood. The
new VantageScore is the result. Now your credit score is graded A-F.
More than two-thirds of all consumers get a passing grade of C or
higher, under the VantageScore system. This should make things
easier for consumers to get credit, even if you have limited credit
history. Your VantageScore number ranges from 501-990. A score of
600 or lower is an F. From 601-700 is a D. From 701-800 is a C.
Anything above that is a B (801-900) or A (901-990). The national
average VantageScore is 736.
The good news is, since all three VantageScores will be the same,
you only need to order one copy! Experian has volunteered to provide
this service to consumers. For $6, you can order your report on-line or
via mail. You can order online at www.vantagescore.experian.com. I
recommend mailing your request, via certified mail, return receipt
requested, using the following letter:
(Date)
Experian
PO Box 9600
Allen, TX 75013
Dear Sir/Madam:
I am writing to request a copy of my VantageScore report. I
understand that the fee for this report is $6. I have enclosed a [check
or money order] in this amount.
IV if applicable)
zip code
• Date of Birth
I am also enclosing a copy of a photo identification card [driver’s
license, state ID card, military ID card] containing my name and
current mailing address. I am also enclosing a copy of a recent [utility
bill, bank or insurance statement] containing my name and current
address.
Sincerely,
[Your name]
Under the VantageScore system, a six month current history of ontime payments will have greater weight with a new lender than years of
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old late payments on debts that have been paid off in full, as long as
you‘re not ―maxing out‖ your available credit.
FICO scores are based on five criteria:
 Have you consistently paid your accounts in a timely
manner? (35%)
 How much do you owe on your accounts? (30%)
 What type of credit do you have – revolving, mortgage,
unsecured, etc.? (10%)
 How long you have had your credit history? (15%)
 How many new credit accounts have you opened? (10%)
Vantage credit scores are determined by six factors:
 Have you consistently paid your accounts in a timely
manner? (32%)
 What percentage of the total credit available to you are you
currently using? (23%)
 What is the total amount of all your account balances,
current and delinquent? (15%)
 How long have you had credit and do you have a healthy mix
of credit types? (13%)
 How many recent credit inquiries do you have and how
many credit accounts have you recently opened? (10%)
 What is the total amount of credit that you currently have
access to? (7%)
Some credit repair experts will encourage you to get your FICO
scores directly from myFICOscore.com/10 or some other such
website. They make money from being an affiliate of
myFICOscore.com (as do I). But they‘ll do their best to convince you
that going to their recommended website page is the best way to get
your FICO scores. The truth is, you can get each individual FICO
score from each of the three individual credit bureaus when you order
your individual credit reports and the cost is less than $40.
Knowing what negative credit information is listed in your credit
reports (as we talked about in Chapter 1) will help you determine what
steps and strategies you can take to improve your personal credit
worthiness in the eyes of creditors. If you have been following the
advice in Chapter 1 during the past year, you‘ll have developed a firm
foundation for your credit score. If you haven‘t, don‘t worry. You can
start taking steps today to improve your score so you‘ll look more
attractive to mortgage lenders.
2. Determine how much house you can afford. Including principal, interest,
taxes and insurance, it‘s a pretty safe estimate that you can afford to
pay a mortgage equal to 20% of your pretax income. When you talk to
lenders about pre-approval, be up-front about your bankruptcy — and
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be equally as up-front about the great job you‘ve done rebuilding your
credit in a short time. It will be very tempting to buy the biggest house
you can afford, using the best mortgage tricks available, like nomoney-down, adjustable rate, interest-only balloon payment
mortgages.
Yes, you‘ll get a lower monthly mortgage payment. But these types
of mortgages are a lot like investing in options. You‘re betting that the
value of your home will go up enough to let you use the ―economic
equity‖ to pay off the balloon loan or give you enough equity to use as
your down payment on a conventional mortgage when the balloon
payment is due. ―Economic equity‖ is what I call the equity that builds
because the market value has gone up. When the market freezes and
housing prices plummet, as they did in central Florida and elsewhere
in 2006, you may find that you actually have no or negative equity in
your home when your balloon payment is due. Ouch! Play it safe, buy
a smaller, lower value home and build solid equity by paying off the
mortgage as quickly as possible.
If you are a two-income household and you really want to maximize
your spending power, buy a house that is based on what you can
afford with just the higher salary. Then put the entire second salary
into the bank for one year. Once you‘ve got that amount set aside,
start using the entire second salary to pay off your original mortgage.
Think about it. If the second salary in your home is $25,000, and you
put $25,000 toward the principal of a $100,000 mortgage, how quickly
will your entire 30-year mortgage be paid off? That‘s right! In less than
four years you will own your home free and clear. Continue to bank
that second income and use cash to buy your next home.
Imagine going from bankrupt to owning your home outright and
buying your next home for cash in 5-10 years. Not only is it possible,
it becomes highly-probable when you start looking at how you can put
your money to work for you instead of for your creditors. And, if
you‘re settled in and love your current, fully-paid-for home, you can
always use the money in the bank to buy a smaller rental property (just
be sure to keep 20%-50% equity in your investment properties to
protect against market swings). Enough daydreaming about where
you‘ll be financially in ten years. Let‘s get back to purchasing your
home now, shall we?
Like I said, 20% of your pretax income is a good percentage to be
putting toward a mortgage payment. Lenders will pre-approve you for
up to 28% of your pretax income, but you may feel like you‘re
stretching to make those payments. For example, with $50,000 in
annual pretax income, your lender will likely approve you for a
monthly mortgage payment of $1,150. That‘s 28% of your monthly
income, and it would allow you to qualify for a $150,000 loan. At 20%
of your monthly income, however, your mortgage payment would be
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a more manageable $833 – which would buy you a $120,000 home.
Sure, you‘ll be buying a smaller house for that amount. That‘s a small
trade off for creating a cushion against unforeseen expenses, because
you‘ll be paying less each month for your housing. Once you know
how much house your lender thinks you can afford, shop for houses
that sell for at least $25,000 less than that amount. This will give you a
cushion against getting over-extended if your finances change
suddenly.
Back when I bought my first home after bankruptcy my lender told
me I could qualify for up to $150,000. So I started shopping for
houses in the $125,000 range. In general, you‘ll want to get a 30-year
conventional loan with the lowest possible payments – and with as
little money up front as possible. That‘s why I strongly recommend
getting an FHA or VA loan, especially if you‘re a first time buyer or
haven‘t owned a home in at least three years. With these loans you
make a lower down payment – 3% of the home‘s selling price, or less.
The FHA has also been pretty forgiving in granting mortgages to folks
with two-year old bankruptcies. The only drawback is that you
generally can only get an FHA loan if the home‘s value is less than
$219,849, unless you‘re buying in Alaska, Guam, Hawaii or the Virgin
Islands, where the cap is $329,774 for a single family home.
If you have had negative credit information added to your credit
reports after your bankruptcy, don‘t despair. You can still become a
home-owner, but you‘ll have to be more creative about how you get
your financing. If you can pay a down payment of at least 30% of the
home‘s value, you would improve your chances of getting accepted
for a mortgage.
When you find a house you like and you‘re ready to buy, ask the
seller for the name of the company that holds the current mortgage on
the house. Then tell the mortgage company: “I’m planning on buying the
house at _________ that is owned by _________. I understand that your
company currently holds the mortgage on this house and I wanted to give you the
opportunity to keep the mortgage. What’s the best rate you offer on a 30-year
fixed-rate FHA loan?”
Be sure to ask how many points are included in that rate package.
Every point tacks an extra 1/8 of a percent onto your loan‘s interest
rate. When you make an offer to the seller, you can often split the cost
of the points, as well as other costly items like transfer taxes (more
about this in a minute). Ask your banker and the seller‘s mortgage
holder for an estimate of closing costs, so you can see how much
money you‘ll need at the closing. Then get a good attorney to help you
draw up a contract that keeps your closing costs low.
Most real estate agents will encourage you to fill out their contract
on the spot and offer it to the seller. Don‘t do it. The only way to
protect your interests and make sure that you get the best deal
167
possible is if you have your attorney draw up the contract, or have a
buyer‘s broker help you draw up a contract and then have your lawyer
review it before you sign anything.
Beware of lenders who encourage you to go for a longer term on
your mortgage, as I mentioned in the introduction to this book. Let‘s
compare your costs and your interest payments when you borrow
$100,000 using a 30-year mortgage at an interest rate of 6.25% versus
a 40-year mortgage with an interest rate of 6.5%. (Lenders generally
add an extra quarter percent to the interest rate for the ―benefit‖ of
extending your mortgage to 40 years versus the conventional 30
years.)
At first, the 40-year mortgage seems to have a slight advantage,
because it would save you $30.26 each month (for every $100,000
you‘re borrowing). Bear with me a minute while I throw some
numbers at you so you can see how creditors appeal to your desire to
save $30 a month so they can get you to spend an extra $60,000.
Let‘s start by looking at how much you will have saved on that 40year loan after one year. Saving $30.26 a month on a year‘s worth of
mortgage payments saves you $363.12 during the year. You will pay
$6,484 in interest the first year of your 40-year loan, compared to
$6,217 in interest the first year of your 30-year mortgage. Having a 40year loan actually costs you an additional $267 in interest the first year.
So you save $363.12 in payments your first year but you spend an
extra $267 in interest the first year of the 40-year loan, making your
first year savings just $96.12.
Now, let‘s see what your savings will be for each loan in the long
run. By the time you pay off the house, you‘ll have paid a total of
$281,019, versus $221,658 for the 30-year mortgage. You pay nearly
$60,000 ($59,361) in extra interest over the life of the 40-year loan.
What if you only stay in your house five years? A 30-year loan is still
the winner, hands down. You will have paid off an additional $3,568
of the loan amount (giving you $3,568 more equity). And you will
have spent $1,753 less on interest with a 30-year loan than you would
with a 40-year loan. So at the end of five years, a 40-year loan would
have cost you $5,321 more than a 30 year loan. The fact is the only one
who wins with a 40-year mortgage after the first year (or a 5- or 6-year
car loan) is the creditor!
STRATEGIES TO HELP REDUCE CLOSING COSTS
Closing costs can be very expensive — usually from 3%-6% of the
amount you‘re borrowing. Here are five possible ways you can reduce
your closing costs. I used all five of these techniques and actually
wound up getting a check for $1,018 from the closing attorney. (The
first time he‘d ever had that happen!)
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1. Roll as many of your closing costs into your mortgage as you can. Some
items must be paid separately at the closing, but others can be rolled
into your mortgage. Ask your mortgage officer for a list of charges
that can be included in your mortgage.
2. Split closing costs with the seller whenever possible. Sellers will commonly
pay half the points and transfer taxes, but only if you ask.
3. Roll closing costs into the price of the home. If your loan will be for less
than the appraised value of the home, ask the seller to let you bump
up the price of the house in the contract so you can use the extra
money to pay part of your closing costs. Make sure your contract says
“Seller agrees to pay an additional $X,XXX to buyer, to be used for closing
costs.”
4. Close at the very end of the month. One expense you will have to pay
out-of your-pocket is your property taxes. These are calculated daily.
The closer you are to the end of a month, the fewer days‘ worth of
taxes you will you need to pay. That‘s why it makes sense to close on
your new home during the last week of the month.
5. Have the seller pay you at closing for any needed repairs. The house I
bought after my bankruptcy needed a lot of work. When I had the
house inspected, I made a list of 10 repairs that needed to be made.
Then I gave the seller two options. Either make the repairs or pay me
the cost of the repairs at the time of closing. The seller made some of
the repairs and paid me for the others. The total cost of the repairs
that still needed to be made was about $4,000. My closing costs were
around $3,000; which means I had $1,000 due me. That‘s where my
$1,018 check came from.
The U.S. Department of Housing and Urban Development (HUD)
has a great, FREE booklet called Buying Your Home: Settlement Costs and
Information, 2002 Edition, which I highly recommend. You can
download a free copy at the HUD website
(www.hud.gov/library/index.cfm). If you don‘t have computer access,
call 202/708-1112 and ask to have a free copy of the booklet mailed
to you.
WHERE TO GET YOUR DOWN PAYMENT
Most lenders let you borrow 80%-90% of a home‘s value. This
means you‘ll have to come up with a down payment of 10%-20% of
the house‘s price, in addition to your closing costs. Or you could get
an FHA mortgage, where your down payment will be between 3%-5%
of your loan amount. With an FHA loan, you can even roll most
closing costs into your loan — so the down payment may be your
only expense.
The only money I paid out was $3,000, which I used as my down
payment for a home with an FHA mortgage. I had saved this money
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in my company‘s 401(k) plan. By law, you can withdraw money from a
401(k) account for the down payment on your primary residence —
the house you‘re going to live in.
Withdraw the money, instead of borrowing it, for two reasons.
First, if you borrow the money you can only tap 50% of your
account‘s value, versus 80% for withdrawing. Second, any money you
borrow has to be paid back — and if you stop working for that
employer, you‘ll need to pay all the money back right away. In this day
and age, when people are getting laid off left and right, having to live
on your savings and pay back a retirement plan loan is an extra stress
you don‘t need! Be sure to have your plan administrator take out the
unpaid taxes you didn‘t pay when you put the money into your taxdeferred account so you won‘t be hit with an unexpected tax liability.
DON’T HAVE MONEY FOR A DOWN PAYMENT?
Every state (and the District of Columbia) has a department that is
known as a housing authority. Housing authorities often have special
programs for providing down payment assistance to people who are
either first-time homebuyers or who have gone bankrupt. The housing
authority may offer you a grant or provide a bridge loan or some other
type of down payment assistance to help you make up the difference
between the amount you have available for a down payment and what
the lender wants as a down payment.
In this chapter, you‘ll find detailed information about each state‘s
housing authority. Contact yours to find out if you‘re eligible and what
the process is, as soon as possible, so you can begin to take steps to
qualify. You will find a national directory online at:
http://www.sdhda.org/Main/partners.htm.
Every state has a number of agencies and programs in individual
regions or counties of the state. Rather than list them all here, I‘m
listing the name of the main housing authority and that organization‘s
main website address. You can check your local phone book listings
for the local phone number of the agency nearest you. The
requirements to receive a grant or loan assistance vary. However, you
can expect that you‘ll be required to meet these general requirements:
 Be a first-time homebuyer or have not owned a home in the
last three years.
 Have a signed purchase agreement for your home before you
actually apply for the mortgage.
 Have copies of your federal income tax returns from the last
three years.
 Have decent (not perfect) credit. Your bankruptcy should
have been discharged for at least a year and there should be
no new negative credit information on your file.
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 Be ready to live in the home within 60 days of closing on
your mortgage (property cannot be rented out).
 Have an income that is at or below prescribed income limits
for that state.
In general, you will probably qualify if your income is no more than
80 percent of the area median income for a family your size. Be sure
to check with your local housing authority to see what the particular
requirements are for your state‘s programs.
Most programs require you to complete a homebuyer education
course before you purchase your home. I recommend taking this
course as your very first step even if it‘s not mandatory, and even if
you‘ve owned a home before. At the course, you will learn what
documents a potential lender will want, and which lenders in your area
work with the housing authority‘s programs. After completing the
course, your next step will be to contact the lender so they can analyze
your monthly income, your credit history and your debt level. This will
help them determine how large of a mortgage you are likely to receive.
With this information, you can then start targeting homes within your
price range, which will save you a great deal of time and frustration. I
don‘t want you finding the house of your dreams, only to find out that
you just missed out on being able to finance it through the program.
You can use a real estate agent or go it alone when you‘re looking
for your home. If you‘re not familiar with the process, the real estate
commission is well worth what it will cost you to have someone on
your side helping negotiate the sales price, explain the terms of the
contract and guide you through the home inspection process.
Whenever possible, look for a real estate agent who is listed as a
buyer‘s broker. These agents have your best interests at heart.
Once you have a signed contract with the seller, you will then meet
with your lender to fill out a mortgage application. This is when you‘ll
get an estimate of how much money you will need for your down
payment and your closing costs. You can expect that it will take
approximately 30 days to have your loan processed, as long as you
respond quickly to any requests your lender makes for additional
information. Your lender may issue a conditional approval so you can
set a closing date, even though your lender may still need additional
information from you.
The closing will take place at the title company‘s office (often a
lawyer‘s office) and you will have a lot of documents to sign. I
encourage you to take time to read them thoroughly. If you‘re a slow
reader, ask for a copy of the documents up front so you can read them
a few days before the closing and write down any questions you have.
Because housing authorities go through the closing process so
often, you can usually expect your closing to go very smoothly.
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STATE-BY-STATE LISTINGS OF HOUSING AUTHORITIES
Remember: These programs do not directly provide assistance.
Instead, they provide a list of approved lenders who you can contact
to determine if you are eligible, based on your state‘s criteria. The
lender will explain to you the maximum loan amount and the
maximum amount that your home can cost (the sales price limit) in
the area where you are purchasing a home. The lender can also tell
you the income limit for the area where you are purchasing. Once the
lender has gathered all required materials from you and qualified you
for the loan program, the lender will work with the housing agency to
secure your loan through the program.
Alabama Housing Finance Authority (www.ahfa.com/FirstStep;
PO Box 230909, Montgomery 36123-0909). AHFA offers special
interest rates, down payment and closing cost assistance. If your
household income is 80% or less of the state median income, your
down payment loan is interest free. If you are not a first time buyer or
you have owned a home within the past three years, you may also be
eligible in certain areas. Your local mortgage lender can tell you where
these target areas are located. For a list of local lenders, call AHFA at
800/325-2432 or visit www.ahfa.com/FirstStepLenders. Income
limits range from approximately $52,000 to $77,000.
Alaska Housing Finance Corporation, HomeChoice Program
(www.ahfc.state.ak.us). AHFC provides statewide financing for
homebuyers with special reduced-interest loan programs and reduced
down payment programs (as little as 5%) for low- and moderateincome borrowers through local mortgage lenders. You do not need
to be a first-time homebuyer and may have owned a home in the past
three years. After completing the 8-hour AHFC HomeChoice
program, AHFC will waive up to $250 of your commitment fee. You
must be current on any child support payments and only properties in
Planned Unit Developments are eligible for financing. The
Homeownership Opportunity Program (HOP) provides down
payment and closing cost assistance through a variety of non-profit
organizations.
Arizona Department of Housing (www.housingaz.com).
Through the Arizona Homebuyer Solutions, ADH provides loans to
low-, moderate- and middle-income residents, including down
payment assistance, through local mortgage lenders and a variety of
non-profit agencies. The program includes lower interest rates and
federal income tax credits.
Arkansas Development Finance Authority
(www.state.ar.us/adfa) ADFA‘s HomeToOwn program provides
funding through the American Dream Downpayment Initiative
(ADDI). Up to 6% of the purchase price may be provided in the form
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of a forgivable loan for down payment and closing costs up to
$10,000. The loan is forgiven in equal annual installments over a
period of five years as long as you continue to own, occupy, maintain,
insure and pay all taxes on the home. If the home you‘re buying has
lead-based paint hazards, additional funds may be provided to
eliminate the lead hazard.
California Housing Finance Agency (www.calhfa.ca.gov;
Homeownership Programs, 1121 L Street, 7th Floor, Sacramento, CA
95814; 916/324-8088). The CalHFA Homeownership Program offers
below market interest rates and a variety of down payment assistance
programs to eligible homebuyers through a variety of approved
lenders. If you‘re buying a property in a federally designated targeted
area, you may be eligible regardless of when you last owned a home.
Colorado Housing Finance Authority (www.colohfa.org).
Through the Colorado State Housing Assistance Corporation
(www.coloradohousing.org), CHFA provides homebuyers with
assistance including non-repayable grants and gifts to cover down
payments and closing costs. Your first step in this program is to attend
and complete the free CHFA homebuyer education course. The
CHFA website has upcoming locations, dates and times.
Connecticut Housing Finance Authority (www.chfa.org). CHFA
has more than 80 participating lenders statewide. In targeted areas you
may be eligible for assistance regardless of when you‘ve owned a
home previously and even if your income is over the program‘s
income limits, which vary from town to town. You may be able to get
down payment assistance and borrow funds for closing costs through
the state‘s Downpayment Assistance Program (DAP). These lowinterest loans (currently 1%) are secured by a second mortgage on
your home. CHFA also offers mortgage assistance to teachers and
military personnel.
Delaware State Housing Authority (www2.state.de.us/dsha).
DSHA helps residents locate low-interest loans to buy homes. The
state also offers an American Dream Down Payment Act, which
provides grants for down payment assistance for low-to-mid income
families. Additional programs exist for police officers, firefighters,
sanitation, maintenance workers and teachers employed by the state.
District of Columbia Department of Housing and Community
Development (www.dhcd.dc.gov; 202/442-7200). The Home
Purchase Assistance Program (HPAP) helps low-to-moderate income
residents purchase homes. Financial assistance for down payments
and closing costs are also available for residents. Non-residents who
have worked in the District of Columbia are also eligible if they‘ve
lived in the District for one year before applying. Priority is given to
applications from District residents. Closing costs in the amount of
4% of the purchase price (up to $7,000) is provided. To qualify, you
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must contribute $500 or 50% of any liquid assets greater than $3,000.
If you qualify as a very low- or low-income applicant, this contribution
may be capped at $500 total. To encourage homebuyers in the District
of Columbia, mortgage loans are offered interest free and payments
under the HPAP program are deferred for five years. Starting the sixth
year of the loan, you begin paying monthly principal-only payments.
District of Columbia Housing Finance Authority
(www.dchfa.org; Home Resource Center; 202/777-4663;). Through
the Home Resource Center and Mortgage Loan Group, the DCHFA
provides low-interest mortgage loans and closing cost assistance.
Grants equaling 3% of the home‘s purchase price may be offered for
down payment and closing cost assistance. When contacting a
participating lender, be sure to ask for the D.C. Bond Program.
Special assistance is also offered to police officers and teachers.
Florida Housing Finance Corporation (www.floridahousing.org;
227 North Bronough Street, Suite 5000, Tallahassee, FL 32301-1329;
850/488-4197 or 888/447-2977). With the Florida program, your
income can be up to 115% of the area median income. Florida also
offers three down payment and closing cost assistance programs. You
may be eligible for a second mortgage loan or upfront cash assistance
to cover these expenses. Depending on which program you qualify
for, you can receive up to $25,000 worth of assistance. The home
loans offered through the FHFC programs are zero-interest, nonamortizing second mortgage loans. This means you don‘t repay the
amount you receive for the down payment or closing costs unless you
sell the home, refinance your first mortgage, or move out. The first
time homebuyer requirements are being waived in 13 counties due to
hurricanes Wilma and Katrina. These waivers will remain in force until
December 31, 2010. As a result, you may be eligible for assistance
even if your income exceeds the program limits. The purchase price
for homes in these counties can be higher than the program limits.
Call the above number for a First Time Homebuyers Brochure. FHFC
also offers a community loan program for teachers, firefighters, health
care workers, police officers and active and veteran military personnel.
Georgia Department of Community Affairs
(www.dca.state.ga.us; www.dcaloans.com; 60 Executive Park South,
NE, Atlanta, GA 30329; 800/359-4663). GDCA requires you to
contribute a minimum of $500 toward the purchase of your home for
their Dream First Mortgage Loan program. You may also qualify for a
zero-interest, deferred second mortgage of $5,000 to $20,000 to help
pay your down payment and closing costs. Income limits range from
$58,000-$78,000, depending on the number of people in your
household. The purchase price of the home must be below $200,000
($250,000 in the Atlanta metro area).
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Housing and Community Development Corporation of
Hawaii (www.hihomeownership.org; 877/523-9503). Hawaii offers a
great deal of hands on help, beginning with an Orientation Session.
You will be assigned a counselor to help you determine how close you
are to being what they call ―Mortgage Ready.‖ HCDC offers an 8hour education course, and follow-up counseling sessions to help you
overcome any obstacles to you becoming a homeowner. They also
help you determine which assistance programs you may be eligible for.
Then you get pre-qualified for financing before you even apply for
your mortgage. To ensure your success as a homeowner, HCDC also
offers classes and counseling on Basic Maintenance and Repair,
Predatory Lending Practices and Mortgage Delinquency.
Idaho Housing and Finance Association (www.ihfa.org;
800/219-2285). The IDAMortgage program offers a variety of terms
on home mortgage loans, including lower-interest rate 30-year fixed
mortgages and 100% financing, so you don‘t have to come up with a
down payment. IHFA also offers grant money toward closing costs
and down payments, from $1,000 to $10,000. You must be ready to
occupy the property within 14 days after closing and you must have an
acceptable employment history. In 27 counties, you may be eligible for
the program regardless of how recently you have owned a home.
Illinois Housing Development Authority (www.ihda.org;
312/836-5244). IHDA finances mortgages through partner banks for
low- and moderate-income families. They also provide cash grants (up
to $5,000) to help with your down payment and closing costs,
depending on your income. Home repair grants are also available.
Indiana Housing and Community Development Authority
(www.ihcda.in.gov; 800/669-4432). The IHCDA provides a list of
participating lenders, by county. You can get a complete brochure
package by calling the number above. You may have owned a home in
the past three years if you buy a house in a targeted area. IHCDA
offers down payment and closing cost assistance in the form of a
second mortgage equal to 5%-10% of the sales price or appraised
value (no more than $3,500 - $7,000). These zero-interest, no-payment
second mortgages are based on your income. The best thing about
these second mortgages is that if you live in the home for five years
and don‘t refinance your first mortgage, the entire amount of the
second mortgage is forgiven on the fifth anniversary of your closing
date. IHCDA recommends you get started by contacting one of their
recommended lenders to pre-qualify you for a mortgage.
Iowa Finance Authority (www.iowafinanceauthority.gov;
800/432-7230). IFA has programs to help low- and moderate-income
residents become homeowners. Participating lenders can only charge
allowable closing costs. There are no origination fees or discount
points charged with mortgages that are offered through IFA‘s First
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Time Home Buyer Mortgage Loan Program. The First Home Plus
program provides affordable financing plus cash assistance (up to 3%
of the mortgage amount) for down payment, closing costs and even
required repairs, if your income is below $46,000. The My Community
Mortgage program allows you to buy a home with $500 down. Other
loans offered through IFA require a maximum down payment of 5%.
If you buy in a targeted area, you may be eligible under the program
even if you have owned a home in the past three years. Start the
program by applying through a participating lender (the list of lenders
can be found on the IFA website). The lender will fill out all the
necessary forms and submit your loan application.
Kansas Housing Resources Corporation
(www.kshousingcorp.org; 611 S. Kansas Avenue, Suite 300, Topeka,
KS 66603-3803; 785/296-4818). If your income is at or below 80% of
the median income for your area, you may qualify for down payment
assistance from the First Time Homebuyers Program (FTHB). Loans
are 15%-20% of the purchase price, and are awarded on a sliding scale
depending on your income. Your minimum investment will be $500
or 2% of the sales price, whichever is higher. Visit the website for a
list of participating lenders, who will help you complete the required
paperwork and determine what steps you need to take to apply for the
down payment assistance.
Kentucky Housing Corporation (www.kyhousing.org). KHC
offers homeownership education classes and low interest rate home
loans. You may be eligible even if your income is as high as $89,000.
Down payment and closing cost help is also available. You could
qualify for up to $5,000 which is repaid over seven or 10 years, or you
could qualify for up to $10,000 with no repayment required,
depending on your income and family size.
Louisiana Housing Finance Agency (www.lhfa.state.la.us).
LHFA offers several low-rate loan programs for first time
homebuyers. The lower your annual income (up to 115% of the
median income for your area), the lower the interest rate will be. If
your annual income is lower than 80% of the median income you may
also be eligible to receive a gift of a portion of your closing costs. The
amount of the grant varies, depending on how much you are
borrowing. You may be eligible for a grant of up to 4% of the
mortgage amount to assist you with down payment and closings costs
if you qualify for the LHFA‘s MRB Assisted Program Loan. Louisiana
also offers a special American Dream Down Payment Initiative
(ADDI) for single parents. Low-interest rate loans are also available
for teachers, even those who teach at private schools.
Maine State Housing Authority (www.mainehousing.org;
207/626-4600; 800/452-4668; TTY line: 800-452-4603). The Maine
Assist program can help you with your down payment, closing costs
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and even prepaid escrow expenses. If you are eligible, you could
qualify to receive a grant for as much as 3% of your mortgage amount
– up to $4,000 – when you close on your home. The program requires
you to attend a 10-hour HoMEworks homebuyer education course. If
you want to buy a fixer-upper, Maine also offers the Purchase Plus
Improvement program, where improvements to heating, plumbing,
electrical systems, additions and other upgrades – valued up to
$15,000 – may be included in your mortgage.
Maryland Department of Housing and Community
Development (www.dhcd.state.md.us). MDHCD‘s Community
Development Association has a More House 4 Less Mortgage
Program, which works with lenders to offer low-interest loans,
extended mortgages (35- and 40-year), and interest-only loans. If
you‘re building a home in a Priority Funding Area (what other states
call a target area), you may qualify for a CDA mortgage. If you need
assistance coming up with your down payment and/or closing costs,
the Down payment and Settlement Expense Loan Program (DSELP)
can help. You can borrow up to $5,000. There is no interest on the
loan and repayment is deferred until you payoff, refinance or sell your
house. Your contribution toward the down payment and closing costs
must be at least 1% of the amount of your first mortgage. Some
counties require you to take a homebuyer education workshop and
receive a housing counseling certificate before you buy your house.
Massachusetts Department of Housing and Community
Development (www.state.ma.us/dhcd) and MassHousing
(www.masshousing.com). Your bankruptcy must have been
discharged for at least two years before you apply for a MassHousing
mortgage and you must have at least one year‘s worth of good credit
history after your bankruptcy. If you had a foreclosure or did a deedin-lieu-of-foreclosure, you‘ll need to wait five years before applying.
MDHC offers a Soft Second Loan Program to help you cover the
costs of purchasing your home. You may qualify for a low interest
loan, a low down payment (as little as 3% of the purchase price), no
points (which can reduce your closing costs by $3,000-$7,000), and no
mortgage insurance fees, which saves you $35-$70 per month. Some
communities offer additional closing cost assistance, and you may be
able to include repair costs in a Soft Second mortgage. MDHCD is big
on education. In addition to courses to help you purchase your home,
they offer courses to help you keep up with your payments.
Michigan State Housing Development Authority
(www.michigan.gov/mshda). MSHDA offers low-interest rate loans
through participating lenders. Unlike most other housing authority
programs, Michigan does allow your lender to charge a 1% loan
origination fee. This means that for every $100,000 you borrow, you‘ll
be paying an additional $1,000 in closing costs. You must meet the
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income requirements, which are based on the maximum annual gross
household income. Unlike other states that adjust your income based
on the number of people in your family, Michigan requires you to
include the income of all adult members of your household. You may
be eligible to participate in the program even if you‘ve owned a home
in the last three years, if you‘re willing to buy in a targeted area. To
apply through the MSHDA program, you‘ll need to bring your signed
real estate contract with you to a participating lender. If there‘s a
chance that you‘ll need to relocate in the next 10 years, make sure you
consult with a tax professional before you apply, though. You may
have to pay a federal ―recapture tax‖ if you sell your house for a profit
within the first nine years. Down payment assistance may also be
available for low-income borrowers.
Minnesota Housing Finance Agency (www.mhfa.state.mn.us;
800/710-8871; 651/296-8215). MHFA offers the Minnesota Mortgage
Program (MMP) which matches you up with participating lenders who
offer low-interest loans. You‘ll need to have copies of your federal tax
returns for the past three years and you must meet the income limits
and sales price limits for your area. You may also be eligible for up to
$3,000 worth of closing cost and down payment assistance through a
deferred Entry Cost Homeownership Opportunity (ECHO) loan. The
interest rate on ECHO loans is set at 5% and the interest only accrues
for the first 10 years of the loan. You pay the loan back with interest if
you sell, refinance or move, or once your first mortgage is paid off.
Mississippi Home Corporation (www.mshomecorp.com). If you
live in Mississippi, there‘s a long list of documents you will need to
provide when participating in your state‘s Down Payment Assistance
Program as a first time homebuyer. You will find a complete list on
their website. You also have to have less than $4,500 in liquid assets
and meet your county‘s income limits. And you need to do a good job
of rebuilding your credit for at least a year post-bankruptcy. You could
also receive a second mortgage to help with the down payment and
closing costs from a participating lender. If you qualify, MHC will lend
up to 3% of your first mortgage loan amount.
Missouri Housing Development Commission
(www.mhdc.com). MHDC offers a First Place Program through
participating lenders across Missouri. To get started, contact a
participating lender from the list on the website to get ―pre-approval‖
before you start house shopping. This way you‘ll know exactly how
much you can afford to borrow and how much house you can afford
to buy. The program‘s income limits are based on the total amount of
income from all adults in the house. You have to be ready to occupy
the house within 60 days of the closing date. MHDC also offers a
Cash Assistance Payment in the amount of 3% of your mortgage loan.
You can use this money to pay a portion of your down payment,
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closing costs, prepay taxes, insurance premiums and other loan
expenses, including the inspection. Low-income residents may also
qualify for the American Dream Down Payment Initiative, which
offers forgivable loans of up to 6% of the home‘s purchase price. The
first-time buyer requirement may be waived if you‘re a displaced
homemaker or single parent.
Montana Board of Housing (www.housing.mt.gov). The MBOH
offers mortgage loans for first time homeowners and displaced
homemakers, if your income falls within the program‘s income limits.
Participating lenders offer low- interest rate loans, and the MBOH
program offsets some lender fees as well. You may also qualify for a
second mortgage down payment loan, which provides $5,000-$7,500
worth of down payment assistance. In some areas of the state, you
may be able to get a deferred loan for as much as $45,000. To
participate in the program, you must take part in MBOH‘s
Homebuyer education and counseling programs. To find an upcoming
class or to arrange for counseling, contact the Montana
Homeownership Network (MHN) online at www.nwmt.org or by
calling 800/318-0268.
Nebraska Investment Finance Authority (www.nifa.org). NIFA
offers a wide variety of different assistance programs designed to help
you become a homeowner. Lenders participating in the First Home
program offer low-interest rate mortgages for first time homebuyers,
or those who have been displaced due to a divorce, natural disaster or
required job relocation. Income limits are determined by the total
gross income from all sources, for all adults expected to live in the
house. You must occupy the home as your principal residence and you
must have reestablished your credit for at least a year after your
bankruptcy discharge. NIFA mortgage loans can be assumed by
another buyer, as long as they would have been eligible to apply
through the program. The First Home Plus program also reduces
lender fees and the Single Family Homebuyer Assistance program
(HBA) provides down payment and closing cost assistance to eligible
buyers, up to 4.25% of the first mortgage amount. The second
mortgage is deferred and is forgiven if you keep your first mortgage
longer than 11 years. You will need to contribute at least $500 from
your own assets or from a gift. If you‘re interested in purchasing a
fixer-upper, NIFA also offers the First Home Super, which provides
up to $3,000 for repairs that need to be made before closing on the
house. You must attend a homebuyer education class to participate.
For a list of classes and upcoming dates, contact the Nebraska
Housing Developers Association at 888-879-3403.
Nevada Housing Division (www.nvhousing.state.nv.us). NHD‘s
participating lenders offer low-interest mortgages and assistance with
down payment and closing costs, depending on your income and
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assets. Your gross household income must meet the program‘s limits,
and your assets cannot exceed 50% of the purchase price of the home,
unless you are disabled or elderly and your assets are the primary
source of your income. Under the down payment and closing cost
loan program, you can receive up to $15,000 in assistance, through a
20-year second mortgage. Your assets, after closing, must not exceed
$5,000. To be eligible for any NHD loans, you must also complete a
First Time Homebuyer Education Course.
New Hampshire Housing Finance Authority (www.nhhfa.org;
800/649-0470). The Home Ownership Division‘s Single Family
Mortgage Program offers low-interest rate mortgages to first time
homebuyers, as well as lower down payment requirements and cash
assistance grants of up to 4% of the loan amount. This money can be
used to defray the cost of your down payment, closing costs and
prepaid escrow amounts. You must contribute at least 1% of the
purchase price from your own assets. As long as you keep the first
mortgage for 48 months, the grant is forgiven.
New Jersey Housing and Mortgage Finance Agency (www.njhmfa.com; 800/654-6873). If you‘re a first time homebuyer or you are
willing to buy in a targeted urban areas, you may qualify for a lowinterest rate mortgage from a participating lender. You must meet the
income and purchase price limits and must be be able to pay the down
payment from your own assets. You can pay closing costs through a
gift from family members or a community non-profit agency that
work with HMFA. You must pay a fee equal to 1% of the loan
amount when you apply for your mortgage. You will be reimbursed
for this amount if you select a loan with zero points. You must occupy
the home within 60 days of closing and must live in the house as long
as you have the mortgage. If you‘re using HMFA‘s Community Home
Buyer Program, you must also take part in counseling sessions and
attend the home ownership education sessions.
New Mexico Mortgage Finance Authority
(www.housingnm.org; 505/843-6880). Depending on where you‘re
interested in buying a home, you may qualify for a low-interest rate
mortgage loan on a house worth as much as $343,000. You must meet
the annual household income limit for your area and you must apply
through a participating lender. The best place to start is by attending a
homebuyer‘s education course and participating in a housing
counseling session. If you qualify, you may obtain a low-interest
mortgage through MFA‘s Mortgage$aver program. Depending on
your income, MFA also offers a variety of programs that provide
down payment and costing cost assistance. The Mortgage Booster
program may be your best bet if you don‘t have enough assets to pay
your down payment and/or closing costs. You may qualify for a 30year low interest rate second mortgage equal to as much as 8% of your
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home‘s sales price. MFA combines your first and second mortgage
payments into a single payment for your convenience.
New York State Division of Housing and Community
Renewal (www.dhcr.state.ny.us); New York State Housing
Finance Agency (www.nyhomes.org); New York City Housing
Authority (www.nyc.gov/html/nycha/home.html). New York offers
a variety of mortgage assistance programs. Check with the above
websites to see which program‘s qualifications you may meet. If you
live in one of the five boroughs of New York City, you may be eligible
for the HomeFirst Down Payment Assistance Program through the
New York City Department of Housing Preservation and
Development (HPD). This program pays $10,000 or 6% of the
home‘s purchase price (whichever is greater) toward your down
payment or closing costs for a home, condo or co-op. You must have
some savings to put toward the down payment and closing costs (how
much will depend on your income) and you must complete a
homebuyer education course taught by a HPD-approved counseling
agency. You‘ll need to meet the income limits (less than $35,150 for a
single person; $50,250 for a family of four) to qualify for the
forgivable loan to use toward these costs.
North Carolina Housing Finance Agency (www.nchfa.com;
919/877-5700). NCHFA offers low-interest mortgages, interest-free,
deferred down payment assistance (up to $7,000), second mortgages
(up to $20,000) and job loss protection if you lose your job within the
first two years of obtaining your mortgage. And if you don‘t qualify
for a NCHFA loan, you may qualify for a Mortgage Credit Certificate
that provides a federal tax credit, so you can deduct more of the
mortgage interest you pay each year. You must apply through one of
the 700 participating lenders in the state. (These loans are often
referred to as ―MRB loans‖ because the state uses Mortgage Revenue
Bonds to fund the loans). You must meet the income and sales price
limits and be a reasonable credit risk. You can receive a free,
confidential preliminary analysis of your eligibility by visiting the
NCHFA website and submitting a ―QuckCheck‖ form. For the down
payment assistance, you must be able to pay $750 from your own
funds and you‘ll need to pay the loan principal back once you are no
longer the home owner or 30 years from the date of the primary
mortgage loan, whichever comes first. NCHFA works with local
agencies to provide low-income residents with second mortgages of
up to $20,000 for new homes. For a list of participating agencies,
check out the New Homes Loan Pool Program. I particularly like the
Job Loss Feature in the Home Saver Program. If you keep your
mortgage current and wind up on unemployment, NCHFA will pay
your principal and interest for four months. (You pay the taxes and
insurance.) The mortgage payments get sent directly to your lender.
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You only repay the amount paid on your behalf when you no longer
own the home, or if you default on your first mortgage. If you‘re
thinking of building a new home in a rural area of the state, you may
also qualify for a Rural Housing Direct Loan.
North Dakota Housing Finance Agency (www.ndhfa.org). The
rules and regulations at NDHFA are fairly complex, especially if you‘ll
be combining a first mortgage with any kind of down payment or
closing cost assistance. So it‘s a safe bet to start by talking with
someone in NDHFA‘s Homeownership Division. If you meet the
income limits and program limits for the home‘s purchase price, you
may be eligible for a low-interest rate mortgage through the
FirstHome Program. You may also receive a credit of as much as 3%
of your first mortgage amount through the Start Program. You must
be able to pay at least $500 out of your own pocket and you can‘t use
the Start Program credit if you‘ll be using another down payment
assistance program, so make sure your counselor weighs all the
options and helps you choose the one that gives you the best benefit.
The Down Payment and Closing Cost Assistance Program (DCA) for
example, offers eligible borrowers an interest-free, deferred loan of
3% of the purchase price or $2,000 (whichever is greater). You‘ll still
need to pay at least $500 out of your own pocket.
Ohio Housing Finance Agency Office of Homeownership
(www.ohiohome.org; 614/466-3821). The First-Time Homebuyer
Program offers low-interest rate mortgages. If you meet the criteria,
you can apply through any of the participating lenders. There may be
an application fee depending on which lender you use. The My Ohio
Mortgage program offers flexible terms including 100% financing,
reduced closing costs (such as a 1% origination fee and zero points),
for those with less than perfect credit histories. If you‘re a teacher,
police officer, firefighter or health care worker you may also qualify
for this program. OHFA also offers down payment and closing cost
assistance. If you‘re eligible, you can choose between a down payment
grant equal to 2% of your home‘s purchase price or a second
mortgage of up to 4% of the purchase price. OHFA offers an online
map of the state‘s target areas. Most counties contain at least some
target areas. If you are planning on buying in a target area, you can
have owned a home within the past three years. If you meet the
eligibility requirements on the website, your next step is to contact one
of the participating lenders listed in the County Information section
and begin the application process. Your lender and your real estate
agent can guide you through the entire home buying process, or you
can contact the Office of Homeownership for more information. If
you might be relocating in the next 10 years, consult with a tax
professional before you apply, since you will have to pay a federal
―recapture tax‖ if you sell your house for a profit within the first nine
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years. The OHFA and its participating lenders also offer the Mortgage
Credit Certificate program to help you qualify for a mortgage if your
income is still too low to qualify through the program.
Oklahoma Housing Finance Agency (www.ohfa.org; 405/4198257, 800/256-1489, ext. 257). OHFA‘s 1st Gold loans are available
statewide from participating lenders to provide first time homebuyers
with down payment and closing cost assistance. Start by contacting a
lender who participates in OHFA Advantage (there are more than 100
lenders statewide to choose from) to see if you qualify. The lender will
explain the lending process and determine the loan that will be your
best choice. Your income must be within the state income limits and
your home‘s purchase price must meet the program‘s guidelines as
well. Funding for this program becomes available two to three times
each year, so you‘ll want to plan your home purchase accordingly.
Check with the participating lender to see when funds will become
available this year.
Oregon Housing and Community Services
(www.ohcs.oregon.gov; 503/986-2000). With OHCS your bankruptcy
must have been discharged at least two years and you cannot have had
a foreclosure for five years. OHCS provides financial support,
including grants and tax credits, to help lower- and moderate-income
residents become homeowners. With the Residential Loan Program,
you get a choice between the RateAdvantage Home Loan option
which gives you the best interest rate, or the CashAdvantage Home
Loan option which gives you a low-interest loan and cash assistance
equal to 3% of your loan amount to put toward your closing costs.
For most counties, your annual gross household income can‘t exceed
$58,900 (as high as $72,892 for some counties). Loan origination fees
and discount points charged by the participating lenders in this
program cannot be more than 1.75% of the amount you‘re borrowing.
Check with the lender to see about other closing costs. You must be
an Oregon resident or planning on moving to Oregon to apply.
Pennsylvania Housing Finance Agency (www.phfa.org). The
PHFA has a Keystone Home Loan program for eligible first time
homebuyers. You‘ll need an acceptable credit history, so the first step
is to contact one of the PHFA‘s counselors to see what you‘ll need to
do to get your credit in shape. If your FICO credit score is below 660,
you‘ll need to take a mandatory homeowner education course. In a
nutshell, if none of the adults who will live in the house within 12
months of closing have owned a home in the past three years, and the
household income meets the state income limits, and the total cost of
acquiring the house (including closing costs) is less than the program‘s
purchase price limit, you may qualify for a low-interest rate loan.
You‘ll need to have enough savings set aside to pay the mortgage
application fee and closing costs, plus a down payment. You may also
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be eligible to save 25% on your total insurance. This discount is only
available on request, so be sure to ask your lender to request the
discount. If your credit score is higher than 660, you may qualify to
put down as little as 3% of the loan amount. The Keystone PLUS
Assistance Program has even stricter income and asset limits and you
must have either a disabled household member or at least one child
who is related to you by blood, adoption or legal guardianship under
age 18 living in the home at least half the year. If you meet the criteria,
you could be eligible to receive a zero-interest loan of up to $2,000 to
put toward closing costs. If you don‘t qualify for the PLUS program,
you may still be able to get a no-interest, deferred second mortgage of
up to $15,000 through a HOMEstead Down payment and Closing
Cost Assistance Loan. You only repay the loan when your first
mortgage is paid off or you no longer own or occupy the home.
Expect to pay a fee of 1% of the loan amount plus $300. These fees
may also be deferred by rolling them into your loan.
Rhode Island Housing (www.rihousing.com; 401/450-1344).
With the RIH programs your household income for one person, in
most areas of the state, can be as high as $81,200 ($97,400 in targeted
areas) and you can buy a single family home or condo that costs as
much as $374,000 ($450,000 in targeted areas). To get started, call the
number above or email loaninfo@rihousing.com. Once you‘re ready
to apply for a loan, you can do so by contacting any of RIH‘s lending
specialists directly, or by contacting one of the program‘s participating
lenders. In general, you will need to be able to put down a 5% down
payment. RIH also offers Cash Assistance grants equal to 3% of the
mortgage amount to help with down payment and closing costs. The
grants are forgiven in equal annual installments over the first seven
years you own your home. You pay any outstanding balance if you sell
your home within the first seven years. Extra assistance is also
available if your income is less than $30,000. You may qualify for an
―Equity Rebate‖ grant equal to 2% of the purchase price, or $1,000,
whichever is less. RIH also offers a deferred ―Silent Second
Mortgage‖ if your income is less than $40,000. This mortgage can be
equal to 10% of the purchase price. You make no payments on the
loan as long as you have a first mortgage. With the program‘s ―Closing
Cost Assistance Loan‖ you can borrow up to 5% of the purchase
price or $5,000 (whichever is less) to pay closing costs. This loan is
paid back over 5-15 years, depending on the amount you borrow.
South Carolina State Housing Finance and Development
Authority (www.schousing.com; 803/896-9508). SCSHFDA‘s First
Time Homebuyer Program offers low-interest rate mortgages to first
time buyers who meet the program‘s requirements. There are 12
counties in SC where you cannot have owned a home within the past
three years. In all other counties, this requirement is waived. You will
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need to rebuild your credit report for at least a year after your
bankruptcy is discharged. The interest rates offered by participating
lenders and the program you are eligible for will vary depending on
your income and the purchase price for the home you‘re buying.
Single parents and disabled residents may also qualify for assistance
under this program. Option I provides low-interest rate loans for
properties in Targeted Counties only. Option II offers a $4,000 Down
Payment and Closing Cost Assistance (DPA) Loan. Half of this
amount is forgiven after five years if you‘ve remained in the property
(20% of the forgivable loan is forgiven each year). The other $2,000 is
deferred for three years and then you have five years to repay the loan,
at 4% interest (which does NOT accumulate during the deferment
period). Option III provides a $5,000 forgivable DPA loan, where
$1,000 is forgiven each year, as long as you stay in the home. The
forgivable down payment options are only offered for homes that
were built after 1978. To see if you‘re eligible, call or visit the website,
or email homeownership@schousing.com.
South Dakota Housing Development Authority
(www.sdhda.org). First time homebuyers who qualify can use one of
SDHDA‘s participating lenders to get a low-interest rate mortgage.
These loans are good for new or existing homes. The purchase price
limits for existing homes vary by county. For new homes, the
purchase price is capped at just over $204,000. The Employer
Mortgage Assistance Program offers low-interest rate second
mortgages to help cover your down payment and closing costs. You
can borrow from $600 to $6,000 at 2%, for 5 years. If you qualify,
SDHDA makes it easy for you by combining your first and second
mortgages into a single payment. Your employer can provide you with
an ―Eligibility Certificate‖ if you qualify. If you leave your job,
however, the interest rate jumps up to the prime rate. If you don‘t
qualify for down payment or closing cost assistance through your
employer, you may qualify through the Loan Assistance Program
(LAP). This program lets you borrow $2,000 to $10,000 for 5-10
years. Your gross annual income must be within 80% of the area
median income for your family size. Funds are available through a
pool of funds, so check to make sure funds are currently available if
you are interested in this program. South Dakota also participates in
the American Dream Down Payment Initiative program, which offers
zero-percent deferred second mortgages of $1,000 to $10,000 to offset
your down payment and closing costs.
Tennessee Housing Development Authority Homeownership
Operations (www.tennessee.gov/thda). THDA offers low-interest
rate loans through their Great Rate Mortgage Program. They offer
loans with a slightly higher interest rate, plus down payment and
closing cost assistance, through their Great Start program. While it‘s
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mandatory that Great Start applicants take the homebuyers education
class, I encourage you to take the class even if you‘re looking to apply
for the Great Rate program. Your household income and the purchase
price must meet the limits set by the THDA. These limits are based
on the size of your household and where the home is located. You
must use the property as your primary residence. You‘ll need to make
a minimum investment from your own assets, depending on how
much you have saved and your income. If you may be relocating in
the next 10 years, consult with a tax professional before you apply,
since you will have to pay a federal ―recapture tax‖ if you sell your
house for a profit within the first nine years. Participating lenders may
charge a 1% origination fee. Your down payment can come from your
own assets, a contribution from the seller at closing, or a gift.
Texas Department of Housing and Community Affairs
(www.tdhca.state.tx.us). The First Time Homebuyers Program
(FTHB) offers low-interest rate loans for those who are eligible. You
may qualify for a down payment and closing cost assistance grant if
your income is less than 60% of the Area Median Family Income
(AMFI) or less than 140% if you‘re buying in a targeted area. The
grant amount is equal to 5% of your mortgage amount. These funds
are available on a first-come, first-served basis each year, so I
recommend checking the website to see if funds are currently
available. Depending on your income, you may qualify for a Mortgage
Credit Certificate that provides a federal tax credit, so you can deduct
more of the mortgage interest you pay each year.
Utah Housing Corporation (www.utahhousingcorp.org; 801/9028300; 2479 S. Lake Park Blvd., West Valley City, UT 84120). The first
step to take if you‘re interested in buying a home after bankruptcy in
Utah is to attend a Homebuyer Education Class. The UHC offers a
wonderful brochure that lists contact information for all the
community organizations that offer these classes. The brochure also
provides contact information for all the participating lenders, making
it a snap to move forward if you qualify through their programs. First
time homebuyers and single parents who have been homeowners in
the past may qualify if their income limits and the housing purchase
price meet the programs guidelines. UHC offers a special guarantee to
eliminate the fear or confusion of having to pay the federal recapture
tax (which only kicks in if your income rises dramatically and you sell
your home for a profit within nine years of taking out the loan).
They‘ll actually guarantee to fully reimburse you if you have to pay any
recapture tax. UHC also is a bit more flexible on credit requirements.
Even if one of your credit scores is below 620, you may still qualify as
long as you have a history of timely payments after your bankruptcy is
discharged. The FirstHome Program offers low-interest rate loans;
FirstHome Plus offers a second mortgage with a 1% higher interest
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rate to pay down payment and closing costs. You can borrow up to
6% of the first mortgage under this program. The same programs are
offered to single parents, with different income requirements. UHC
allows you to build up ―sweat equity,‖ where you assist with
construction, to offset some of the down payment and closing costs.
Vermont Housing Finance Agency (www.vhfa.org). At the
VHFA, your bankruptcy won‘t count against you much as long as you
can show that you‘ve made 24 months of on-time payments after your
bankruptcy. Talk with a participating lender in the program to find out
what steps you‘ll need to take to make your credit acceptable. The
VHFA offers low-interest rate mortgages (MOVE program) and cash
assistance (Cash Assistance Rate) for down payments and closing
costs through its participating lenders. All borrowers also qualify for
an exemption of up to $500 of the Vermont Property Transfer Tax. If
you qualify, you can get a no-interest Cash Assistance second
mortgage for up to 3% of the loan amount or your entire down
payment and closing costs, whichever is lower. If you keep your first
mortgage for at least 48 months, the second mortgage is forgiven.
VHFA also offers ―shared equity‖ programs through non-profit
agencies like Habitat for Humanity. One extra program VHFA offers
is the Limited Refinance Program which allows you finance needed
home improvements or replace a high interest rate mobile home loan
with a lower rate loan. You will need a good payment history of two
years and have a FICO score of at least 660 to get a loan equal to 95%
of the appraised value or a loan equal to 100% of current loan plus
closing costs and improvements, whichever is lower. If your FICO
score is 659 or lower, you‘re eligible for a loan equal to 90% of the
appraised value or 100% of current loan plus closing costs and
improvements, whichever is lower. VHFA offers required education
classes through the NeighborWorks HomeOwnership Center. You
must be referred to a participating lender from this center in order to
apply for any VHFA programs.
Virginia Housing Development Authority (www.vhda.com; 601
S. Belvidere Street, Richmond, VA 23220; 877/VHDA-123; 804/7821986). Virginia‘s first time homebuyer program is called SPARC
(Sponsoring Partnerships and Revitalizing Communities). SPARC
offers low-interest rate mortgages for first time buyers who meet the
purchase price and income limits for the program. You may have a net
worth of up to 50% of the purchase price and can buy homes on up
to two acres (up to 5 acres if you get a waiver). Funds are offered
through local housing groups. Each group has its own requirements,
so contact the VHDA directly to determine which groups have funds
available in the area where you wish to purchase a home.
Washington State Housing Finance Commission
(www.wshfc.org; 800/767-4663). WSHFC Homeownership Programs
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offer first time homebuyers an opportunity to receive low-interest rate
mortgages through participating lenders. The first step you should
take is to attend one of their free 5-hour homebuyer education
seminars to see if you qualify. Reservations are required and you can
find a list of upcoming seminars in your area on the above website.
Once you have your completion certificate (which is valid for two
years), you can contact a loan officer, who has also been trained by the
Commission, to see what program you will qualify for. In general, for
a single person, your income must be less than $60,000 in most
counties (as high as $85,000 in some counties) and the purchase price
must be lower than $230,000 (as high as $370,000 in some counties).
WSHFC offers a variety of second mortgage programs for teachers or
first time buyers who are going through their Homeownership
Program. House Key Plus lets you borrow up to $5,000 ($7,500 in
some counties) for 10 years. If a member of your household is
disabled, you may qualify for a 1% second mortgage of up to $15,000
to cover down payment and closing costs. You may need to pay a
contribution from your own savings of $500. You can borrow up to
$30,000 toward your required 2% down payment with a deferred 4%
second mortgage through the House Key Plus Arch East King County
Program. The loan becomes payable when you move, refinance or
when the first mortgage is paid off. In rural areas, you may be eligible
for the House Key Rural Program, which offers low-interest second
mortgages of $1,000 to $10,000. If you‘re looking to buy in Seattle,
then the House Key Plus Seattle Down Payment Assistance Loan
Program may be helpful. If you are eligible, you may qualify for up to
$60,000 in down payment assistance. The loan is deferred for the first
eight years of the loan and the interest rate is 3%.
West Virginia Housing Development Fund (www.wvhdf.com;
304/345-6475). The WVHDF offers a handy on-line form to help you
determine which program you may qualify for. If you‘re looking to
purchase or refinance a home that needs some renovations done, you
may want to consider the Mountaineer Mortgage Plus… Renovation
Program (MMPR) which lets you include up to $25,000 in the loan for
renovations. Some West Virginia employers also participate in the
Employer Assisted Loan Program. If you‘re a first time homebuyer,
you may qualify for a lower-interest rate loan under the state‘s
Mortgage Revenue Bond Program. WVHDF also offers 10-year
deferred second mortgages to cover down payment and closing costs
through its Home Ownership Assistance Program. The state‘s
Secondary Market program helps all residents become homeowners
(as long as the loan amount is less than $417,000), regardless of your
income or when you last owned a home. You‘ll need to save up 3% to
put toward your down payment under this program. You can even
refinance, buy a second home or an investment property under this
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program. You will need to attend the state‘s home buyer education
course if you‘ll be getting a loan of more than 95% of the purchase
price (of course, I recommend taking the course no matter what).
Wisconsin Housing and Economic Development Authority
(www.wheda.com). Wisconsin is thoroughly committed to helping
residents become homeowners. They now have a SmartPath program
that helps you assess your credit worthiness, develop a plan to rebuild
your credit and provide you with homeowner education. Your
SmartPath counselor will refer you to a qualifying lender once you‘re
ready to start the purchasing process. WHEDA‘s Home Plus Loan
offers up to $10,000 for down payment and closing costs, and a line of
credit for future home repairs. The second mortgage is offered with a
15 year term and for the first two years you make interest-only
payments. To qualify, you must have less than $4,500 in liquid assets
to put toward your down payment and closing costs, although you can
still apply for the loan for the home improvement line of credit. The
Federal Home Loan Bank of Chicago (FHLBC) also offers grant
money for first time Wisconsin homebuyers. If you qualify, you may
be eligible for a zero-interest, deferred and forgivable loan from
FHLBC through a member lender. You will need to contribute at least
1% of the purchase from your own funds. All funds are offered each
year on a first-come, first-served basis to first time homebuyers, so be
sure to apply early in the year.
Wyoming Community Development Authority
(www.wyomingcda.com; 307/265-0603). The WCDA‘s Standard
Homebuyer Program offers low-interest rate mortgages to first time
homebuyers through participating lenders, if your income meets the
income limits and the purchase price for the home falls within the
program‘s guidelines. You may also qualify for down payment and
closing cost assistance. The WCDA also offers a low-interest
refinancing option through the Qualified Rehabilitation Loan Program
and Spurce UP Wyoming II Program. If you need help with your
down payment, you may be eligible for a Down Payment Loan of up
to $13,000 to pay your down payment and closing costs. The loan
term may be from one month to 96 months and your minimum
monthly payment must be at least $25. You will need to invest at least
$750 of your own money toward the closing costs. If you meet the
income requirements, you may also be eligible for even more financial
assistance through the Homebuyer Assistance Program. These funds
are available from time to time and you may receive up to $2,000 for
your down payment and closing costs (as long as you can pay $500 of
your own funds toward these costs). The loan amount (plus 3%
interest) is due if you ever sell the home or move out in the first 30
years. If you stay in the property for the full 30 years, this second
mortgage is forgiven.
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THINKING OUTSIDE THE BOX TO BUY YOUR HOME
Another way to get the home of your dreams when you don‘t have
a down payment and you don‘t qualify for assistance from your state‘s
housing authority, is to offer the seller the chance to lease the home to
you with an option to buy. This will delay your purchase several years,
which would give you enough time to qualify for more conventional
financing. You build up equity toward whatever purchase price you
agree on, rather than just a pile of rent receipts.
Every state has different rules for leasing with an option to buy.
Contact your State Consumer Protection Agency to find out the
specifics in your area. The paperwork is critical when you choose a
lease-option strategy. You‘ll need a sales document and a lease
document and everything must be up to your state‘s code, which is
constantly changing.
Make sure the sales document clearly states that you can buy the
house at the home‘s appraised value as of the time you exercise your
option or at the sales price as of the date the lease option is dated,
whichever amount is lower. This way, you won‘t pay more than the
home‘s fair market value if you exercise your option.
Generally, with a lease-option, you rent a home for two to three
years and a portion of your rent gets set aside until you build up
enough savings to pay the down payment. In addition, those two years
give you enough time to qualify for more conventional financing. Of
course, if you decide to move before you exercise your option and
before you actually buy the home, you‘ll forfeit any money that‘s been
set aside. So use this option only if you are fairly certain that you will
be staying in that area.
OTHER STRATEGIES FOR BUYING A POST-BANKRUPTCY HOME
If you don‘t have the money for a down payment, there are a few
other strategies you can use to get the house of your dreams after your
bankruptcy. Both of these strategies work very well if the seller of the
home you want to buy isn‘t strapped for cash and would welcome a
steady stream of income from you while you restore your credit
enough to qualify for a mortgage.
1. Seller Take-Back or Owner-Held Mortgage. Take-back or owner-held
mortgages are usually second mortgages, but it‘s becoming more
commonplace to see private sellers offering first mortgages as takebacks. Usually this happens when the sellers have paid off their
mortgage and also already own their new home.
You have two options with a take-back mortgage. The seller may be
willing to offer you an ―interest-only‖ mortgage at the going interest
rate, where you only pay interest; you don‘t pay any principal for
several years. Instead, the loan is a balloon loan, where you would owe
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the total loan amount at the end of a set period, such as five years.
This would give you enough time to get qualified for a conventional
loan. The second option is more like a regular mortgage, where you
pay principal and interest. Either way, the seller earns a steady stream
of income from the home. If you default on the loan, the seller can
foreclose on the property.
Many sellers used to shy away from take-back mortgages, because
they would have to keep track of your mortgage payments, initiate
collections and foreclosure procedures if you defaulted, and all that
other tedious stuff. Then the trend shifted, and sellers discovered that
if they had a mortgage lender draw up the papers, used the
standardized forms and met a few other requirements, sellers could
then sell the loan to Fannie Mae, instead of having to collect monthly
payments from you. This meant that sellers could offer take-back
mortgages without having to tie up all their equity for several years.
2. Land Contracts. This deferred sales agreement between you and
the seller of the home is only available in some states, so check with a
qualified real estate attorney in your area to see if a land contract is an
option. With a land contract, you both agree on a time by which you
must come up with your own financing to take the property off the
seller‘s hands. You move into the home and make monthly payments
to the seller. Although the seller isn‘t legally the owner, he or she is
still considered the owner of the home by the mortgage company in
most states. So the loan is still technically the seller‘s debt and will be
reported on the seller‘s credit report.
Generally, you‘ll have to come up with some cash to buy out the
seller‘s equity (either all or part of it, depending on how quickly the
seller wants to get cash out of his property). If you can‘t finance the
house by the agreed upon date, the land contract expires and the
property continues to be the responsibility of the seller, although the
seller may legally have to sue you to get clear title to the property. If
you decide to use a land contract, hire an attorney to draw up the
contract to make sure that everything is done correctly. Not all
mortgage holders will agree to a land contract, but the industry is
changing rapidly. VA loans, in particular, are good choices for land
contracts.
Jerry, a computer expert with the military in Virginia Beach, used a
land contract to buy his dream house. He closed on his house with a
land contract shortly after bankruptcy. Eighteen months later he was
able to get a mortgage on his own at an affordable interest rate. You
can too!
Start by looking for ―For-Sale-By-Owner‖ homes that have been on
the market for a few months and ask the seller if they would consider
a Land Contract arrangement.
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WHAT TYPE OF MORTGAGE LENDER SHOULD YOU USE?
There are basically two types of mortgage lenders: ―A-list‖ lenders
and ―BCD-lenders.‖ The worse your credit report looks, the further
down the alphabet you get shuttled. That‘s why it‘s so important that
you rebuild your credit until you‘re back on the ―A‖ or ―B‖ list before
you refinance. To find the best mortgage lender for your situation, I
recommend using a mortgage broker, who has the ability to work with
a wide variety of lenders and who can come up with the best loan deal
for you.
The mortgage broker will probably have you fill out a mini loan
application to see where you fit, credit-wise. Be upfront about your
past bankruptcy. A good mortgage broker will help you put your best
foot forward for the lender, even going so far as to help you write a
letter of explanation about the circumstances surrounding your
bankruptcy.
Some mortgage brokers, however, will try to immediately label you
as a ―sub-prime borrower‖ in order to charge you a higher interest
rate. You‘ll be able to spot these brokers right away. They‘ll sound
something like this: “Oh, well, I see you have a bankruptcy here.
Hmmm...That will make it more difficult to get you approved for a loan. We can
still get you a mortgage, but you’re gonna have to pay a higher interest rate, of
course, because of this bankruptcy here.”
These mortgage brokers will talk in circles, trying to use your guilt
to justify charging you more interest. Don‘t fall for this ploy. After
your bankruptcy has been discharged for a year, and assuming you
don‘t have any new late payments on your credit report, you can
qualify for the same interest rate as everyone else.
If overpaying interest on your loan doesn‘t scare you away from
these mortgage experts, here‘s another way some mortgage
professionals will try and charge you more money, simply because
they are counting on you feeling guilty over declaring bankruptcy.
Many sub-prime loans also include a pre-payment penalty. After a few
years of paying a higher interest, when you go to refinance at a more
reasonable interest rate, you could get a nasty surprise when you
discover that you now have to pay a penalty which could range from
3% of the outstanding loan ($3,000 on a $100,000 loan balance) to six
months‘ of interest (about $4,800 on a $100,000 loan at 8.5%).
I‘m a trusting person by nature, and at the same time, it‘s important
not to take anyone else‘s word for financial decisions you‘re going to
be responsible for. So don‘t take your lender‘s word for it when they
say there is no prepayment penalty. Make sure you are personally
informed by reading the contract and finding where it clearly states
that there is no prepayment penalty. Once you read it on the contract
or application, initial it for added protection.
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There is one area where confusion sometimes arises regarding
prepayment clauses. Most loan applications and contracts now clearly
state that you don‘t get a refund of finance charges or interest that you
have already paid, even if you pre-pay the remaining principal or
balance of the loan. Don‘t be alarmed by that language – it‘s there to
prevent confusion about what you do and don‘t get back when you
pay off your loan early.
If you have had good credit since your bankruptcy, with at least six
months to a year‘s worth of on-time payments, or if you reaffirmed a
car loan and have had at least six months worth of on-time payments,
you should be able to get a decent interest rate. If you run into a
mortgage lender who wants to steer you to a higher interest rate,
politely but firmly say: “I know I have enough credit references to qualify for the
going market rate. Since you’re not able to approve a loan at that rate, I don’t
want to waste any more of your time.” Then pick up your papers and walk
out the door. Remember: No creditor can humiliate you, unless you
let yourself be humiliated. Even after bankruptcy, you can get a good
deal from the lenders that are used by the better mortgage brokerages.
For convenience, many people prefer to deal with mortgage brokers
electronically. When you are bouncing back from bankruptcy, I
recommend against using an online lender. Why? Because online
lenders can‘t see you face-to-face. An online lender can‘t look you in
the eye and see that you are truly ready for a fresh start. As a result,
you have to jump through more hoops and provide more
documentation to these lenders. Also, most online mortgage brokers
or lenders will immediately sell your mortgage loan to another lender.
It‘s far better to use a local mortgage broker or lender.
Look in your yellow pages under ―mortgage brokers‖ for a local
branch of one of the large, reputable mortgage brokers. They can use
a wide variety of lenders, and their experienced mortgage brokers can
walk you through the process and help you get a competitive
mortgage.
A few nationwide mortgage brokerages that have solid reputations
in the industry include SunTrust, Prestige Mortgage Services and
Universal American Mortgage Company (UAMC).
HOW TO BUY A HOME LESS THAN A YEAR AFTER BANKRUPTCY
You may find it necessary to relocate after your bankruptcy and you
may want to buy a home sooner than the one to two years you would
have to wait to restore your credit after bankruptcy. Luckily, you still
have several options:
1. Take over an existing loan on a property that’s worth less than the current
mortgage. Especially in areas where property values are falling sharply,
you can find homeowners who are ―upside-down‖ on their mortgage.
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They owe more than the home is worth, and especially if prices are
starting to rise again, this might be a good time to buy such a home.
Sometimes, you won‘t even need to come up with a down payment in
order to take over a loan like this. Instead, you may only need to come
up with enough to bring the defaulted loan current, which could be
just a few thousand dollars. Often, you are doing the homeowner a
huge favor – and you may be helping them avoid foreclosure or
bankruptcy.
2. Get a non-conforming mortgage. Many lenders offer ―nonconforming‖ loans, which let you qualify for a mortgage soon after
your bankruptcy is discharged. You may be required to pay a down
payment of 25% or more, and your interest rate will likely be in the
double digits. If you decide to go with a non-conforming mortgage,
make sure that the interest rate is automatically reduced after several
years of good payments on your part, or make sure that you‘re
guaranteed the opportunity to refinance at a lower interest rate after
two years of good payments. Non-conforming mortgages are issued
by ―CD‖ lenders. If you go this route, expect to pay an interest rate of
around 10% and have to come up with a down payment of at least
20%. I‘m personally not a big fan of non-conforming loans, because I
think you waste a lot of money on higher interest. Unless rents in your
area are a lot higher than mortgages and property values are rising in
the area where you want to buy, you‘re better off waiting than jumping
into a non-conforming mortgage.
REFINANCING AFTER BANKRUPTCY
I didn‘t own a home when I declared bankruptcy, but many people
do. If you‘re a homeowner, and you want to refinance after your
bankruptcy has been discharged, you do have some options,
depending on whether you filed a Chapter 7 or a Chapter 13. If you
filed Chapter 13, your options for refinancing will depend on whether
you have completed your repayment plan or whether you are in the
middle of your repayment plan. In addition, there are a few additional
restrictions to refinancing while you are making payments under a
Chapter 13 bankruptcy. We‘ll talk more about these in a minute.
Regardless of what type of bankruptcy you filed, you can avoid
paying an out-of-this-world interest rate when you refinance your
home after bankruptcy if you follow the strategies you‘ve read about
so far — rebuilding your credit before you apply to refinance.
Let‘s look at refinancing after a Chapter 7 bankruptcy. Basically, the
longer it‘s been since your bankruptcy was discharged, the better. If
you try to refinance within six months of your bankruptcy discharge,
you are likely to pay through the nose. Work to rebuild your credit
over six months to a year and you‘ll get a much more reasonable
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interest rate. Lenders I talked to were very up-front about what you
can expect when you apply for a mortgage after bankruptcy.
Bottom line: If you discharged your debts under Chapter 7, you‘ll
be considered an A+ borrower within two years. This assumes that
you have no new negative credit information on your credit reports,
and you have added certain new positive credit information on your
credit reports. That‘s because time isn‘t the only factor that mortgage
refinancing companies look at. You also need to show that you‘ve reestablished your credit with at least three good credit references.
One of the biggest myths in the credit world is that you have to
have several credit cards, with balances, in order to rebuild your credit
score. Your credit score is a piece of paper. It doesn‘t determine your
self-worth, or your ability to repay your debts. When it comes to
getting credit in order to rebuild your FICO scores, I recommend
going with the ―essentials.‖
The essentials are one major credit card that is reported to the three
major credit bureaus, and a gas card or a medical creditor (like
CareCredit), and a car loan. I call these ―essentials‖ because, unlike a
department store credit card, these types of debts are for essential
living expenses – transportation or medical care. A student loan or
other reaffirmed debt, with a positive on-time credit payment history
after your bankruptcy discharge would also be good.
You can safely rebuild your credit using two or three of these types
of loans so your credit payment history shows the refinancing
company that you‘re a good credit risk. Use your credit card for small
purchases every month and pay the bill off in full each month.
Avoid falling for department store credit cards with promotional
offers where you get an immediate 10% discount on your purchases
or some free gift just for applying. Whether you‘re accepted or turned
down for the credit card, it appears as an inquiry on your credit report,
which makes it looks like you‘re eager to take on new debt after your
bankruptcy and may lower your credit score. Every department store I
know of accepts major credit cards as a form of payment. The high
interest rate charged by a department store credit card on your
account balance will quickly cost you more than the 10% savings you
received when you applied!
Many people erroneously believe that carrying a balance on your
credit card shows you are a better credit risk. The truth is, having a
higher balance-to-credit limit ratio actually counts as a negative on
your FICO scores. Carrying a balance does show creditors that you
are a potentially more profitable customer, though, because creditors
don‘t actually like customers who pay their bills in full each month. In
creditor terms, these customers are the ones who are actually
considered deadbeats – because they use the creditor‘s money each
month and never have to pay any interest for the privilege!
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Remember: the only reason you are getting any kind of credit card
after bankruptcy is so you can provide credit references to a future
mortgage lender. Don‘t run up bills on your credit cards or start
carrying a balance from month to month or the mortgage lender may
assume you have gotten yourself back into the same debt cycle you
were in before you declared bankruptcy. Instead, show creditors (and
yourself!) that you‘ve turned over a new leaf by creating a new on-time
payment history month after month, where you pay your bills in full
every month.
When you are ready to refinance, call several different mortgage
loan brokers and tell them you‘re looking for competitive refinancing
rates. Don‘t go to anyone who specializes in ―bad credit‖ mortgage
refinancing. You want a mortgage broker who deals with ―A‖ lenders
who have access to BCD sources. Any good mortgage broker gets
paid out of the loan proceeds, so don‘t let any mortgage broker talk
you into paying them anything simply to meet with you.
REFINANCING DURING CHAPTER 13 BANKRUPTCY
Most mortgage and financial service companies that help people
who are currently making payments under a Chapter 13 repayment
plan fall into one of three categories. There are those who work within
the Chapter 13, those who specialize in ―Chapter 13 buyouts‖ which
pay off the balance owed under your Chapter 13 bankruptcy by
refinancing your current mortgage, and those who specialize in having
your Chapter 13 bankruptcy dismissed and having your outstanding
debts rolled into a new mortgage loan amount.
Which one you use will depend on what your current circumstances
are, how much equity you have available in your home and how much
debt is included in your Chapter 13 bankruptcy. For the most part,
these mortgage companies require you to have completed at least one
year under your Chapter 13 repayment plan and your payment history
under the Chapter 13 reorganization must be good, with all payments
made on time.
Consumer-friendly lenders won‘t even attempt to make a buyout
loan unless it will significantly lower your monthly payments, you‘ve
had a good payment history since you began your bankruptcy
repayment plan and you have 25%-30% equity in your home. Loans
that require your bankruptcy to be dismissed are usually offered only
after you‘ve been in the repayment plan for at least three years.
If your current mortgage holder is reporting late payments, and you
know you made all your payments on time, gather together copies of
your cancelled checks or bank statements showing when you paid
your mortgage payments and give them to the potential mortgage
lender. And ask the mortgage company what additional
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documentation they will need from you. If need be, contact a debtor‘s
rights attorney like those at Lawyers United for Debt Relief
(www.ludr.org; 542 S. Dearborn Street, Suite 1260, Chicago, IL 606052090; 312/939-2221) to protect your interests and help you refinance.
Also, be sure to fully understand if the mortgage solution the
company is offering will require you to dissolve the Chapter 13
bankruptcy or whether their mortgage is designed to work around
your Chapter 13 bankruptcy. Ask the lender to put in writing whether
or not your Chapter 13 will be dissolved and whether the equity in
your home will be used to pay off the outstanding debts that are
currently inside the Chapter 13 plan. Make sure you‘re comfortable
with and fully understand what debts you will still be responsible for if
you take this route.
In all my research, I have only come across one mortgage brokerage
company that has a solid reputation for helping bankrupt consumers
get quality financing and reasonable rates while they‘re in a Chapter
13. The challenge is that companies who are most willing to risk
taking on bankrupt consumers wind up putting themselves at a higher
risk for more defaulted loans, like New Century Mortgage).
Evergreen Pacific Mortgage, Inc.
(www.evergreenpacificmtg.com; 911 Country Club Road, Suite 350,
Eugene, OR 97401; 800/460-6142 or 541/342-2535) offers mortgages
for those who are currently in a Chapter 13 repayment plan. They
have brokers who go above and beyond to work with consumers,
especially those who are experiencing interference from current
mortgage lenders who want to keep your loan for themselves.
Be sure to check with your state‘s Attorney General‘s office as well
as the Better Business Bureau to determine if this company is still
providing quality services. A truly professional mortgage broker will
provide you with all the contact information you need (including
phone number and address) to verify their authenticity.
Before deciding to go with any mortgage service company to
refinance your mortgage, find out who buys the majority of their
mortgages and make sure that they have a good consumer-friendly
reputation as well.
When you‘re looking to refinance after declaring bankruptcy it pays
to have kept your mortgage as current as possible. Mortgage lenders
look most closely at your last 12 months‘ history on your mortgages.
The fewer 30-day late payments you‘ve had in the past year, the lower
interest you‘ll get when you refinance. You can generally qualify for a
refinance loan from a C-lender if your mortgage payments haven‘t
been 30 days late more than four times, or more than 60 days late one
time in the last 12 months. If you‘ve got fewer late pays than that
showing on your current mortgage, and you can‘t wait a full year to
refinance, there‘s still hope, so don‘t worry if you can‘t wait a full year
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to get some of the extra late pays to be more than a year old. With
many mortgage brokers, you can get a loan from one lending source
and after two years of good payments, you can have the interest rate
lowered.
ANY ADVANTAGES TO INTEREST-ONLY MORTGAGES?
Interest-only mortgages appear to offer you the advantage of a
lower monthly mortgage payment. I consider interest-only loans to be
like stock options. You are paying a monthly amount that is more like
rent than a mortgage payment. Your monthly payment isn‘t building
up any equity or ownership in the house. At the same time, you are
betting that your home‘s value will increase, thereby automatically
creating some equity.
There are many risks with interest-only loans. These loans are
designed to ―help‖ you buy a more expensive home than you could
otherwise afford by allowing you to have lower payments for a few
years and then your payment changes to an adjustable rate and usually
requires you to start paying the principal at the same time. A double
whammy.
Most mortgage lenders are also allowed to raise the interest rate a
full 5% the first time they adjust the rate up – which can nearly double
your mortgage payment. And if housing prices in your area go down,
or your home‘s value depreciates due to a hurricane or forest fire or
mudslide or flood, for example, you could be left with a mortgage
payment on a house that no longer exists – or you may not be able to
refinance or sell your home, because you will owe more on it than a
lender is willing to finance or a buyer is willing to pay.
What happens when you want to sell? You will either have to come
up with the difference between what the buyer will pay or you have to
keep the house you‘re trying to sell and run the risk of falling behind
on your payments and ultimately losing the house, which puts you
right back where you were before your bankruptcy. That‘s the last
thing I want to see happen to you. That‘s why I keep looking for ways
to help you create what you want in your life without taking on undue
debt.
I‘m not trying to paint a gloom and doom picture here. I just want
to make sure that you know all the risks of using an interest-only
mortgage as an option for buying a home too quickly after filing
bankruptcy.
CREATING A HOME WHEREVER YOU ARE
There is an old saying that ―home is where the heart is.‖ Which is
so true. Often, we want to ―own‖ a house because we think it gives us
freedom. We think it allows us the opportunity to do whatever we
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want with ―our stuff.‖ And so we get frustrated that we can‘t create
the home we want if we rent instead of own. Or we see the rent we‘re
paying as a waste of money because we‘re not building up any equity.
So we rush to buy as quickly as possible, no matter what the hidden
costs might be to our financial future.
Now is the time to practice all your new financial skills, which
include patience. Invest some time and energy into enjoying and
creating a sense of home where you are today. When I moved to the
North Carolina beaches, I didn‘t know where exactly I wanted to
settle in the area. So, instead of rushing out to buy a home, I wrote
down what I wanted. I wanted beautiful water views from every room,
a beautifully decorated living space and a lush garden.
I found a third floor condo for rent that overlooked the ocean from
the front and a thriving salt marsh from the back. The front deck was
expansive and I built a lush container garden that was admired by all
who visited. And, with the help of two decorating friends, I created a
warm and inviting home.
As it turns out, I was only meant to be there a few short years. Now
that I‘ve relocated to Florida, I‘m doing the same thing – creating
what I desire here, while I wait for clarity on where I truly want to live.
Ask yourself what you want in a home. Then ask yourself: If this is
as good as my financial situation ever gets, what can I do with this
place to create what I want in a home? Then take action toward
creating that, where you are. When you do, you will soon find that
you‘re much happier and then you can move forward toward
becoming a homeowner from a place of joy and excitement. You
deserve it!
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1. Make sure you know exactly what your credit reports say about you.
2. Research what strategies you can use to reduce your closing costs.
3. Figure out how much house you can afford to buy.
4. Decide how much down payment you will need, and where you can
get your down payment from.
5. Decide if you will need to use a ―no-down payment‖ option, like
―lease to own.‖
4. Explore your state‘s ―first-time‖ homebuyers program.
5. Explore alternative ways to own a home now.
6. Shop for the best mortgage lender.
7. Explore your best options for refinancing.
8. Learn the pros and cons of interest-only mortgages and make sure
you‘re comfortable with your risks before you select one.
9. Take steps to create a sense of home where you are now.
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CHAPTER 11
Making Yourself Identity Theft Proof
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Back in 1995, Sandra Bullock made a movie called ―The Net‖ in
which the unimaginable happens. A computer-savvy criminal steals
her identity and swaps it with that of an unsavory character in order to
create world chaos. It was character-assassination at a cyber-level, but
the identity theft was merely a tool to accomplish a larger, more
sinister fictional goal.
Today, there are many ways people can use your identity in order to
illegally obtain access to money, using credit they‘ve obtained in your
name. You‘re working very hard right now to build a solid credit
history. I don‘t want anything or anyone to jeopardize your new
financial security.
That‘s why I‘m including this chapter on how to make yourself
bullet-proof from identity theft. In this chapter, you‘ll find a concrete
strategy to help you avoid identity theft and detailed advice on how to
verify whether or not you‘ve been a victim if you suspect someone is
trying to steal your identity. You‘ll also find step-by-step instructions
for what to do to stop identity theft if it‘s happening in your life, plus
guidance to help you recover from identity theft if it does occur.
Just as police would advise people to lock their doors at night, there
are some straight-forward, common sense things you can do to
protect yourself from identity theft. There are also a few tricks of the
trade that savvy insiders know can help deter identity thieves.
AVOIDING IDENTITY THEFT
Since I have a direct-mail background, I know how frustrating it can
be when people use direct mail lists to perpetuate scams on other
people. That‘s why I encourage you to opt out of pre-approved or
pre-screened credit or insurance offers, which carry the greatest risk
for identity theft. You have two different options for doing this. You
can immediately opt-out for five years on-line or via telephone. Once
you‘ve completed that step, you can then opt-out permanently via mail
if you want. You must mail in the form they ask you to print out to
permanently opt out and stop receiving unsolicited (junk!) mail from
creditors, insurance companies and even mortgage issuers who buy
mailing lists.
To start the five year opt-out process, visit the credit reporting
industry‘s special website, www.optoutprescreen.com, and fill out their
on-line form. When you are done, a page will pop up for you to print
out and mail in. Your name will then be permanently removed from
the mailing lists that Equifax, Experian, Innovis and TransUnion
provide to businesses who are looking to offer you credit or insurance.
If you don‘t have internet access, you can call toll-free 1-888/5678688 (877/730-4105 if you‘re using a hearing impaired TDD system)
to start the opt-out procedure. Be sure to ask them to send you a mailin form for the permanent out-out option.
If you don‘t receive your mail-in form in a few weeks, or if you find
that you‘re still being deluged with junk mail from possible creditors,
write to: Optoutpreescreen.com, PO Box 600344, Jacksonville, FL
32260 and let them know.
FREEZING IDENTITY THIEVES IN THEIR TRACKS
Your best protection against identity theft is to place a security
freeze on the information in your credit report. This way you control
who gets to see the information in your reports. You also protect
yourself from anyone else opening a credit account using your
identity. Placing a security freeze on your credit reports may mean you
have to take a few extra steps when you‘re applying for credit. It is
well worth the effort, though. Think of it this way. If you lock your
front door when you go out, and you return home juggling your baby
and the groceries, it can be a hassle sometimes to get your keys out
and unlock the door before you go in. If the phone is ringing, or the
baby is tired and cranky, or it‘s pouring rain, then you might feel a
sense of urgency about getting inside quicker and you might be a bit
miffed that you‘ve locked your door. A security freeze is like that
locked door. If you‘re in a hurry to get approved for credit, then the
security freeze is going to feel inconvenient, but in the long run, it will
be well worth it to know your identity is safe and sound.
When you apply for a credit card, car loan, mortgage or any other
type of credit, you will need to either remove or temporarily lift the
security freeze so the lender can access your credit report. There‘s an
old saying that says that your first choice in selecting a lender should
be someone with whom you already do business. Any company you‘re
already doing business with (like your bank, or current auto or
mortgage lender) can access your credit report without needing to lift
the security freeze. Also, your current lenders can access your
accounts to monitor your account, increase or decrease your credit
line and to gain information to help them collect on any past due bills.
REQUESTING A SECURITY FREEZE
Adding a security freeze is a lot like ordering your credit reports.
You‘re going to need to contact each of the credit bureaus individually
to place the security freeze. Right now only 21 states allow all their
residents to place security freezes on their credit reports. If you‘re a
resident of California, Colorado, Connecticut, Delaware, Florida,
Hawaii, Illinois, Kentucky, Louisiana, Maine, Minnesota, Nevada,
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MAKING YOURSELF IDENTITY THEFT PROOF
New Hampshire, New Jersey, New York, North Carolina, Oklahoma,
Pennsylvania, Rhode Island, Vermont or Wisconsin, you can request a
security freeze. In Kansas, South Dakota, Texas and Washington, you
can place a security freeze on your credit report files only if you‘ve
already been a victim of identity theft, which doesn‘t make a lot of
sense to me. For some reason, this protective option isn‘t available at
all in the other 25 states or the District of Columbia, as of this time. If
your state isn‘t currently listed, be sure to call and ask the credit
bureau if you‘re eligible to place a security freeze, as new consumer
protection laws are being passed every month. Hopefully, soon
everyone, worldwide will be able to place a security freeze on their
files to protect their important personal information.
If you are able to place a security freeze on your credit reports, it
will be the best money you could spend to protect your identity. If
you‘ve already been a victim of identity theft, you can place the
security freeze for free. Otherwise, you‘ll be required to play a fee
ranging from $5 to $20, depending on what state you live in. Most
states charge $10 to place a freeze and $10 to lift or replace a freeze.
To add a security freeze to your credit reports, send the following
letter, via certified mail (this is mandatory, not a strong suggestion like
all the other letters I‘ve recommended!) to each of the credit bureaus:
(Date)
Equifax Security Freeze
P.O. Box 105788
Atlanta, GA 30348
Experian
P.O. Box 9554
Allen, TX 75013
P.O. Box 1358
TransUnion
Fraud Victim Assistance Department
P.O. Box 6790
Fullerton, CA 92834
Dear Sir/Madam:
I am writing to request that a security freeze be placed on my
credit report. My personal information is as follows:
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[Name]
[Address]
[Date of Birth]
[Social Security number]
In addition, please find enclosed proof my current address [copy of
your driver’s license or copy of a bank statement, insurance statement
or current utility bill in your name] and the required payment, if any
[via check or money order].
[If you’ve been a victim of identity theft already]:
I have already been a victim of identity theft and am including a
copy of [the police report, identity theft report, or other law enforcement
agency report, such as a Department of Motor Vehicles report].
Thank you for your prompt attention to this matter.
Sincerely
[Your Name]
Oddly enough, the credit bureaus even accept credit cards for
payment. However, since you would have to mail them all your credit
card information, which increases your risk for identity theft, I highly
encourage you to pay by check or money order instead.
Each credit bureau will send you a copy of a 10 digit security freeze
confirmation number in a letter that includes a number to call when
you want to lift or remove the security freeze. Store these numbers in
a very safe location (a safe deposit box is my recommendation). This
way you know that you are the only one who has access to those
numbers. When you‘re ready to apply for credit, you will need to give
the credit bureaus the appropriate confirmation number to request a
temporary or permanent removal of your security freeze.
TEMPORARILY LIFTING A SECURITY FREEZE
When you‘re ready to apply for credit, ask the creditor which credit
bureau they will be using to check your credit. Then call the number
provided in your confirmation letter from that credit bureau, or mail
the following letter to the credit bureau. In most states, you can
request that your security freeze be temporarily lifted for the named
creditor or for a specific period of time. Five days should be long
enough if you‘re applying for the security freeze lift via telephone. If
you‘re mailing in your request, you may wish to ask for a 30 day
security freeze lift.
If you definitely know which creditor you want to use, ask that the
freeze be lifted for just that creditor. Or, if you want the flexibility of
shopping around among creditors, ask for a 10-30 day temporary lift
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of the security freeze so different creditors will be able to assess your
credit worthiness.
Do NOT give any creditor your security freeze confirmation number. When
you request the temporary lift of your security freeze, each credit
bureau will give you a Lender Personal Identification Number which
is what you will want to give to the creditor. This is their ticket to
access your credit report. If you lose either your security freeze
confirmation number or the lender personal identification number,
you can request new ones, but it will cost you another fee.
(Date)
P.O. Box 105788
Atlanta, GA 30348
Experian
P.O. Box 9554
Allen, TX 75013
P.O. Box 1358
TransUnion
P.O. Box 6790
Fullerton, CA 92834
Dear Sir/Madam:
I am writing to request that my security freeze be temporarily
lifted for [name of creditor OR length of time (three to 30 days specify the dates, if possible)]. My personal information is as follows:
[Name]
[Address]
[Date of Birth]
your driver’s license or copy of a bank statement, insurance statement
or current utility bill in your name] and the required payment, if any
[via check or money order]. My 10 digit security freeze confirmation
number is:_____________________________.
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Sincerely
[Your Name]
Even though you can call (and in the case of Experian, even go on
line) to temporarily lift your security freeze, I still recommend
requesting the lift by mail. Your certified receipt will serve as your
proof that it was you and not someone else who requested the security
freeze be lifted.
PERMANENTLY REMOVING A SECURITY FREEZE
If you‘re lucky enough to live in a state where you‘re allowed to
place a security freeze, I can‘t think of any good reason why you might
want to have the security freeze permanently removed. If you do want
to have the security freeze removed from your credit reports
permanently, send the following letter to each credit bureau:
(Date)
P.O. Box 105788
Atlanta, GA 30348
Experian
P.O. Box 9554
Allen, TX 75013
P.O. Box 1358
TransUnion
P.O. Box 6790
Fullerton, CA 92834
Dear Sir/Madam:
I am writing to request that my security freeze be permanently
removed from my credit report. My 10 digit security freeze
confirmation number is: _____________________________.
My personal information is as follows:
[Name]
[Address]
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:
[Date of Birth]
[Previous addresses for the past two years]
your driver’s license or other government issued identification card, or
copy of a bank statement, insurance statement or current utility bill in
your name]. Enclosed is the required payment, if any [via check or
money order].
Sincerely,
[Your Name]
TIPS FOR AVOIDING IDENTITY THEFT
I‘m the first person to see the good in other people. And I want you
to do the same. I also want you to take a few precautions to protect
yourself against identity theft, just as you would protect yourself from
getting hit by a car when you cross the street. Simple advice like ―cross
at the light‖ and ―look both ways before you step off the curb‖ can
save your life when crossing the street. Likewise, these simple steps
can help save your identity:
 Only give your Social Security number, mother‘s maiden
name or account numbers out to people for verification
purposes when you‘re the one who initiated the contact.
 Take outgoing mail to the post office rather than leaving it in
your mailbox. This is especially important if the mail
contains bills you‘re paying with a check. Identity thieves
love it when they can do ―one-stop-shopping‖ and get your
account number, your checking account number and your
signature (off your check, which they can then practice
forging).
 Remove mail daily from your mail box to reduce the
enticement to possible identity thieves.
 Put a vacation hold on your mail if you‘re going to be gone
more than two or three days.
 Pay attention to when your bills usually arrive each month.
Call your creditors if they don‘t arrive within a week of that
date.
 Change the personal identification number (PIN) or
passwords to your credit card, bank and other accounts every
6 months or at least once a year. This goes for on-line
accounts too. Make it a number that others would be unlikely
to know.
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 If you do ANY online banking or bill paying, install a good
spyware program and anti-virus program for your computer.
Identity thieves have gone hi-tech, using ―keylogging
spyware‖ to capture your keystrokes so that criminals can
then log into your accounts as if they were you, and transfer
money to wherever they desire. The best spyware I have
found to date is Spybot Search & Destroy. Spybot
(http://www.spybot.info) was created by Patrick M. Kolla.
Patrick is so serious about ―spyware busting‖ that he offers
his software free, with a request that if you find it helpful,
that you please make a donation (and send up a prayer to the
―most beautiful girl in the world‖). This software has helped
me protect my computer and helped many others I know
―uncripple‖ their computers. There are many good antivirus software programs on the market. My personal
preference is Panda Anti-Virus Software
(http://www.pandasoftware.com).
 Keep your Social Security card at home or in your safe
deposit box.
 Request your free annual credit reports by mail each year and
review them carefully to make sure you‘re familiar with all
accounts listed.
 If you‘re in the military and are called up or deployed, place
an active duty alert on your credit reports before you leave.
 Shred or (better yet) burn documents containing personal or
financial information. This makes it more difficult for
dumpster-diving thieves to gain access to your information. I
recommend burning over shredding because new technology
now makes it possible for some scanning software to recover
shredded documents using pattern recognition. These
programs can put paper shreds back together like a jigsaw
puzzle in a matter of minutes. To be ultra safe, you could
even shred and then burn your most important documents.
 Balance your checkbook monthly. I especially recommend
using Quickbooks or any other accounting software. Search
functions on these software programs make it easier for you
to identify fraudulent transactions.
 Keep copies of all account numbers, expiration dates,
creditor fraud department phone numbers and customer
service numbers in a secure place.
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IF YOU SUSPECT IDENTITY THEFT
If you suspect you may be a victim of identity theft, I encourage
you to place an initial fraud alert on your credit reports. This protects
you from anyone who may be attempting to establish a new credit
account, issue an additional card for an existing credit account, or
increase the credit limit on any existing account unless you can prove
to the creditor that you are who you say you are. With an initial fraud
alert, you provide the credit bureau with a telephone number that
must be used to contact you in order to verify that you are the person
requesting the credit. If they can‘t reach you to obtain your
authorization, the credit request will be denied. An initial report stays
on your credit report for 90 days and is a good action to take if your
wallet has been stolen, or if you‘ve been taken in by a financial
―phishing‖ scam and are afraid that someone may have your financial
information. When you place the initial fraud alert on your credit
report, all three major credit bureaus are notified and you are entitled
to one free credit report from each of them.
Other important steps to take if you suspect someone has tried to
steal your identity:
 Watch for letters informing you that you have been
approved or denied for credit at companies where you have
never filed an application for credit.
 When balancing your checkbook, look for skipped check
numbers or unfamiliar charges.
 Get a copy of your personal earnings and benefit statement
to see if anyone is using your Social Security number for
employment.
 Call the Department of Motor Vehicles and see if a duplicate
driver‘s license has been issued in your name.
HOW TO STOP IDENTITY THEFT IN ITS TRACKS
If you do find that you‘re a victim of identity theft, don‘t panic. I
know identity theft is going to create some chaos in your life – what
you do right now is what will determine the extent of that chaos.
Immediately take these first four actions. Then systematically start
taking the other actions to stop identity theft in your life.
Anytime you have contact with any creditor or financial institution
regarding an identity theft issue, be sure to document your
conversations. Create a log book and include the name, date, phone
number, time and details of any and all phone conversations you have.
Confirm all discussions in writing. Keep copies of all correspondence
you send, including printouts of any e-mail correspondence. And send
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all correspondence via certified mail, return receipt requested. This
will give you an important paper trail if you ever have to defend
yourself in court against a creditor who is attempting to collect on a
debt that was fraudulently incurred.
1. Call the National Consumer Assistance Center (888/3973742). This line is available 24 hours a day, seven days a week, 365
days a year. An initial security alert will be automatically placed on
your credit files. Your name will be removed from the pre-screened
solicitations, and you‘ll receive a free copy of your credit reports.
Review your credit reports to see if any unfamiliar accounts or credit
applications appear. Once you‘ve reviewed your reports, call the
special number on the credit report and you will be connected with a
consumer assistance associate at the credit bureau fraud victim
assistance program. They will help you identify any fraudulent items.
Time is important here. The credit bureau must complete their
investigation within 30 days, so the sooner you file your police report
and request the documents from the creditors in question, the sooner
everything will be back to normal in your world!
2. File a police report. Only in California and Louisiana are police
required to issue a police report in the case of identity theft. In other
states they are not required to do so, although many police will, if
asked. If your police department isn‘t authorized to issue a police
report, ask them to file a Miscellaneous Incident Report instead. If the
police still won‘t take a report, move on to Step 3 and file the ID
Theft Affidavit with the police. You will need a police report in order
to protect yourself from being financially responsible for any
fraudulent charges.
When you file your report, include anything you know about the
dates the theft may have occurred, what accounts may have been
opened, and anything you know about the alleged thief. Some police
agencies only offer ―automated online reports.‖ I recommend bypassing this process and requesting a face-to-face meeting with a
police officer. This way, they have a face to put to your name (which
helps protect you from the ―fake you‖ claiming to be the ―real you‖
that alerted police, when he or she is caught). Filing a face-to-face
report also gives you an opportunity to provide additional information
that the automated report may overlook.
3. File an ID Theft Affidavit and fill out a Fraudulent Account
Statement for each account. The Federal Trade Commission
provides these documents online at (www.ftc.gov/idtheft). Once you
have your police report and the fraudulent account application and the
affidavit and fraud statement, send these documents as proof that the
account is not your responsibility. Do the same for any collection
agencies who are attempting to collect money from you for these
accounts. Taking these steps will go a long way toward helping you
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clear your name if any judgments are entered into against you due to
these fraudulent accounts.
4. Put an extended fraud alert on your credit report files. Do
this right now! As I mentioned earlier, an extended fraud alert protects
you from anyone establishing a new credit account, issuing an
additional card for an existing credit account, or increasing the credit
limit on any existing account unless you can prove to the creditor, in
person or via telephone, that you are who you say you are. With an
extended fraud alert, you provide the credit bureau with a telephone
number that must be used to contact you in order to verify that you
are the person requesting the credit. If they can‘t reach you to obtain
your authorization, the credit request will be denied. An extended
fraud alert stays on your credit report for seven years.
If you‘ve been a victim of identity theft, and you‘ve filled out the ID
Theft Affidavit and Fraudulent Account Statement, you can request
an extended fraud alert. You will then be eligible to receive two free
copies of your credit reports from the three major credit bureaus
within the next 12 months and you will automatically be opted-out of
all pre-screened credit offers for five years. To place an extended
fraud alert on your credit report, you will need to provide the credit
bureau with proof of identity, which may include your Social Security
number, name, address and other personal information.
Once the extended fraud alert goes into effect, any business wishing
to extend you credit must verify your identity first before issuing you
credit. The creditor may attempt to contact you directly, which could
cause delays if you haven‘t kept your contact information current. If
you move, change your phone number, your name or your marital
status, for example, be sure to notify the credit bureaus so they can
update your file.
To file an extended fraud alert, send the following letter:
(Date)
Experian
P.O. Box 9556
Allen, TX 75013
Dear Sir/Madam:
I am writing to request that an Extended Victim Alert be
placed on my credit reports from all major credit reporting agencies.
Enclosed is a photocopy of a valid government issued
identification card [driver’s license, state ID card, military ID card or
passport] which was obtained prior to the date of the alleged identity
theft, plus one copy of a current [utility bill, bank statement or
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insurance statement] showing my name, current mailing address and
the date of issue.
Also enclosed is a copy of a valid identity theft report or ID Theft
Affidavit that I have filed with a [federal, state or local] law
enforcement agency. The report number is:__________________.
IV if applicable)
zip code
• Date of Birth
Below are the two phone numbers that I wish to have included in
my alert. Please contact me at these numbers should anyone attempt to
obtain credit using my credit information.
Primary phone number: [xxx-xxx-xxxx]
Secondary phone number: [xxx-xxx-xxxx]
Sincerely,
[Your name]
Be sure to send a copy of your identity theft report, not the original.
And send your request for the extended fraud alert via certified mail,
return receipt requested.
5. Close all your current financial and credit accounts . Write
the Security or Fraud Investigation Department at each financial
institution and every creditor you actually have an account with and
ask them to close your account and reopen it with a new account
number. Send the letters certified, return receipt requested. Remember
to send copies, not your originals, of any supporting documents.
Follow up any phone calls with a letter outlining what was discussed
in the phone call.
6. Find out where the fraudulent bills are going. Contact
creditors you haven‘t personally opened accounts with and find out
the address where they are sending the fraudulent credit cards or bills.
Tell the creditors to send you a copy of the account application used
by the criminals to open any fraudulent account in your name. It is
mandatory that they send you this application and any other business
transaction records relating to your account, at no charge, within 30
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days of your request. Remember to follow-up any telephone request
with a mailed request, sent certified, return receipt requested.
Once you have the address where ―your‖ mail is being sent, notify
the local postmaster to forward all mail in your name to your actual
address. This will help you discover if there are any other accounts
that have been opened in your name or if any other credit has been
applied for in your name. Many creditors have a fraud dispute form
they will want you to fill out. Ask the creditor if they will accept the
ID Theft Affidavit instead of their fraud dispute form so you don‘t
have to keep filling out form after form. If the company doesn‘t have
a standard form, send them a signed original of your ID Theft
Affidavit. Once the account has been closed and the identity theft
issue has been resolved, ask the creditor to send you a letter stating
that they have closed the disputed account and that you are not
responsible for the fraudulent debts. This letter will be your best proof
if this debt ever shows up again on your credit reports.
7. Report any stolen checks to your bank or financial
institution and put a stop payment on those check numbers .
Cancel your checking and savings account and ask your financial
institution to issue you new account numbers. Get a new ATM card,
account number and password. Remember to do the same for any
investment accounts you have as well.
8. File an identity theft complaint with the Federal Trade
Commission. This will help them them track down and stop identity
thieves. You can contact them on-line, by telephone or by mail.
Thanks to the Federal Paperwork Reduction Act, the FTC has asked
that you file your complaint electronically, using their on-line
complaint form (www.ftc.gov/idtheft). You can reach the FTC
Identity Theft Hotline at 877/438-4338 (TTY: 866/653-4261).
RECOVERING FROM IDENTITY THEFT
Most people who are victims of identity theft report they feel
personally violated. They feel as if someone had come into their home
physically and stolen something very precious from them. Which they
have, in a sense. They have attempted to hijack your reputation, your
integrity. Some creditors, not knowing if you are the real you or the
fake you, may become hostile or disparage your character as you‘re
trying to recover from identity theft. Stay the course.
Keep reminding yourself that just because someone has a
perception of you being a deadbeat, this doesn‘t mean that this is who
you are. You know who you are. What other people think of you, as
hard as it may be to accept when we‘re taking something personally, is
none of your business. Your business is to recognize that the identity
thief, whoever he or she may be, hasn‘t ―done this thing to you.‖ They
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have simply ―done this thing.‖ It‘s not personal. It‘s simply a way this
thief has found to overcome his or her sense that they are not enough.
It may seem like small consolation to remember the old saying
―imitation is the greatest form of flattery.‖ But the attitude you take
toward the identity thief is going to determine how well you recover
from an identity theft.
1. Request a security freeze if you‘re allowed to in your state.
2. Lift the security freeze only temporarily if you‘re applying for new
credit.
3. Be proactive and take the listed steps to avoid identity theft.
4. Put an initial fraud alert on your credit report if you suspect you
may be at risk for identity theft.
5. Take quick, decisive action to limit the damage done if you‘re a
victim of identity theft.
6. Keep focused on what you know is true about who you are. Don‘t
let yourself become jaded because of one scared thief‘s actions.
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CHAPTER 12
What If You Get In Over Your Head Again?
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
I know it is frustrating not having the cash on hand to do what you
want, when you want to do it. I know that borrowing money on credit
gives you the ability to fulfill your needs right here, right now. I also
know how hard it is to watch more and more of your hard-earned
money go to pay these bills every month.
You‘re left with less and less cash on hand to do what you want,
which then causes you to borrow even more on credit to fulfill those
immediate needs, and then THAT bill comes and you are stuck trying
to figure out how you are going to pay the growing credit card bills.
Next thing you know, you‘re relying on credit to pay for everyday
items.
Sometimes it seems like an endless cycle, doesn‘t it? And
bankruptcy was supposed to stop that; bankruptcy was supposed to
give you a fresh start, wasn‘t it? Yet things may now be just as bad as
they were before you declared bankruptcy, or at least they look like
they‘re headed that way.
In my research I‘ve discovered the biggest factors that determine
whether or not someone may wind up being a bankruptcy filer:
Overspending. Spending more than is coming in, not creating setasides for periodic large expenses.
Lack of savings. Not having enough money set aside from your
income to create a cash cushion
Medical bills. Being underinsured, choosing lower premiums in
exchange for lower coverage, not having disability insurance.
Uncorrected credit report errors. Not taking the time to correct
errors, which can result in higher interest rates.
I‘ve also discovered that most people who have difficulty getting
back on their feet after bankruptcy run into trouble in one of three
places:
 They don‘t update their credit reports, so the old, negative
information about each account appears, along with the
bankruptcy, and sometimes even collection agencies for the
same account.
 They don‘t take time to slowly rebuild their credit with a
good credit card that reports their payments to all the major
credit bureaus
 They aren‘t able to keep up with debts they reaffirmed
during the bankruptcy.
That‘s why I have written this book. To give you these tools so you
can truly have a fresh start after bankruptcy. Now, if you‘re reading
this book after you‘ve already gotten aboard the runaway train, you
may be asking yourself: How do I get the train to stop before it jumps the
tracks and derails again, taking me headlong down the cliff into financial ruin and
thoroughly devastating my self-confidence and financial future? Take a deep
breath! If you find yourself in debt over your head again, don‘t panic. I
know it‘s hard to think about being in debt again, but there is a way
out!
If things are just a little tight, there is a quick and easy strategy you
can use to start getting things back on track and stop having to live
paycheck to paycheck. First, stop charging for 30 days. Put the credit
cards in the freezer in a plastic bag filled with water and don‘t even
think about using them. You may find that not adding any new debt is
all you need to do to get back on track.
Most of us get stuck in ―debt management‖ rather than ―debt
repayment.‖ Debt management is where you send in a $200 payment
to a credit card, but you charge $210 that month (or more), and when
you get your new bill, you still owe the same amount. Sticking your
credit cards in the freezer, where you can‘t add any new debt to them,
will help you get out of debt faster.
In addition to not charging on credit cards, it‘s also important not
to borrow money during the 30 days either. This is a common mistake
people make when they stop charging. They figure they can pay back
people when more money comes in.
Avoid ―buy now, pay later‖ offers that come to you. Whether
you‘re buying a magazine subscription or a new dining room set, don‘t
buy it unless you have the money to pay for it now.
I know it can be very scary to try and live only on the cash you
make. If you start having difficulty making ends meet, don‘t panic.
And don‘t automatically assume that you have to sacrifice everything
in your life to avoid taking on new debt.
The most important debts are your secured debts: your car loan and
your mortgage or rent. Once you‘ve paid for those each month, use
your remaining income for daily living expenses: food, insurance,
gasoline, utilities. Finally, use your remaining income to pay a little
something toward each of your unsecured debts, so you don‘t
jeopardize your home or your family‘s well-being. Just because a
creditor says you ―have to‖ pay a certain amount each month doesn‘t
mean you need to sacrifice your family‘s well being. The trick to taking
control of your financial future is to honor yourself first. Know how
much you can realistically pay each creditor and don‘t overextend
yourself trying to make the creditor happy. As long as you are
committed to paying the debt off in full, that‘s all that matters. Do it
in a time frame that doesn‘t create undue hardship for your family.
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WHAT IF YOU GET IN OVER YOUR HEAD AGAIN
SHORT-TERM STRATEGIES TO HELP YOU GET BACK ON TRACK
As you work to build up more income and pare down your
expenses, you might want to incorporate some of these short term
strategies into your life:
1. Sell items you can do without. Start with the big items, then look to
sell smaller items. Garage sales, consignment shops, flea markets and
free newspaper advertisements are all great places to sell items, large
and small. Look at all the books, videos, extra electronic equipment
and appliances, collectibles, clothes and sports equipment that are
cluttering up your home.
Start small, so you don‘t get too overwhelmed at once. Take one
box, one drawer, one room at a time. You‘ll be surprised at how much
more motivated you‘ll be once you convert your first batch of clutter
into cold hard cash! If you‘re not sure it‘s a good idea to sell a big
item, calculate what it costs you to own the item, versus what it would
cost to rent it for the same number of days you used it.
For example, say you have a boat. Write down how many days you
spent on the boat in the past 12 months. Don‘t include days you spent
cleaning, etc. Only include days you actually had fun on the boat.
Then write down how much you‘ve paid out on the boat in the past
12 months. Include any monthly payments, dockage fees, and
supplies. Then add in an hourly rate for time spent maintaining the
boat. This will tell you how much you‘ve ―paid‖ to own the boat this
year. Next, call around and find out how much it would have cost you
to rent a boat for the number of days you used it. Now you can easily
see which costs you more right now — renting or owning. If it‘s less
expensive to rent, it makes more financial sense to sell the boat rather
than keep it.
I understand your big ticket item, like a boat or a classic car or a
motorcycle, may have sentimental value and it makes you feel good,
but right now it may be causing a drain on your finances. You‘re
always better off getting the best price you can while you‘re in control
of the situation. If people ask why you‘re getting rid of these items,
just say, “You know, I just got tired of them. I figured someone else could enjoy
having them more than I’m enjoying them now.” Down the road, when
you‘ve got your finances back under control, you can replace these
items, or buy even better toys — for cash — and not have the debt
hanging over your head.
Do you have a car with a loan that‘s ―upside down,‖ where you owe
more on the car than it‘s worth? If so, try selling the car. When you
find a buyer for your car, negotiate a price, and make sure the buyer is
approved for financing. Then call your lender, tell the lender that you
have a buyer, and how much they‘re willing to pay, and negotiate with
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your lender to see if you can pay a lower monthly payment on the
remaining amount.
Your lender may be very interested in this option, since he/ she
doesn‘t want to have to repossess the car or have you fall behind on
payments. Remember: If the first person you talk to can‘t help you,
keep asking to be transferred until you reach someone who has the
authority to work with you. Some lenders may balk at helping you
since the remaining amount you owe would no longer be secured by
the car. Smaller banks and private finance companies may be more
willing to work with you.
2. Give yourself and your family members a temporary allowance. This may
sound odd, or controlling, but it can be a lifesaver. Most of us spend
an enormous amount of money each day or each week on ―stuff.‖
You know the feeling. You leave home with $20 and by the end of the
day your wallet is empty, and you have nothing to show for the $20
you spent, right? Make sure that both you and your spouse are okay
with setting up an allowance situation, so one of you doesn‘t come
across as a ―disciplining parent‖ and the other one as a ―punished
child.‖ Money can carry a lot of emotional weight, so talk through
what‘s being triggered when you bring up the subject of cutting back
on money.
Cutting back on things you ―want‖ can push some buttons. So try
to keep in mind this important thought: Cutting back or eliminating
the things you ―want‖ now, for the next six months, will make it
possible for you to have many more of the things you ―want‖ for the
rest of your life, without debt. If you don‘t take action now, you‘ll
always have to pick and choose between the things you ―want.‖ Set up
a temporary allowance and the end result will be permanent
prosperity.
3. Boost your income by renting out space in your home or garage. Another
suggestion that might offer immediate relief is to rent out a room in
your house. I know giving up privacy is a hard thing to do, but it will
provide you with some much needed cash that can break the debt
cycle. Before credit cards, many widows and other cash strapped
families rented out rooms and became ―boarding houses,‖ providing
valuable rental space for younger people.
Several good places to find short-term renters are local universities,
hospitals and large corporations. Call the public affairs office at the
universities and hospitals and the human resource department at
corporations near you to see if there is a need for short-term rentals in
your area. You might also be able to make a little extra money by
renting out garage space to someone who needs a place to store a
vehicle, or a place to work on a large project.
4. Track your expenses for one month. Get a shoebox and put it on the
kitchen table and tell everyone in your family to put receipts for
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everything into the shoebox. If you use a vending machine at work,
immediately take a scrap of paper, write down ―Soda, 50-cents‖ and
the date, then stick it in your wallet or your pocket. When you get
home, empty your homemade receipts right into the shoebox.
At the end of the month, sit down and write out what your
expenses and income were that month, so you can figure out where
you‘re spending your money. This lets you see where you‘re spending
more money than you want on stuff you don‘t want. You can then
free up some of that money to pay down debts or pay for the things
you do want!
For a really good do-it-yourself program, I recommend getting a
copy of The Budget Kit: The Common Cent$ Money Management Workbook
by Judy Lawrence (www.moneytracker.com; 408/747-9589). This 8 ½
x 11 workbook is straightforward, easy to use and will help you
prepare for both expected and unexpected expenses throughout the
year. And if you‘re computer-savvy, Judy also offers the worksheets
from the book as Excel spreadsheets, so you can easily plug your
information in, make changes and do ―what-if‖ scenarios to your
heart‘s content!
Judy is also the author of The Money Tracker. You can carry this book
with you to track your expenses, instead of using the shoe-box
method. The Money Tracker includes a monthly section to help you
avoid your ―money triggers‖ and explore your emotions when you
spend money. It‘s a great companion to my free e-book, Heal Your
Relationship With Money. The book also has a ―splurge diary‖ and
money journal.
5. Examine where you’re spending more money than you need to on necessities.
There are some necessities, such as insurance, that you shouldn‘t
scrimp on. But that‘s not to say that you have to overpay for them,
either. For instance, premiums on term life insurance are much lower
than premiums on insurance that builds up a cash value (such as
whole life, variable life or universal life insurance).
One place to cut monthly costs is to buy a term life insurance policy
to replace your cash value life insurance policy. Several good insurance
companies sell term life insurance without charging a commission.
You simply apply for the insurance and, once you‘re accepted, cash
out of your old policy. To cancel your old policy, write your old
insurance company, and ask them to send you cancellation forms and
forms for the return of any cash value. Send your letter certified,
return receipt requested. You should hear back within two to three
weeks. If not, call your insurance agent.
Once you receive the cash value that‘s owed to you, you then can
use part of the money to pay your premiums (or prepay your premium
for the entire next year) and then use the rest to pay your daily living
expenses or to pay off your debt.
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You can get a quote from a variety of high-quality, low-fee
insurance companies for free by calling Insurance Information, Inc. at
800/472-5800 or 508/394-9117. You can also go on-line and get free
quotes from select companies. One of the best free quote sites I‘ve
found is www.ReliaQuote.com Your best bet will be to get a policy
with a 10-year renewable term, guaranteed to age 70.
6. Use the DebtBuster Strategy if you can “do-it-yourself,” or see a credit
counselor. The DebtBuster Strategy, on page 83, will help you see at a
glance who you owe and how much you owe. It will also help you
work out a realistic way to pay off those debts, in as little as one year.
If this is too difficult, then I encourage you to go see a credit or
budget counselor.
You‘re not alone if you can‘t set up or stick to a budget.
Budget counselor Judy Lawrence worked hands on with a variety of
clients for years, specializing in budget counseling for the wealthy. She
had an heiress who received over a million dollars a year from her
trust fund — and couldn‘t make ends meet. Judy got her to work
within a budget of $20,000 a month, and now she‘s able to save
money, donate money to charitable causes and still do the things she
wants to do. It just goes to show you that no matter how much money
you have, it won‘t ever be enough if you don‘t have a solid plan
outlining where you want to spend your money. Most of us haven‘t
learned how to make a budget work for us. Instead, we‘re constantly
trying to cram our expenses into an unrealistic budget.
You can do most of what credit and budget counselors do. But if
you‘re too emotionally involved with your money situation to create
and stick with a plan and negotiate with your creditors, then going
through a credit counselor may be a good option for you. Sometimes
it just helps to have a third party acting as a go-between. You can even
give creditors permission to talk to a spouse or a friend who isn‘t
emotionally involved, if talking to your creditors upsets you too much.
Also, if you discover that filing bankruptcy again is your only
remaining option, the new bankruptcy law now requires you to go
through credit counseling prior to filing for bankruptcy. Credit
counselors, including those who are listed as Consumer Credit
Counseling Services (CCCS) are nonprofit organizations that offer
free budget counseling and debt management (repayment) programs.
Their pre-bankruptcy services are offered for a one-time donation of
$50 and their debt management programs (DMP) are usually offered
for a small monthly fee (which is built into your monthly payment).
These companies will often negotiate with your creditors.
Consumer Credit Counseling Services (CCCS; 800/388-2227) has local
offices across the country and the 800-number will automatically
connect you to the office nearest you. The quality of service (and the
cost) varies at each site, but you can generally get good budgeting help
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at CCCS. If the counselor tells you that bankruptcy is your only
option, try the other organizations listed here first before you take that
step. If you‘d like an ongoing relationship with your counselor, where
you can sit down face-to-face every few weeks, this is the group for
you.
Readers have reported excellent service from the CCCS in Houston,
Texas. Less than stellar reports have come in regarding the Budget
Credit Counseling Service in New York City. If you wind up using
CCCS, please write me and let me know how your experience is —
good, bad or indifferent!
Credit counseling services have received a great deal of bad press
during the past few years. I personally recommend that you select a
credit counseling agency which is a member of
The National Foundation for Credit Counseling (NFCC). These
credit counselors have undergone certification training and must
adhere to a strict code of ethics. You can find a NFCC member near
you using their on-line Agency Locator (www.debtadvice.org) or by
calling their 24-hour automated phone line at 800/388-2227.
Many NFCC members offer on-line support and phone support.
However, many also are open only from 8am-5pm Monday-Friday. If
you are only available during evening or weekend hours and want
phone support, or prefer to meet with a counselor in-person, you may
find other credit counseling services through the U.S. Trustee
Program. Visit their website at http://www.usdoj.gov/ust/index.htm.
On the right, you‘ll see a header called ―Bankruptcy Reform.‖ Look
beneath that header and you will find a listing for ―Credit Counseling
& Debtor Education.‖ Click on that link and you will be taken to a
page where there is a box on the left that says ―Credit Counseling for
Consumers.‖ This is where you‘ll find a listing for ―Approved Credit
Counseling Agencies.‖
Please remember, these counseling agencies are on this list only
because they have met the requirements that the U.S. Bankruptcy
Trustees have set up for pre-filing education. They may or may not
offer debt management/repayment programs and there is no
governing body behind them (like NFCC members have) to protect
your rights and to ensure that the counselor you‘re working with is
trained and/or certified.
There are many good independent counseling services that are not
members of the NFCC. Be sure to check any credit counseling agency
against the criteria I list below and make sure there are no complaints
on file with the Better Business Bureau where the company is
headquartered.
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WHAT TO EXPECT WHEN YOU USE A CREDIT COUNSELOR
With a credit or budget counselor, you set up a workable budget
and send money to the credit counseling service so they can pay your
creditors directly. You write one check to the credit counselor and
they take the money and divide it up among your creditors. An added
bonus of using a credit counselor is that you will learn some new
money management strategies, so you have a better chance of staying
out of debt for good.
Most credit and budget counselors can work with your creditors to
get them to accept smaller payments from you, and attempt to freeze
or lower interest rates and late payment or over-the-limit fees. When
you use a credit counselor, they can often stop the harassing phone
calls from creditors that seem to come every ten minutes during
dinner.
Credit counselors can only help if you have income to make
payments to your creditors. Even part-time income will be enough to
get you started. The required payments usually run about 3% of the
debt, and are usually paid out over 36 months, much the same as a
Chapter 13 bankruptcy.
Your credit counselor should be able to get your creditors to either
immediately reduce their interest rates or get them reduced after
you‘ve made three to six months‘ worth of payments on time. Larger
creditors, such as MBNA (now Bank of America) and Citibank —
which often will only negotiate their interest rates if you‘re using a
credit counseling service — are more likely to lower or freeze your
interest rate immediately. If you stick with the program, your debts
will generally be paid off within three years.
Some credit counseling agencies report to the credit bureaus that
your accounts are under repayment through them. As a result, some
of your accounts will be listed on your credit report as ―being paid
under a repayment plan,‖ but not all of them will be listed that way.
Other credit counseling services don‘t report anything to the credit
bureaus, so your credit reports may still show that you‘re behind on
your payments. Your creditors will generally only report that your
account is being paid under a repayment plan if you‘re paying less than
your normal minimum monthly payment or if your payments under
the plan are paid to them late.
Many people who have used credit counselors have found that
they‘ve spent three to six months in the repayment plan before their
accounts started being reported as up-to-date. Even so, many
creditors don‘t even report this activity on your credit report. After
three to six months of repayment through a good credit counselor,
however, you should find your credit report in good standing.
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In general, it is better to show that you paid the account with
budgeting help than to show that you were consistently late, or that
the creditor charged off the account. Once you finish the repayment
program, your accounts will be adjusted to show that your account
was paid in full.
In the past, independent credit counselors were more likely to have
your best interest at heart because they didn‘t receive payments from
creditors to offset their expenses. Most credit counseling agencies,
including those who are members of NFCC, are set up to help both
you and your creditors. Think of it as a win-win-win situation. You
receive help getting your bills paid. The creditor knows they will be
receiving some amount from you each month. And the credit
counseling agency is the middleman, helping to make it all happen.
Some offices are more consumer-friendly while others are more
creditor-friendly. Shop around to find a credit counseling service that
is willing to work with you on your behalf to get creditors to freeze or
lower interest rates, remove late payment or over-the-limit penalties,
and update your account‘s status on your credit reports.
SELECTING A GOOD CREDIT OR BUDGET COUNSELOR
If you do decide to use a credit counselor‘s debt repayment
program, after you meet with the counselor for your free or low-cost
(usually $20-$50) budget counseling session, ask for an experienced
credit counselor even if you‘re using an agency that is a NFCC
member. When credit counselors are first hired at NFCC member
agencies, they usually receive a few weeks of training, where they
follow an experienced counselor around.
Then the credit counselor starts the certification process, which
takes 18 months. During those 18 months, the credit counselor will be
tested on material from various study guides, which covers things like
counseling psychology, consumer rights and collection practices. As a
result, a new counselor may not yet have any experience or knowledge
about a particular problem you may be having. Your financial future is
too important to put in the hands of an inexperienced counselor. Ask
to be assigned to a counselor who has at least two years of experience.
Then, once you get your counselor, be sure to ask these questions
before you sign up:
1. Which of my creditors have worked with you in the past to reduce payments,
or freeze or lower interest and fees? Before you sign up for a repayment
plan, make sure that the counseling service can help you reduce
interest and fees for your creditors. Not all creditors are willing to
negotiate with credit counselors. If most or all of your creditors are
willing to negotiate, then it may be in your best interest to start a
repayment plan. If most of your creditors won‘t work with the credit
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counselor, then a repayment plan won‘t work for you. To be on the
safe side, ask the credit counselor for a list of the creditors that have
worked with them or have them put in writing which of your creditors
they have successfully negotiated with in the past. These creditors
often work with credit counselors: American Express, AT&T, Bank of
America, Capital One, Chase, Citibank, Discover, GE Capital, JC Penney,
Sears (which is part of Citibank), USAA and Wachovia.
2. Can you take money electronically out of my checking account or
will I have to send you a certified check or money order each month?
You‘re much more likely to stick with a repayment plan if making the
payment is a ―no-brainer.‖ If you‘re pressed for time and don‘t think
you can get to your bank each month to get a certified check, make
sure the counseling service can take money out of your account
electronically.
3. When will my creditors be paid? Some counseling services have a set
date each month when they take money out and apply it to your debts.
Sometimes, creditors wind up being paid after their due dates. Make
sure that the counseling service will work with your creditors to
change the due dates or will set up your payment schedule based on
when you get paid. The best services will work around your payday
and your bills‘ due dates.
4. How often can I see statements of my accounts? Your counselor should
send you monthly reports or provide you with 24/7 on-line access to
your account so you can see you how much of your payment is going
toward interest, how much toward the minimum payment and how
much toward the counselor for his/her services. Generally, expect to
pay around $20 to get started and $5 a month for each creditor. If
you‘re paying much more than that, the counselor isn‘t doing you a
service. After you‘ve been with the program three to six months,
request a copy of your credit reports and double check that the
creditors are reporting your accounts the way the counselor said they
would.
5. Do I have to put all of my debts on the repayment plan or only some?
Accounts that have low balances or accounts that you‘re current on
don‘t need to be listed in the repayment plan, unless you want them to
be. Don‘t let a credit counselor strong arm you into putting all the
debts onto the repayment plan unless you believe it‘s the only way
you‘ll get them paid off.
6. Will I always deal with the same counselor or at least get a live
person on the phone when I call during regular business hours? How
long does it take for you to return phone calls? Make sure you‘re
comfortable with the answers you get here, and that you‘re
comfortable with the people you might be dealing with. After your
free budget counseling session, call your counselor once or twice with
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questions you have about the budget paperwork to make sure that you
can easily get your questions answered and your phone calls returned.
CHOOSING THE BEST CREDIT OR BUDGET COUNSELOR FOR YOU
Choosing the best credit or budget counselor for your needs is a lot
like choosing the best credit card. There is no one best counselor for
everyone. The best counselor for you will depend on your needs.
Individual budget coaches or prosperity advisors such as myself, work
well if you need hands-on guidance — but they will also expect you to
be actively involved in getting out from under your debt.
For instance, I encourage people I counsel to make a commitment
to not add any new debt, one day at a time. I also encourage you to
change the way you think about debt and money, explore and expand
your money beliefs so you start getting rid of negative thoughts and
actions about money, and start filling your life with more positive
thoughts and actions about money. And I have you use my GoalGetting
Strategy in Chapter 4, to get focused on what you want to achieve in
life. That‘s a lot of work!
If you‘re up for the task, you can get additional information on my
prosperity advisory services by calling 800-507-9244. I charge
$150/hour to help you work through your financial issues, which may
include helping you create your own repayment plan that fits your
family‘s income. The ultimate goal of my sessions is to help you create
a permanent prosperity consciousness so you can create true wealth.
There is no obligation or payment due to any of the debt repayment
organizations until after you‘ve determined what your monthly
payment would be under the plan and you‘ve joined their program. I
encourage you to explore all your options and then pick the one
you‘re most comfortable with.
Call the credit counselor to make an appointment and bring all your
paperwork with you, showing your expenses and your income. At
your appointment, you‘ll meet with a counselor who will conduct an
in-depth interview with you, to help you set up a household budget
separating your needs from your wants. That budget counseling
session may be all you‘ll need. Or you may want to continue working
with a counselor to set up a debt repayment program.
You may find that you are in need of a debtor‘s rights attorney like
the attorneys at Lawyers United For Debt Relief (www.ludr.org,
312/939-2221). Debtor‘s rights attorneys work on your behalf to
negotiate with your creditors and get them to stop foreclosure,
repossession or garnishments and get creditors to lower your
minimum payment. LUDR may be right for you if you can‘t even pay
your creditors the minimums due or if you‘re behind on your car or
mortgage payments. Your monthly fee will be more expensive than it
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would be with a credit counseling agency; what you are getting is a
lawyer working on retainer. You‘ll pay an initial payment to set up the
program, then 10% of your monthly payment, which averages out to
$26/month) over the course of your repayment program. In the end,
you‘ll pay your debts off in full and you‘ll know from the beginning
the exact date you will be debt free.
LUDR and other debtor‘s rights attorneys may also be able to help
you refinance defaulted student loans at an interest rate of 8.25%, so
long as the loans are not already involved in a court case. They can
also help you recover damages from creditors who violate the Fair
Debt Collection Act.
No matter what type of counseling service you use, once you
complete your repayment program, I encourage you to get copies of
your credit reports again. Then use the strategies in Chapter 1 to make
sure that all the accounts you have paid off under the repayment
program are being reported accurately.
Sometimes your credit reports will show that you‘re still in a debt
repayment or debt management program. Other times, your credit
reports will show that you still have past due bills, even though those
are the bills you just paid off. Check out your credit reports and take
whatever steps you need to take to update your credit report, so it still
shows you in the best light possible.
DO YOU FIND IT HARD TO STOP SPENDING MORE THAN YOU MAKE?
Declaring bankruptcy and getting out of debt are incredibly
empowering things to do. But they won‘t do you any good at all if you
still find yourself spending more than you make. You‘ll find yourself
caught in the same vicious circle eventually. If this happens to you, I
urge you to pick up a copy of How to Get Out of Debt, Stay Out of Debt
and Live Prosperously, by Jerrold Mundis.
If habitual overspending stops you from digging your way out of
debt, you may be a compulsive spender and Debtors Anonymous can
help. Debtors Anonymous is a 12-step program that can offer you
support and guidance in overcoming a barrier to your financial
recovery. You do not need to actually be in debt to be a member of
DA. The only requirement for membership in DA is a willingness to
stop incurring unsecured debt. There are many reasons people are
drawn to Debtors Anonymous. Business failures, a pattern of
bouncing checks, excessive student loans, unpaid taxes, gambling, real
estate losses, even messy divorces are good reasons to attend DA
meetings.
One of the greatest things about DA is that it is founded on the
principle of taking responsibility for your debts and for your actions
that caused the debts in the first place. A good DA meeting can help
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you discover how to repay your creditors in a positive way, help you
set up a budget or spending plan and learn to work with what you
have without getting so stressed out or so financially strapped trying
to pay the squeakiest wheel that you wind up getting into debt again. I
love how people in DA focus on their habits and find new friends
who are willing to listen and not judge as you work through your
money issues. After all, they‘ve either been there before or are going
through the same thing too!
Debtors Anonymous groups can often be supportive, but be
forewarned that there are factions of DA that frown on bankruptcy.
Mostly this attitude comes from all the people they see come through
the doors several years after bankruptcy, in debt up to their eyeballs.
Don‘t let that deter you from getting the support you need. You can
start a new trend of DA members who join up right after bankruptcy
— and remain solvent for the rest of your life!
Check your local newspapers and community center listings for
meetings in your area. You can also find out about meetings in your
area by sending a self-addressed, stamped business-sized envelope to:
The General Service Board of Debtors Anonymous, P.O. Box
920888, Needham, MA 02492. To find a meeting near you, I‘d also
recommend visiting http://www.solvency.org. Debtors Anonymous
also has a wonderful website that you might want to visit:
http://www.debtorsanonymous.org. Remember: the only requirement
for being a member of DA is a desire to not take on any new debt.
You‘re not alone if you spend money to make yourself feel better.
But there are other, more constructive ways you can deal with
personal problems besides running to the nearest store to buy
something, or buying gifts as a way of expressing your love, or buying
gifts in order to be ―accepted‖ by others.
Today, you can start to change your habits a little at a time.
When you get the urge to buy something to make yourself feel
better, slow down, take a deep breath, go for a walk, exercise, garden,
putter around the house, take a hot bath, or even clean out some
clutter in your life. You may just find something you‘d forgotten you
owned, which is almost as good as going out and buying something
new to begin with!
Clutter and debt are often connected in our lives. That‘s why I cowrote a book called Effortless Freedom From Clutter and Debt,
which is currently available electronically at www.clutteranddebt.com.
This book combines debt reduction, organizing, time management
and prosperity principles to help you take control of your clutter and
debt in 20 minutes or less, every day.
Compulsive gambling could also be an obstacle to your financial
security. Compulsive gambling is a serious illness that creates
mountains of problems, financial and emotional. You‘re not alone if
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you have a gambling problem. The United States Department of
Public Health estimates that there are six to ten million Americans,
men and women alike, who suffer from compulsive gambling.
COULD YOU HAVE A GAMBLING PROBLEM?
If you‘re wondering if you might have a gambling problem, or like
to gamble but don‘t think it‘s a problem for you, I encourage you to
honestly answer the following twenty questions, just to be on the safe
side:
1. Do you ever take time off work to go gambling or to recuperate from gambling?
2. Has gambling made your home life unhappy?
3. Has gambling affected your reputation?
4. Have you ever felt bad after gambling?
5. Do you ever gamble to get money to pay debts or solve financial difficulties?
6. Does gambling cause a decrease in your ambition or your efficiency?
7. After losing, do you feel you must return as soon as possible so you can win
back your losses?
8. After a win, do you have a strong urge to win more?
9. Do you often gamble until your last dollar is gone?
10. Do you ever borrow money to finance your gambling or to pay for something
that you couldn’t afford to buy yourself because of your gambling losses?
11. Have you ever sold or pawned anything to gamble?
12. Are you reluctant to use “gambling money” for normal expenditures?
13. Does gambling make you careless about the welfare of yourself or your family?
14. Do you ever gamble longer than you had planned?
15. Have you ever gambled to escape worry or trouble?
16. Have you ever considered committing an illegal act to finance your gambling?
17. Does gambling cause you to have difficulty sleeping?
18. When you have an argument, disappointment or frustration, do you get an urge
to gamble to make yourself feel better?
19. Do you ever have an urge to celebrate any good fortune with a few hours of
gambling?
20. Have you ever considered suicide as a result of your gambling?
How did you do? Most compulsive gamblers will answer ―yes‖ to at
least seven of these questions. If you think you may have a gambling
problem, I encourage you to contact Gamblers Anonymous, a 12-step
support program that is open, free-of charge to people who have a
desire to stop gambling. Groups meet all over the country. To get
information about meetings in your area call 213/386-8789 or write:
Gamblers Anonymous International Service Office; P.O. Box 17173;
Los Angeles, CA 90017. Their website
(www.gamblersanonymous.org) also has an on-line directory of
meetings, worldwide.
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HOW TO KEEP FROM FALLING BACK I NTO DEBT
If you find yourself in a financial crunch down the road — say you
get laid off unexpectedly (which happened to me!), you can still easily
keep yourself from getting back into debt. Don‘t let yourself get
overwhelmed by the total amount you owe. Instead, break the debt
down into manageable chunks. This will help you get yourself back
up-to-date on your bills.
For some bills, you can make payments that are smaller than the
monthly requirement until you regain your financial footing. Even a
$5 or $10 payment shows that you‘re making a good faith effort. Try
to send at least $5 to each of your creditors every month. By making
small payments you let the creditor know that you are trying to catch
up.
It is important, though, that you don‘t let late fees and missed
payment fees pile up, or you‘ll be taking one step forward and two
steps back. Follow the steps below and you‘ll keep moving forward.
CALL YOUR CREDITORS FOR A NEW REPAYMENT SCHEDULE
If you find yourself falling behind with your creditors, call your
creditors and ask them to negotiate a new repayment schedule with you. Make this
call before your creditors start calling you. This keeps you in control
of your finances. Sit down and work up a budget with your daily living
expenses. Determine how much you can realistically pay each creditor
and how long it will take you to resume your regular payment
schedule.
Then call your creditors, or ask a friend or relative to call on your
behalf (be sure to tell your creditor that your friend is authorized to
talk to them, or this won‘t work). When you call, explain your
situation calmly, and propose your modified payment plan. For
example, you might offer to pay 50% of your normal payment for
three months and then resume your regular payment amount.
Some creditors are starting to realize that working out these
―hardship payment plans‖ is in their best interest. One woman found
that Citibank was helpful, and her willingness to stick to her guns
about how much she could pay each month created a ―win-win‖
situation for both her and her creditor:
My [Citibank] account was chronically delinquent due. They
placed me on a hardship program with a 5% interest rate and a
monthly payment of $85. My balance is $5,500. The hardship
program is set up for six months at a time, and then the payments
revert back to the original amount and interest, once the account is no
longer delinquent.
I have gone through the cycle of making six regular payments and
then not making the higher payments and being placed back on the
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hardship program several times. Citibank just reviewed AND
renewed my hardship payment. They will get twelve payments in a row
instead of six. I get 5% interest and a payment I can afford.
Call your creditors and tell them your financial situation. Ask about
the hardship program and explain how much you can afford. They
take what you can pay or they get nothing. Stand your ground and
they will listen to you.
Write down the name of the person you talk to, the date and time,
and what you agreed to do. You may or may not be successful with
the first person you talk to. Do not be discouraged!
Remember: Your goal is to get the creditor to say ―Yes!‖ to your
repayment plan. Faced with a choice of no money or some money,
your creditor is eventually going to work with you. If you get turned
down, politely ask to speak to the person who has the authority to
work out a deal with you. And never, ever agree to pay more than you
know you can pay the creditor each month. Once you break an
agreement with a creditor, they are much less likely to work with you
on a repayment plan.
So if you think you can afford to send $50, but that might put you
in a pinch, stick to your guns and say “I know I can pay you $25 a month.”
If they ask for $50, simply say, “I’d like to agree to $50 a month, but that’s
just not realistic. And I don’t want you to be disappointed in me if I can’t come up
with that amount some month. I can commit to $25 a month and will send extra
money whenever I can.” Letting your creditors know up-front that your
word is important to you will strengthen your credibility.
Once your creditor agrees on the phone to your reduced payment
plan, write a follow-up letter to the person you spoke with to confirm your
agreement. Be sure to keep a copy of the letter for your records. Send
the letter via certified mail, return receipt requested, so you have proof
that the letter was received.
WRITE YOUR CREDITORS IF THAT’S MORE COMFORTABLE
If you‘re uncomfortable asking for help from your creditors over
the phone, send them the following letter as soon as you realize you‘re
going to miss a payment (or as soon as you can once you‘ve missed a
payment):
(Date)
[Creditor]
[Address]
[City, State, Zip]
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Dear Sir/Madam:
My financial situation has changed unexpectedly because [I was
laid off, lost my job, had a medical crisis, was divorced, etc.]. I cannot
currently make the minimum payments required on this account and
am asking for your assistance in getting this bill paid. I have a solid
payment history with your company [note if you’re currently behind],
and I want to keep my good credit with you. I see two possible
solutions to this problem, and I have listed them in order of which
would work best for me.
1. I would like to request a 60 day deferral, allowing me to skip
two payments. (If your account is already behind, ask for a 90 day
deferral). I trust that you would reage the account so that it remains
current and that the skipped payments would not be reported as past
due.
OR
2. I would like to request that the interest be frozen and the
minimum payment be cut in half for the next six to twelve months.
This would give me enough time to make adjustments in my budget so
I can begin repaying my account.
I apologize for the inconvenience, but I hope you can help me get
through this difficult time. Please send me your written reply and call
me within the next 10 days to let me know which option is best for
you, so I can budget the payment amount. You can reach me at [your
phone number]. The best time to call is [best time to call you].
Thank you again.
Sincerely,
[Your name]
This letter will help you get caught up with most creditors, without
damaging your newly reborn credit rating. If you have creditors who
won‘t work with you and continually hound you with telephone calls,
you may need to be more proactive with your creditors. Send them
the following certified letter:
(Date)
[Creditor]
[Address]
[City, State, Zip]
Dear Sir/Madam:
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I have attempted to work out a repayment plan with you to
satisfy your need to have my debt to you repaid, without my having to
declare bankruptcy or default on this debt entirely. To date, you have
been unwilling to work with me to make this repayment plan a
possibility. Instead, you continue to make harassing phone calls
demanding repayment of this debt.
I am writing you today to let you know that it is inconvenient for
you to phone me at home or work, or to contact anyone associated
with me, whether they be neighbors, co-workers or anyone else. As of
the date you receive this letter, all further contact with me must be in
writing to my billing address. No other contact should be made by you
to me or to anyone I know regarding this debt.
As you know, any future calls from you will be a violation of my
rights as a consumer, and I will exercise my rights to their fullest
extent, including bringing suit against you for violation of the Fair
Debt Collection Act.
As I have told you in the past, my financial situation has
changed unexpectedly because [I was laid off, lost my job, had a
medical crisis, was divorced, etc.]. I cannot currently make the
minimum payments required on this account and am asking for your
assistance in getting this bill paid using the repayment plan I have
worked out.
I trust that you will work with me, in writing, to develop a
repayment plan that will allow this debt to be successfully repaid.
Thank you again.
Sincerely,
[Your name]
Be sure to send this letter certified, return receipt requested.
Include a copy of your original letter to the creditor, with your
suggested repayment plan. Once the creditor has signed for the letter,
you are then in a position to sue them if they attempt to contact you,
or anyone else, by phone to talk about your debt. Every time a
creditor violates your rights by attempting to contact you over the
phone, you can sue them for a minimum of $1,000. Once a creditor
realizes that you know your rights and won‘t be harassed, they‘ll be
much more likely to work out a repayment plan with you that you can
afford.
WHAT IF YOU FALL BEHIND ON YOUR MORTGAGE?
Less than one year after I bought my home and started renovations,
I was laid off from my job. Between unemployment and my savings, I
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was able to pay my mortgage for six months. The first month I knew I
would not be able to make my mortgage payment, I called my
mortgage lender who suggested that I call HUD, because my loan was
an FHA loan. On FHA loans, HUD is the private mortgage insurer,
which means that HUD insures FHA loans against nonpayment.
The first thing the HUD representative said to me was, I wish you’d
called us right after you got laid off instead of using up your savings to pay your
mortgage! It turned out that, because I had an FHA loan, I was eligible
for ―HUD Assignment,‖ which is now called a ―Special Forbearance.‖
HUD reduced my mortgage from more than $1000 a month to less
than $40 a month for three years, added the remaining payment
amount to the end of my mortgage and gave me three years to get
back on my feet. Your monthly payments under a HUD Special
Forbearance could range from zero to a small portion of your current
mortgage, for up to three years. At the end of the three years, the
missed mortgage payments are tacked onto the back end of your
mortgage. So, basically you turn your 30-year mortgage into a 33-year
mortgage.
Depending on your financial situation, HUD offers several options
to help you get back on track if you have an FHA loan. The minute
your financial situation changes (you lose a job, have an extended
illness or injury, or a drastic change in your family living
circumstances), contact your lender immediately. If you have an FHA
loan, call your lender and ask to be connected to the Loan Counseling
or Loss Mitigation department. When you reach a loan counselor, say
“I want to apply for forbearance or mortgage modification assistance.”
Your loan counselor will ask you to provide current financial
information. Rather than give this information out over the phone,
ask them to fax you the form, so you can gather your financial
paperwork together to give them a complete answer. Get this
information to your lender as soon as possible. Your lender will then
review your financial information, figure out which program is best
for your situation and hook you up with a HUD counselor at the
nearest housing counseling agency. If you have a challenge
communicating with your mortgage lender, for any reason, you can
also call HUD directly at 800/569-4287.
HUD offers three programs that you may be eligible for:
1. Temporary reduction or suspension of your monthly mortgage payment. This
is the Special Forbearance I mentioned earlier. If your income was
suddenly reduced, or your expenses were suddenly increased, you
could be eligible for three years of reduced or suspended payments.
The current terms and remaining loan amount will stay the same, as
will your interest rate. Once you‘ve missed three of your regular
mortgage payments, HUD will start reviewing your case for
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forbearance. While your case is being reviewed, your lender cannot
take steps to foreclose on your home.
While you‘re being considered for forbearance, your lender will call
each month, just to verify that you‘re living in the home; if you vacate
the home, you lose your right to be considered for HUD forbearance.
Having you in your home is added protection for your lender, so don‘t
dread these calls. They‘re just checking in with you.
One of the first things my HUD counselor told me was to not be
alarmed if I got turned down for HUD assistance. She said that a high
percentage of cases are initially turned down, at least once or twice. If
you get turned down when you apply for HUD assistance, follow the
appeals process listed on the back of the papers you receive. I was
fortunate. My application for HUD assistance joined a growing stack
of applications during a federal government furlough. When the
government finally got back to business, they must have realized that
all those appeals created more work for them. As a result, my
application was approved on the first try. So don‘t give up if you get
turned down. Work with your HUD counselor. He or she will be glad
to walk you through the steps you need to take.
Once you get approved for HUD assistance, you‘ll be asked to fill
out a financial statement detailing your income, expenses, and various
debts. List everyone you owe money to, so HUD gets a total picture
of what your income and expenses look like. You‘ll also have to
provide a copy of your last tax return and your estimated income for
the coming year. HUD will then use this information to calculate what
your payments will be for the coming year. You will then get a formal
payment plan agreement from HUD. Sign both copies and return one
copy, via certified mail, to HUD. Follow the terms of the payment
plan exactly, and make your payments on time every month.
You can then use the time you‘re in the repayment plan to catch up
on your other bills, pay off other debts and get back on your feet.
Once the three year forbearance period is up, you‘ll have to start
making your regular mortgage payment again, or risk losing your
home. So use this time to your advantage. The strategies outlined in
this chapter will help you take the steps necessary to get back on track
before your forbearance ends.
2. Refinancing or extension of the term of your mortgage. If you‘ve recovered
from the financial problem and are struggling to catch up on your
mortgage, HUD or your lender may allow you to do a mortgage
modification. By modifying the interest rate or the length of your
mortgage, you can roll the outstanding mortgage payments into the
loan amount and reduce your monthly mortgage to a more affordable
amount.
3. Interest-free loan to bring your mortgage up-to-date. If you have already
missed four payments, and you are now able to begin paying your
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regular mortgage payment, your lender may file a ―Partial Claim‖ with
HUD to be paid from the FHA-Insurance fund. The lender gets its
money and you get your mortgage payments back on track. Here‘s
how it works. HUD pays your lender the past due amount and you
sign a Promissory Note for the amount paid on your behalf. The
Promissory Note, unlike a second mortgage, is interest-free. You pay
it off either when you finish paying your first mortgage, or when you
sell your home.
By law, if your lender resells your loan to a private mortgage lender
while you‘re in one of these plans, the new lender must honor the
terms of the forbearance agreements set up under HUD. Some
lenders, however, will try to bully you into believing that they can
foreclose on the loan, or demand full repayment of the money you
tacked onto the end of the loan. If your loan is sold, and the new
lender threatens you with foreclosure or demands repayment in full
for the mortgage payments you didn‘t make during the forbearance
agreement, immediately contact your HUD counselor and ask what
steps you should take. If the new lender is in violation of the original
forbearance agreement, and you made all the payments required by
you under the forbearance agreement, you may have the right to sue
the new lender to protect your home from foreclosure. You may want
to contact a debtor‘s rights attorney, like Lawyers United For Debt
Relief (www.LUDR.org; 312/939-2221) if your new lender doesn‘t
honor the terms of your agreement. Several mortgage lenders in the
past have been sued in class action lawsuits, including MERS and
OCWEN, for such behavior.
WHAT IF YOU DON’T HAVE AN FHA MORTGAGE?
If your financial circumstances change and you have fallen behind
on your mortgage, or are afraid that you will soon miss a payment, you
may still have protection from foreclosure, even if you don‘t have an
FHA mortgage. Again, immediately call your lender and ask to speak
with someone in the Loss Mitigation or Loan Counseling department.
If your lender is unable to assist you, call 800/569-4287, which will
connect you to the nearest housing counseling agency. Many states
have private and community organizations that can help you, even if
you have a conventional or VA loan rather than an FHA loan.
Most of us, when we buy a home, also buy something called
―Private Mortgage Insurance‖ or PMI. Mortgage lenders require you
to buy PMI until you have 20%-23% worth of equity built up in your
home. The amount varies depending on whether you are current on
your loan and how many on-time payments you have made. Private
mortgage insurance protects your lender against default by you. What
most people don‘t know is that PMI can also protect you against
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foreclosure. A housing counseling agency can often help you receive
this assistance before you lose your home.
How exactly does PMI work? Well, if you default on your loan,
your PMI will pay your lender a foreclosure claim to offset the loss the
lender may have suffered. Usually, this amount is more than the
mortgage payments you‘ve missed. Your PMI insurer may find that it
is less expensive for them to advance you enough money to cover
your missed payments, if you‘re in a position to start making payments
again.
Also, if you need to sell your home, even if you‘re ―upside-down‖
on your mortgage and owe more than the home is worth, PMI can
come to your rescue during a ―pre-foreclosure‖ sale. In these cases,
the PMI issuer would pay off part of your remaining mortgage, so that
you won‘t still owe the lender money after your home is sold. If you
decide to use this strategy, I strongly recommend that you first call the
housing counseling agency or consult an experienced real estate
and/or tax attorney before you get started. Otherwise, you could wind
up with ―phantom income‖ that will be reported to the IRS, and on
which you‘ll have to pay taxes.
HOW TO CONTACT AND WORK WITH YOUR PMI INSURER
Your first step, if you need help from your PMI company, and there
is no housing counseling agency in your area that can provide
assistance, is to contact the Workout Department at your PMI insurer.
Tell the insurer that you believe it will cost them less money to help
you than to pay off your mortgage lender‘s claim after foreclosure. In
order to have your PMI insurer help you, your missed mortgage
payments must be due to circumstances they deem beyond your
control: a death or illness, a divorce or loss of a job.
If your PMI insurer agrees, they may pay your lender the money
needed to bring your mortgage up-to-date. You then repay the PMI
insurer. Usually, your repayment is based on your ability to repay and
you generally aren‘t charged any interest during repayment. (This is
very similar to the Partial Claim program offered through HUD.)
Call your mortgage lender and ask them who your private mortgage
insurer is. If your lender is reluctant to reveal this information, politely
and simply state, “Because I pay the premiums on this insurance, I am entitled
to this information. I can either get it from you, or I can call the state banking
commissioner and let them know that you refused to give me this information.”
That should be all you need to do to get the information you want. If
not, call your banking commissioner to complain. You can also call
the well known private mortgage insurance companies yourself, if you
already know who holds your insurance. Here are seven of the most
well-known companies, and their toll-free phone numbers:
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GE Mortgage Insurance Corporation; 800/334-9270
Mortgage Guaranty Insurance Corporation (MGIC); 800/424-6442
PMI Mortgage Insurance Company; 800/288-1970
RADIAN Guaranty Corporation; 800/523-1988
Republic Mortgage Insurance Company (RMIC); 800/999-7642
Triad Guaranty Insurance Corporation; 800/451-4872
United Guaranty Corporation; 800/334-8966
WHAT IF YOUR LENDER THREATENS TO FORECLOSE?
There are ways to keep your house, or at least get out from under
the mortgage debt, without having your home go through foreclosure.
If you can‘t get assistance from your PMI company, go back to your
lender‘s loss mitigation department.
Tell your lender what is happening with your financial situation and
ask for the name and address of the person you can submit a proposal
to for a loan workout or a note modification agreement. These are just fancy
terms for a proposal that lets you adjust the terms of your existing
mortgage, so you can afford to keep your home.
Here‘s one ―workout‖ arrangement that will help if you fell one
month behind on your mortgage and are now in a position to
continue to pay your current month‘s mortgage, but can‘t bring that
late payment up to date. Tell your lender that you can pay this month‘s
mortgage, but that you don‘t have the resources to also pay the past
due payment.
Tell your lender you need to spread the late payment out over 12
months, so you can get caught up. For example, if your current
mortgage is $1,200, you would pay $1,300 ($1,200 plus $100, which is
one-twelfth of your mortgage payment). Also, ask the lender if it is
possible to waive the late payment fee as well. This way, you‘ll pay
your current monthly mortgage plus one twelfth of your monthly
mortgage and you‘ll be caught up again within a year — without a
negative mark on your credit report.
Then explore your options. If you could rent out your home, would
the rental income cover the payments that need to be made to your
mortgage lender? If you could arrange a land contract (with the help
of a good real estate lawyer!), could you set up the contract so the
buyer pays enough money down to cover the defaulted loan amount
and taxes, plus enough of a monthly payment to cover what the lender
needs?
Once the buyer pays 20% of the home‘s value, they can then
refinance with a conventional loan and pay you off completely. You
can then pay off the mortgage lender completely and you still have a
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good credit reference, instead of a foreclosure. And, if the buyer
defaults, your mortgage loan will be current.
If all else fails, and your best option is to sell your home, take a
deep breath. Making a financial choice to get out from under a large
mortgage can actually bring you great relief. I had a client once who
was struggling to make his Chapter 13 payments. The biggest bulk of
the monthly payment was his mortgage, which he had fallen behind
on before filing Chapter 13. After working together for a few months,
he realized that he could take a huge burden off himself, and ease his
stress if he turned the house over to the lender (he didn‘t have much
equity in the house and wouldn‘t have seen much, if any, profit from
the sale). He moved his family into his late parents‘ home, which he
co-owned with his sibling. The house had been for sale for many
months. Now, everyone wins. His Chapter 13 payment is much more
reasonable, he pays his sister a small rent for her half of the house and
he is able to concentrate on his work, which brings in greater income
to his family.
Our homes are our biggest purchase, and very often, we define
ourselves by where we live. Ever heard the saying ―it‘s my dream
house‖? No wonder it can be pretty scary to have financial problems
with our homes! If you find yourself strapped, your first commitment
should be to pay for your daily living expenses: your housing,
transportation, food, medication and insurance. Once those expenses
are covered, you can turn your attention to your other unsecured
debts, like credit cards.
WHAT TO DO ABOUT YOUR CREDIT CARDS
Usually, credit card companies will not close your account as long as
you continue to make some payment and as long as you‘re not trying
to charge anything more to the credit card. If you‘re not able to pay
anything toward the balance due, they will close your account or
suspend your privileges. It looks better on your credit report if you
close an account at your request, so if you find yourself in over your
head and think you will miss payments, cut up the card and send it in
with a letter of explanation, like this one, stating that you need to close
this account while you catch up on your bills. This way, you don‘t put
a new black mark on your newly cleaned credit report. (You‘ll see why
I recommend using a good secured credit card whenever possible!)
(Date)
[Creditor]
[Address]
[City, State, Zip]
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Dear Sir/Madam:
My financial situation has changed unexpectedly because [I was
laid off, lost my job, had a medical crisis, was divorced, etc.].
I am writing to request that you close the above-referenced account
at my request [and use my secured savings deposit to pay off (or pay
down) the balance on the account]. I will continue to make payments
on the account until it is paid in full.
I look forward to being a customer of yours in the future. For
now, however, I must ask you to close this account.
Sincerely,
[Your name]
If you run into a problem trying to get a creditor to honor your
request to close your account and use your security deposit to pay off
a portion of the balance (assuming you have a secured card, and that
the creditor gave you a line of credit over and above your security
deposit amount), your next step is the enforcement agency for that
creditor. Send a copy of your letter, along with a letter stating that the
creditor would not close your account as requested to: Division of
Credit Practices, Bureau of Consumer Protection, FTC, 6th &
Pennsylvania Avenue, NW, Washington, DC 20580. As always, send
your letters certified, return receipt requested.
WHAT TO DO ABOUT OTHER BILLS YOU HAVE
Here are five other types of bills that you can usually get an
extension to pay without damaging your credit report:
1. Utility companies. Your local utility may be willing to work out a
payment schedule for you for a short time. Just make sure you call
them the minute you know you‘re going to be late. Don‘t put it off!
Utilities won‘t generally show up on your credit report. However, if
you pay late and wind up having your service temporarily shut off, you
may need to pay the total balance in full and put up a security deposit
for future service.
2. Medical bills. Most doctor, dentist and hospital bills won‘t usually
be reported to credit bureaus unless the bills are sent to collections.
Try to work out a modified payment schedule with your doctor before
this happens. You can protect your credit report by asking your
medical provider not to report your late status to your credit bureau as
long as you‘re paying something each month. With medical bills, even
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a $5 payment each and every month will show your good faith effort
to get the debts paid off.
3. Gasoline cards. Gasoline companies don‘t usually report your
payment history unless your account falls delinquent 90 days or more.
Again, you can usually work out a modified payment schedule to catch
up if you fall behind. Just make sure you don‘t continue making
charges to the credit card.
4. Car payments. Ask to skip a month on your car payment. Many
lenders will let you skip one payment during the life of the car loan
and tack it onto the back of the loan period. If you‘re going to be late
or know you‘ll miss a payment, call the lender before they call you.
You‘ll have much better luck working out arrangements before your
payments are late instead of after they‘re late. In most cases, your
lender will charge you a processing fee, which is usually 25% of your
monthly payment. If they want to charge you much more than that,
you‘re probably better off finding a way to make the entire car
payment.
5. Student loans. With your student loans, first see about getting a
deferment. If you‘re having financial difficulty because you‘ve lost
your job or been laid off, for example, most student loan
organizations will give you a six month ―unemployment deferment.‖
If you do wind up missing a payment and you need to get caught up,
talk with the lender. A deferment doesn‘t necessarily bring any past
due payments up-to-date.
For instance, once I‘d gotten back on my feet after my bankruptcy,
my remaining student loan payment was about $50 a month. When I
was laid off from my job several years later, I stayed current with my
payments until my savings and unemployment ran out, then I called
and asked for a deferment. They gave me a six month deferment, but
I was still behind one payment. The nice thing about student loans is
you can make partial payments to catch up. Once my deferment
ended, I made one simple phone call and arranged to send in
payments of $60 for five months, which got me caught up again. You
can easily do the same thing.
If you know you‘ll have another bill paid off in six months, offer to
pay half of your student loan payment for the next six months, then
the full payment (which you can do using the additional money you
were paying toward the other bill). If you start repaying your student
loan regularly, and then find yourself falling behind, you may be able
to get a lower payment worked out for a few months, until you‘re on
your feet again.
If you‘re still having trouble getting your bills paid on time, you may
need to use a credit or budget counselor.
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WHAT IF YOU HAVE TO DECLARE BANKRUPTCY AGAIN
Sometimes, declaring bankruptcy causes more problems than it
solves. Some of us just aren‘t ready to be debt-free and may not know
how to live without debt. Or circumstances that seem outside of your
control may cause you to find yourself in a position where you can‘t
pay your debts again. As a result, you may wind up so seriously in debt
again that you‘re faced with the hardest decision of all: Should you
declare bankruptcy again?
First, I recommend that you use all the strategies in this chapter to
see if there‘s any way you can get back on your feet again. Re-read the
reaffirmation section of Chapter 3, in case you opted to continue
paying on a debt that you might have been better off discharging the
first time around.
Today, you have the capability to decide what you want to do. Now,
you can make informed choices that are best for you and your family.
Are there some quick and easy changes you can make in your life to
pare back expenses or boost income? (Any attempt to increase your
income shouldn‘t begin with a great big expense to ―get started‖ – so
watch for where you‘re tempted to take on even more debt in order to
make more money. The saying ―it takes money to make money‖ isn‘t
always true!)
Is it time to put everyone on a three or six month allowance, put a
freeze on gift giving, tighten the belt and funnel as much money as
possible toward paying down the bills until they are all caught up?
Only you will know which decisions you can withstand, emotionally,
right now. And what you decide will be the best decision for you.
It is perfectly normal to feel embarrassed about having to declare
bankruptcy again, but look at it this way: The bankruptcy protection
laws exist to help you get back on your feet. Yes, you made some
mistakes. But now you‘re taking steps to get back on track, for good
this time. You may have tried to go it alone, and get back on your feet
without having any new information or education about the best ways
to handle your money. Maybe you needed to change your attitude
about money and jumped back into debt thinking you were doing the
right thing at the time. Whatever choices you have made along the way
that have brought you back to this point, they seemed like a good idea
at the time, for whatever reason, right? Honor those choices and don‘t
spend any more time beating yourself up or blaming anyone else.
Simply ask yourself: What am I going to do about it now?
If you are not yet eligible to file bankruptcy again, make sure you
focus your attention on paying you priority bills: housing,
transportation, food, medicine and insurance. And look to see ways
you can cut back on those expenses until you get back on track again.
Stop paying any and all other creditors any money until you have built
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up a cash reserve to protect yourself and your family. Make sure your
basic needs are being met. I‘ll go into greater detail about the steps
you can take, in the next few sections.
If filing bankruptcy again appears to be the best option, I encourage
you to seek credit counseling immediately so you can meet the prefiling bankruptcy certification requirement without losing your home,
for example. You don‘t have to accept any repayment plan the agency
proposes, but you will need to give any proposed repayment plan to
your attorney to be submitted with your bankruptcy papers and the
certificate showing you completed the pre-filing counseling.
Check with an attorney to see if Chapter 13 bankruptcy is an option
for you. Under the new law, you may be eligible to file Chapter 13 if
your Chapter 7 bankruptcy was filed at least four years earlier. If you
are currently in a Chapter 13 repayment plan and can‘t keep up with
your Chapter 13 payments, check with your attorney to determine
whether or not you are eligible to declare Chapter 7 bankruptcy.
In October 2005, changes were made in the bankruptcy law that
you need to make sure you understand. In general, to qualify for a
Chapter 7 discharge of your debts, your annual household income
must be below the ―median household income‖ for your state. This
varies from a low of $19,200 in Puerto Rico to a high of $53,557 in
New Jersey (www.usdoj.gov/ust; click on ―Means Testing
Information‖ under the Bankruptcy Reform header on the right side
of the webpage). The kicker is that your current monthly income is
based on your average income during the six months before you filed.
If you‘ve lost your job, waiting as long as possible before filing for
bankruptcy will give you a much lower ―current monthly income‖
than you would have if you filed right after losing your job. If your
average income for the six months prior to filing is higher than the
median, you may still be eligible to file for Chapter 7 bankruptcy if you
meet ―the means test‖ which is designed to determine how much
disposable income you would have every month, based on IRS
national standards, rather than your actual costs.
After you subtract the allowable amounts for living expenses,
housing, utilities and transportation, if you have less than $100 left
over, you may be eligible to file Chapter 7. If you have more than
$166.66 left over, you‘re not eligible. If you‘re in-between the two, you
must calculate whether or not the amount you have left over is
enough to pay more than 25% of your unsecured debts over five years
(60 months). For instance, if you have $150 left over each month and
you have $40,000 in debt, you would only be able to pay $9,000 during
that 60 month period, which would be 22.5% of your debts. So you
would still be eligible.
Under the new law, your property must now be valued based on
what it would cost you to replace it from a store, rather than the old
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―garage sale‖ value. This will increase the value of your personal
property items, which in the past may have been exempt. Even the
residency requirements that determine how long you have to live in a
state before you can use that state‘s exemptions have changed. Now,
you must live in a state for at least two years prior to filing before you
can use the state exemptions and you have to live there for three-anda-half years before you can take the homestead exemption.
While it is still easy for some people to file for bankruptcy on their
own, I think it‘s worth having an attorney draw up or at least review
your paperwork. The new law has some complicated twists and turns
and I wouldn‘t want to see your bankruptcy petition tossed out
because you overlooked something vital in the new law.
The new law states that you must also pay for and complete the
mandatory pre-filing credit counseling and pay for and complete an
approved pre-discharge education course. In addition, you can‘t
discharge debts of $500 or more for certain items that were charged
within 90 days of filing and you can‘t discharge debts of $750 or more
from cash advances taken out within 70 days of filing. You also have
to provide:
 proof of payments received from your employers in the 60
days before filing
 a statement of your monthly income
 any expected increases in income or expenses after filing (any
property settlement, inheritance or life insurance benefits
received within 180 days of filing may need to be paid to
your creditors if it is not exempt)
 tax returns for the most recent tax year (and any back taxes
filed during the bankruptcy proceedings)
If you‘re renting, you have to continue paying your rent after the
bankruptcy is filed, or your landlord can proceed with your eviction.
Declaring bankruptcy again is a perfectly acceptable way to grab the
bull by the horns and take action to get your finances under control if
there is no other option available to you. It will all be okay, I promise.
If you find yourself waking up at night or unable to sleep or
concentrate because of anxiety and worries about having to declare
bankruptcy again, stop yourself wherever you are. Take a deep breath
right then and there and say to yourself, at least 10 times: “I am doing
the right thing. I am doing what is best for me, my family and our future.”
WHAT TO DO IF YOU DECLARED CHAPTER 7
BANKRUPTCY WITHIN THE PAST EIGHT YEARS
If it‘s been less than eight years since you declared Chapter 7
bankruptcy and you still can‘t get out from under your debts, or
you‘ve fallen behind on your mortgage, car payments, alimony, child
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support or taxes, then you may need to declare Chapter 13
bankruptcy. Unlike your Chapter 7 bankruptcy, a Chapter 13
bankruptcy allows you to set up a repayment plan for your creditors
and will help you prevent or postpone a foreclosure on your home or
repossession of your car.
When you file a Chapter 7 to discharge whatever debts you can, and
then file a Chapter 13 to help you set up a payment plan to repay your
remaining debts, it is commonly referred to by bankruptcy attorneys
as ―filing a Chapter 20.‖ There‘s no such thing as a Chapter 20, of
course, but it‘s becoming a more common technique that people are
using when they are still over their head in debt. You may find
yourself in this situation if a creditor pressured you to reaffirm a debt
that would have been dischargeable or if you haven‘t successfully
changed your money attitudes and habits.
WHAT TO DO IF YOU DECLARED CHAPTER 13
BANKRUPTCY AND YOU’RE STILL IN REPAYMENT
Your Chapter 13 repayment plan was originally set up for three or
five years. Don‘t be discouraged if you aren‘t able to keep up with
your payments; only 25% of the people who declare Chapter 13 ever
finish their repayment plans. Some have their Chapter 13 bankruptcy
dismissed when they‘re finally able to sell their homes. Others simply
can‘t keep up with their payments. If money is really tight in your
Chapter 13 repayment plan, first see if there are any effortless ways
you can generate some income that you could use to accelerate the
payoff of one of your larger debts (like your car loan) to get extra
money each month. Brainstorm ideas.
Could you rent out a room? Rent out space in the garage to
someone working on an antique car or looking for a place to store
their boat? Could you sell extra television sets, stereos, small kitchen
appliances, electronic or sports equipment, collections or items you
never or rarely? Is it great to have a KitchenAid mixer in addition to
the small handheld mixer? Absolutely. We love convenience. Be
honest with yourself, though. Could you live without that $400 mixer,
or without a microwave? Absolutely. Do yourself a huge favor. Trade
the convenience factor in for increased financial security and use the
money you get from selling those items to give yourself some
breathing room, financially. You‘ll be glad you did and you can
eventually replace the items once you‘re back on track again.
Thomas Jefferson, an avid book collector, sold his entire library of
books in 1814, then again in 1829, to keep his farm, Monticello,
running. At his death, his estate once again contained a library of more
than 10,000 volumes. You can get back on track again and have even
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more than you‘ve ever had of what you want in your life if you‘re
willing to be patient and take the steps one at a time.
Sit down and brainstorm other ways you can free up some money
each month. Include small things that would be easy to do as well as
big things that would be more challenging, or that you find yourself
resisting. Even if you take clothes to a consignment shop and get an
extra $16 for your effort, that‘s $16 you could put toward your next
car payment or $16 you could use as extra spending money. The
choice is yours. Once you‘ve made a list of what you could do, ask
yourself to mark which items you would be willing to do. And then
mark which items you will do right now.
If all else fails, and you find that you simply cannot keep up with
your Chapter 13 repayment plan, you have three choices:
1. You can have your attorney talk with your trustee about
extending your payment period to five years (if it‘s not already five
years), or getting lower payments under your existing repayment plan.
2. Depending on the circumstances, you may be able to have your
Chapter 13 dismissed, re-file a new one and restart your repayments.
3. You can convert your Chapter 13 to a Chapter 7. The drawback
to this situation is that you may have debts that won‘t be discharged
under the Chapter 7. You will either have to give up these items or
pay off the debts directly to the creditors.
If you believe that declaring bankruptcy again may be your only
option, contact a credit counseling agency that is approved to provide
the pre-filing bankruptcy certification. You can often do the pre-filing
briefing on the telephone and have your certificate faxed or mailed to
you. The cost for this briefing and certificate is $50.
To find an approved credit counseling agency that provides prefiling bankruptcy certificates, visit the U.S. Trustee Program website at
http://www.usdoj.gov/ust/index.htm. On the right hand side of the
webpage, you‘ll see a header called ―Bankruptcy Reform.‖ Look
page where there is a box on the left that says ―Credit Counseling for
Consumers.‖ This is where you‘ll find a listing for ―Approved Credit
Counseling Agencies.‖
Once you have your pre-filing bankruptcy certificate, I encourage
you to contact two or three bankruptcy attorneys — including your
original attorney if you like — so you can explore your options.
When you‘re looking for a good attorney, start by looking to see if
there are any Board Certified bankruptcy attorneys in your area.
Certified attorneys spend hundreds of hours in extra training to make
sure they meet your needs as well as possible. They also have years of
experience, have to pass a comprehensive exam on consumer
bankruptcy and meet the highest legal and ethical standards. You can
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get a free referral to local certified bankruptcy attorneys from the
American Board of Certification (ABC) which is a division of the
American Bankruptcy Institute (ABI). You can reach ABBC at
319/365-2222 or online at www.ABCworld.org. I‘m such a big fan of
theirs that they are the only bankruptcy attorney membership
organization that I have linked to on my website. I‘ve listed other
consumer-friendly attorneys at www.NewCreditAfterBankruptcy.com.
Once you decide to go ahead with a particular attorney, contact all
of your creditors and tell them that you‘re declaring bankruptcy.
Simply say, “I’m retaining an attorney and my attorney will contact you as soon
as my paperwork is filled out.” This way, your lawyer doesn‘t have to
spend time fielding calls from creditors and can contact your creditors
when your bankruptcy paperwork is ready.
As soon as your bankruptcy is filed, contact the credit counseling
agency you used, or any other agency that is authorized to provide
―pre-discharge education.‖ This two-hour education course is also
mandatory. The nicest thing about this whole new procedure is that
competition for your business is driving costs down. Originally,
agencies were charging $50 or more (most of the CCCS agencies still
ask for a $50 donation – which, while not mandatory, can only be
waived in cases of extreme poverty). Now, some companies are
charging as little as $16.95 to take their on-line course. Depending on
the agency, your pre-discharge education can be completed on-line, on
the phone or in person. Your bankruptcy cannot be discharged until
you file this second certificate with the bankruptcy court, showing you
have completed the pre-discharge financial education course.
To find an approved agency that provides pre-discharge financial
education certificates, visit the U.S. Trustee Program website at
http://www.usdoj.gov/ust/index.htm. On the right hand side of the
webpage, you will see a header called ―Bankruptcy Reform.‖ Look
page where there is a box on the right hand side of the webpage that
says ―Personal Financial Management Instructional Courses for
Debtors (Debtor Education).‖ This is where you‘ll find a listing for
―Approved Debtor Education Providers.‖
Once your bankruptcy is discharged, start at the beginning of this
book and follow the recommended strategies, so you can make sure
you don‘t wind up in this situation again.
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1. Use any short-term strategies you can to reduce your expenses and
pay off your debts.
2. Seriously consider going to at least three different Debtors‘
Anonymous meetings to find support and encouragement from others
who wish to live a debt-free life. The radical honesty about money
concerns is always refreshing.
3. Take the quiz to see if you have a gambling problem.
4. Contact your creditors if you‘re falling behind on your payments
and explore your options for new payment plans.
5. Take steps to protect your home if you fall behind on your
mortgage.
6. Set up a repayment plan you can afford with each of your creditors.
7. Close credit card accounts if you need to.
8. See a budget or credit counselor and have a pre-filing briefing in
case you determine that declaring bankruptcy again is in your best
interest.
9. See at least three attorneys if you think you have to declare
bankruptcy again and go with the one you‘re most comfortable with.
10. Take a pre-discharge bankruptcy education course, if you file for
bankruptcy again.
11. Reread this book and put the strategies to use for you!
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CHAPTER 13
Building Financial Security
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In this chapter, I‘m going to give you a few advanced money-saving
strategies to help you build a rock-solid financial foundation. Many
financial advisors have touted that real estate is the best way to quickly
build financial security. These advisors are right, up to a point. Far too
many people have encouraged individuals to buy up and leverage their
investment (which is a fancy way of saying mortgage your investment
properties to the maximum), then use the equity in the property to
buy even more properties which they‘re then supposed to be able to
easily resell or rent. The challenge is what many of these individuals
are now encountering. The real estate market in many areas has
collapsed or come to a grinding halt – leaving people with a fistful of
mortgages and no buyers or renters to pay them off. If you‘ve fallen
into this hole, take a deep breath and this time, let‘s get you invested
in a systematic way that will build your wealth a bit more steadily and
securely.
INVESTING YOUR MONEY
ONCE YOU’RE OUT OF DEBT
Following the DebtBuster Strategy in Chapter 3, you can begin
rebuilding your financial future by paying off any debts that aren‘t
listed on your bankruptcy. Then, as you pay off each debt, invest in
yourself. Each month, set aside that same ―debt payment‖ amount
you were paying on the old bill. This time, though, start paying the
money into an account that puts your money to work for you.
Remember, this is how you‘re going to build a stable foundation
under your financial portfolio. Don‘t dismiss this as a ―not good
enough‖ or ―not quick enough‖ way to gain real wealth. This is the
beginning strategy for creating lasting wealth. So keep an open mind.
Once you pay off any debt you still have, like a student loan for
instance, you can start investing that monthly payment into a mutual
fund. Your goal of being debt free may take a bit longer with this
strategy, because you‘re not putting the debt payment amount toward
any other outstanding debts. In the end, though, once all your debts
are paid off, you will be debt free and you will have begun to build a
savings and investment portfolio at the same time.
Learning to create a habitual, systematic strategy for increasing your
net worth, while paying down and paying off your debts, creates a
win-win-win situation. I know it may seem more rewarding to have
more money in your pocket each month, to buy more things you want
now. And it may be alluring to take that money and use it to pay the
smallest down payment possible on a piece of real estate. I don‘t want
you to jump the gun just yet though.
Instead, I want you to find a balanced way to build a strong
financial future and have what you want in your life. Make a pact with
yourself to have your ―fun money‖ amount be an amount equal to
what you‘ve saved each month.
For instance, I have a friend who has a deal with herself. If she sees
a high-dollar item she wants to buy for herself, she gifts herself
permission to buy it for herself after she has given away to charity an
amount equal to what the splurge item will cost her.
I also encourage you to make a pact, like my favorite real estate
investors have done, to never have real estate mortgages that amount
to more than 20%-50% of the real estate‘s value. These highlysuccessful real estate investors know that keeping 50%-80% of the
equity in a piece of property protects you from the wild ups and
downs of the real estate market over time.
Let‘s go back to the mutual fund strategy. There are many
wonderful investment companies out there that offer mutual funds,
which are invested in a variety of different companies (rather than
putting all your eggs in one basket, like your employer‘s stock
options!). Just as I don‘t like buying a new car because I don‘t like
seeing $3,500 or more of the car‘s value disappearing the minute I
leave the dealership, I am a firm believer in not paying a ―load‖ or
service fee to invest my own money in a mutual fund.
In the past, I have invested with AIM Investments (formerly Invesco).
They now charge up to 5.5% to invest your money (or to take your
money out!). While they do have some good funds and do waive their
initial investment minimums so you can get started investing right
away, with an automatic payment of $50 a month, I want to make sure
you know up front that you‘re paying 5.5% more to invest in their
funds.
Two solid choices that are still no-load – meaning they charge no
sales or service charge (although they do charge a small administration
fee, which varies from fund to fund) – are: Meridian Fund Investments
(800/446-6662) and American Century Investments (800/422-7420).
Meridian has only a handful of fund choices, all of which are wellrated. American Century offers a wide variety of money market, stock
and bond mutual funds that may help you build up sizable
investments over the next five to ten years.
If you‘re comfortable investing on your own, do the research, read
the prospectus for the fund you are interested in and go for it. The
minimums for these funds range from $1,000 to $2,500 and more. If
you need to save up to reach the minimum amount, I encourage you
to open up a savings account at your bank first, and begin saving small
amounts each month. Once you are ready to invest, you can download
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BUILDING FINANCIAL SECURITY
applications for both these fund families on-line. Fill out the
application and mail it in. Be sure to sign up for their automatic
investment plan, and commit to have $50 a month or more sent to
them from your savings or checking account so your investment
continues to grow.
Or, if you prefer, you can get a referral to a financial advisor,
discuss your investment goals and desires, and get professional
assistance with your investments. No matter which way you go and no
matter what your initial investment, if you can put away $50 a month,
you‘ll have put $600 of your money to work for you in just one year.
Invest $150 a month, and you‘ll be saving $1,800 a year. And that
money can grow year after year, by 5% or more.
BUILD YOUR INVESTMENTS BY BUYING WHAT YOU KNOW
If you‘re a bit unsure about investing in the stock market, start by
investing in things you know about and use regularly. For example,
when I first started investing, I owned shares of stock in the drug
companies that made my asthma inhalers and the medicines I took
regularly. I also invested in Proctor and Gamble and Clorox, since I
used a lot of their products. And I rounded out my investments with
Wendy‘s (which was my favorite fast food chain) and Waste
Management (which was the company that collected my trash).
Once you know what companies you enjoy doing business with,
then you can check to see if they have a direct purchase plan where
you can buy shares of stock directly from the company and a dividend
reinvestment plan, where you can automatically reinvest the income
you receive from dividends that are paid on the shares you own. One
wonderful place to find a number of good companies that offer these
plans is www.computershare.com. Again, do your homework and
check out the safety of the stock with a trusted financial advisor if
you‘re not a skilled investor. For some companies, you must already
own at least one share of stock in the company before you can enroll
in their direct purchase plan. This topic is a bit more in-depth than can
be covered here. If you‘d like more information on buying shares of
stock from individual companies, without a broker, and automatic
investing, visit www.artofabundance.com/stocks.htm.
PREPAY BIG LOANS AND SAVE THOUSANDS IN INTEREST
The next advanced strategy I want to share with you is prepayment
of your large loans — your car loans and your mortgage. Prepaying
large loans can really save you some hefty interest. For example, my
car loan was $239 a month. I paid $250 every month and paid off my
loan two months early. You can do the same thing with your
mortgage. Look at your mortgage statement to see how much of your
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payment is interest and how much is principal. Make your regular
payment and include an extra principal payment of $50-$100. You can
save tens of thousands of dollars over the course of your loan. Even if
you only stay in your house a few years, those extra principal
payments work to your advantage because you‘ll have that much more
equity built up in your home when you sell.
Most people look at having mortgage debt as a great way to save
25-cents on the dollar with their tax savings. But it‘s far better to save
the entire dollar than to spend an additional 75-cents trying to save a
quarter. If you disagree, I invite you to send me a dollar and I‘ll send
you a quarter back and you can tell me which makes you feel better –
having spent the dollar to get the quarter back or having kept the
dollar in the first place.
When I talk to many of my clients who have been struggling
financially, and I ask them what it is they really want, many of them
tell me the same thing. They say something like: I wish I had enough
money so I didn’t have to think about the cost of things. When I see something I
like, I just want to be able to buy it, no matter what the price. Prepaying your
mortgage is a giant step you can take toward achieving this sense of
financial security.
Don‘t pay the $300-$500 fee your mortgage company charges when
they offer to set up an automatic payment plan for you. Keep control
of the payments yourself. This way, if you ever need that extra $100
for something else one month, you‘re not locked into paying it toward
your mortgage.
BEST WAYS TO PREPAY YOUR MORTGAGE
What is the best way to prepay your mortgage? The absolute
smartest way to prepay your mortgage is the one I just listed above,
paying extra money each month toward your principal. Other great
strategies include dividing one month‘s payment by 12 and add that
amount to the amount you pay you every month. Write down your
monthly mortgage amount: $______. Now, divide that amount by 12
and write that amount here: $______. Add the two numbers together
and you‘ll know how much to pay each month. For example, if your
monthly mortgage is $600, you would pay $600 plus $600/12 ($50) =
$650. Some lenders require you to specifically state that the extra
amount is a principal payment. To be on the safe side, make a note to
this fact in the ―memo field‖ of your check or pay the extra principal
amount with a separate check each month.
The extra money you pay goes to reduce your principal. After 12
months of paying an extra $50, you‘ve actually paid an entire extra
year‘s worth of your mortgage. That‘s because for the first 15 years of
a 30-year mortgage, only about $50 of your current mortgage actually
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goes toward paying down the principal of your loan — the rest goes
toward paying interest. The more money you send, over and above
your monthly payment, the sooner you pay off your mortgage.
If you don‘t think you have the discipline to always send in that
extra amount, you might want to look into setting up a bi-weekly
mortgage, where half of your mortgage gets taken out of your
checking account every two weeks. This way, instead of making 12
monthly payments, you make 13 payments during the year. You can
save yourself tens of thousands of dollars if you prepay your mortgage
using a bi-weekly mortgage. Let‘s assume you have a 30-year, $100,000
mortgage, at 8.5%. After paying every month for ten years, using the
conventional method, you‘ll have paid off $11,399 of your loan and
will still owe $90,000.
Pay your mortgage over ten years using bi-weekly payments,
however, and you‘ll have paid off $23,242 — building up nearly twice
the equity in the same amount of time. In addition, you‘ll cut nearly
eight years off the life of your loan. You will completely pay off your
$100,000 mortgage within 22.6 years. And you will have saved yourself
over $50,000 in interest. I can think of a whole lot better things to do
with $50,000 than lining my mortgage lender‘s pocket, can‘t you?
There are now mortgage acceleration programs on the market that
are designed to help you maximize when to pay your extra principal
payments to minimize the amount of mortgage interest you pay. They
require to pay a hefty upfront fee (usually $3,500), for their software
program AND encourage you to take out a home equity line of credit.
I‘m not a big fan of moving debt from one place to another. And the
―timing‖ aspect that will save you the most interest isn‘t realistic for
most people. In my opinion, funneling as much extra money as
possible into your principal, as often as possible, is what will save you
the most interest in the long run.
TEN STRATEGIES TO HELP YOU AVOID MONEY DRAINS
Once you‘ve finished saving money on your big expenses, look a
little closer at the everyday things you enjoy, whether they‘re for fun
or necessity. Cable television, mail order clubs, utilities and car
maintenance: they all cost money, even if only a little. When you add
them up at the end of the month, you‘ll discover extra padding that
you can strip away — without stripping away your enjoyment of them.
I‘m a big movie buff, so the first three are wonderful ways to save
money and get to see all the movies you want to see! Use any of these
strategies and you will wind up with more money to spend or invest
on other things, without having to scrimp.
1. Only order cable TV premium channels on sale. Don‘t pay monthly
rates for premium channels unless the cable company is offering a
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special deal. Premium channels can cost $10 a month or more.
However, cable companies often offer six month specials, where you
can get two premium channels for the price of one. Keep tabs on your
cable bill and cancel channels when the special offer expires. You
won‘t always have the same premium channels each month, but
variety is good for your soul!
2. Check out the pay-per-view channels, which let you decide which programs are
worth paying for. Titles and prices of movies, sporting events, and other
programming are listed in your TV guide. When a program catches
your eye, order it by calling the telephone number listed on the screen
and giving the program‘s order number. Viola!
3. See matinees or check to see if your local theatre chains offer discount cards.
With movie ticket prices at $6-$12, treating yourself to a movie — not
to mention treating your whole family — can cost you a small fortune.
You don‘t have to stop going to the movies. Go to the matinee
instead. On weekdays and weekends, ticket prices are often half price
before 6 p.m. Also, some theaters offer discounts for students, senior
citizens and for those willing to wait a week or two to see new
releases. The Kerasotes chain, which has 81 locations throughout the
Midwestern states, has a ―Five Buck Club‖ which you can join for
free. Everyone has to have their own card, and you often can‘t see a
new release until it‘s been out for two weeks – but you also save 50%
on your movie tickets, even if you‘re going out on a Saturday night! In
other areas, local theaters often show films that have been out for a
while for the bargain price of $1.50 or $0.99. Your employer‘s Human
Relations office may also offer free or discounted tickets to movies
and other local entertainment venues and stores. Call them and ask!
4. Rent movies. If you have a VCR or DVD player, wait for movies to
come out on video or DVD. Your family can watch a movie (and
have popcorn and root beer floats) for about $10 total. Make sure you
return the movie on time. It was actually cheaper to order several
movie channels when I lived in the boonies and didn‘t always return
movies on time. Nothing brings you back to earth quicker than a $30
video store bill!
5. Never order your bank checks from your bank. Order your checks
directly from a check company — not your bank. Banks act as the
middleman between you and the check company, and they charge you
for the service. Going straight to the same source your bank uses is a
lot cheaper. Some reputable companies include Checks in the Mail
(www.checksinthemail.com; 800/733-4443), Checks Unlimited
(www.checksunlimited.com; 800/210-0468) and The Check Gallery
(www.checkgallery.com; 800/354-3540) which is the largest supplier
of environmentally-friendly checks. You can usually order 150 checks
for around $13-$15 at your bank, for the standard blue safety checks.
At these on-line check printers, you can order 150 of the same checks
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for less than $10. If you print out your checks, you can buy bulk blank
checks like those offered by VersaCheck® for a whole lot less (1500
checks for $39.99 at Office Depot, for example). Or, if you prefer to
bank on-line, you can completely avoid the expense of using checks!
6. Cancel or avoid “clubs” with monthly fees. Don‘t join on-line, DVD,
CD or book ―clubs‖ that charge monthly membership fees unless you
truly use them every month. Especially avoid any of these that send
you a great deal of spam e-mail or regular catalogs with new offers
each week (or day!). These companies are money-sinkholes designed
to convince you to spend money. And these sales pitches work, too.
They know that it‘s easy to order on impulse (especially on-line) and
they rely on you believing that keeping an item you don‘t really want
will be easier for you than re-packing it and mailing it back to them for
a refund. Instead, spend that money going to visit local events you
enjoy. You‘ll soon discover that you don‘t even miss the shopping!
7. Pare down your magazine subscriptions. Subscribe only to the
magazines you read cover to cover every time you get them. Those are
the ones that give you your money‘s worth. If you find magazines
laying on the coffee table, still wrapped in plastic two months later
with their pages flawlessly uncrumpled, cancel your subscription right
away and get your money back. Those $9.95 (or more) subscriptions
add up! Pick up individual issues of that magazine that truly appeal to
you, or read them at the library.
8. Keep your miscellaneous food purchases in check. Going out to a
restaurant means no cooking and no cleaning, but it‘s also expensive
— especially if you do it often. Cook at home as often as you can.
Pack lunch; bring a thermos to work if you don‘t like the office brew.
Buy your own Snickers stash for work — it‘s a lot cheaper. The same
goes for soda; a two-liter bottle in the office fridge (bought on sale)
costs you less money than two cans of soda. I easily spent $10 a day
on drinks, snacks and lunch. That‘s $200 a month spent on overpriced
food that didn‘t go very far. Half that amount for the same grocery
store items could have kept me well-fed and $100 richer, every month.
9. Maintain your car. Regular oil changes are a must. Don‘t wait until
your car breaks down to get something fixed or a tiny gremlin of a
problem will grow into a monster. Clip coupons for the garage you
regularly use or see if your local garage has a frequent customer‘s club,
where you can get one free oil change after a few oil changes.
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10. Use smart energy-saving techniques. Utilities can be a huge drain to
your wallet. Dripping faucets, running the heat on tropical in the
winter and the air-conditioning on subarctic in the summer are all
money drains. Be comfortable in your home but keep an even
temperature. Don‘t open the refrigerator all the time. Join local utility
energy-saving programs that cycle you on and off during peak periods
and save $8 a month or more effortlessly.
1. Call several mutual fund families and get information on investing
in your future.
2. Check out good stocks you buy direct, rather than through a broker.
3. Set up a prepayment plan for your mortgage that you can live with
to minimize the amount of interest you pay.
3. Each month use a strategy to avoid a money drain in your life. Pay
attention to any place where you say things like “man, we are paying way
too much for…”. Brainstorm with your family to come up with more
great ways to effortlessly save money in these areas, based on what
you like to do in your life! Make a game out of it. The more ways you
can effortlessly find to trim your expenses (especially for the on-going
expenses, like utilities!), the more money you can put toward the
things you really want in your life.
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CHAPTER 14
Keep Up the Good Work!
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Congratulations! You‘ve now spent about 40 hours of your time
and energy fixing your financial problems. That week‘s worth of time
is already showing results for you. Keep up the good work even if you
feel like you‘re spinning your wheels, on any particular day. Keep
looking to see where you can easily and effortless make a choice to
save a little money today and every day.
FOUR STRATEGIES TO KEEP YOU ON TRACK
Here are a few final ways to keep on the right track:
1. Pay your bills on time. Most people mark on their calendar the day
their bills are due. A better way to avoid late payment charges is to
mark the day you need to mail your bill so it will arrive on time. Note
the day the bill is due on your calendar, then count back at least a
week and mark this date as the day to pay your bill to make sure the
check arrives on time. You can save hundreds of dollars every year in
late payment fees and finance charges (not to mention avoid having
your interest rate raised sky-high) simply by making sure the bills get
paid on time. If you decide to use an on-line bill-paying service, be
sure to pay attention to the fine print. Many of these services tell you
that your payment may post to your creditor‘s account 7-10 days after
the payout date (when you made your on-line payment). Set your
payment dates far enough in advance to avoid late payment penalties.
If you like the convenience of paying bills on-line, and want your
payments to post to your bill‘s account faster, consider paying each
bill directly at that creditor‘s website, where payments usually post
within 24 hours.
2. Choose your expenses carefully. If an expense isn‘t truly necessary,
don‘t buy it — even if it‘s on sale – unless you can pay for it with
cash. To treat yourself with something you really want, save up for it
first, so you can pay for it in cash and avoid running up your new
credit card if you‘ve chosen to get one. Separate the necessities from
the luxuries (no matter how small). One of my happiest ―treats‖ was
an easy-to-use, $9.95 manual can opener.
3. Balance your checkbook. The first time one woman finally got up the
nerve to balance her checkbook she found a $50 error — in her favor!
Know how much money you‘ve spent and how much you‘ve
deposited and make sure you always deposit more than you spend.
Consider using a computer program like Quicken or Microsoft Money.
You can avoid having any bounced check charges eat away at your
earning power if you make a commitment to yourself not to ―float‖
checks, writing them out before the money is in your account. It can
be a challenging commitment sometimes, I know. If you find that you
have written a check that may bounce, immediately contact the person
or place who has your check. Let them know that there is insufficient
money in the account to cover the check. Let them know when you
will write a new check, or how much you can give them right now.
Be honorable in your financial dealings, even when it‘s scary. The
rewards down the road will be incredible. If stepping up and saying
something about your money is very scary to you, I encourage you to
get a copy of my free e-booklet, Heal Your Relationship With Money
(www.artofabundance.com). It‘s easy to read and if you take the time
to really think about the questions it contains, and answer them
honestly for yourself, you‘ll find that it becomes easier and easier to
feel comfortable about talking honestly about your finances.
4. Take care of problems before they occur or as they occur. Don‘t wait for
problems to explode into costly and stressful disasters. Whether it‘s a
problem with a credit bureau, paying a bill, whatever, get help.
GOOD RESOURCES TO CHECK OUT
―2007 Consumer Action Handbook.‖ U.S. Office of Consumer Affairs.
Washington, DC.
DRIP Investor Directory of Dividend Reinvestment Plans: Your Guide to
Buying Stocks Without a Broker, 2007 Edition. Horizon Publishing Company.
―How to Dispute Credit Report Errors‖ Public Reference, Federal Trade
Commission. Washington, DC.
―Buying Your Home: Settlement Costs and Information, 2002 Edition‖
U.S. Department of Housing and Urban Development.
Ban Breathnach, Sarah. Simple Abundance: A Daybook of Comfort and Joy.
New York: Warner, 1995.
Caher, James P. and John M. Personal Bankruptcy Laws For Dummies.
New Jersey: Wiley Publishing, 2006.
Dolan, Ken and Daria. Don‘t Mess With My Money: The Dolans‘ NoNonsense Lifetime Money Plan. New York: Random House, 2004.
Dominguez, Joe and Vicki Robin. Your Money Or Your Life: Transforming
Your Relationship with Money and Achieving Financial Independence. New
York: Penguin, 1999.
Feinberg, Andrew. Downsize Your Debt: How to Take Control Of Your
Personal Finances. New York: Penguin Books, 1993.
Horowitz, Shel. The Penny Pinching Hedonist. Mass.: AWM, 1995.
Jaffe, Azriela. Create Your Own Luck. Mass.: Adams Media, 2000.
Knouse, Ken. True Prosperity: Your Guide to a Cash-Based Lifestyle. Texas:
Double-Dome, 1996.
Lawrence, Judy. The Budget Kit: The Common Cents Money Management
Workbook. Chicago: Dearborn, 2004.
Lawrence, Judy. The Money Tracker. Calif.: Advisorpress, 2004.
Leonard, Robin. Money Trouble: Legal Strategies to Cope With Your Debt.
Berkeley: Nolo Press, 2003.
258
:
KEEP UP THE GOOD WORK
McWilliams, Peter and John-Roger. Wealth 101: Getting What You Want
— Enjoying What You‘ve Got. Los Angeles: Prelude Press, 1992.
Mundis, Jerrold. How to Get Out of Debt, Stay Out of Debt and Live
Prosperously. New York: Bantam, 2003.
Mundis, Jerrold. Making Peace With Money. Kansas City: Andrews McMeel,
1999.
Ponder, Catherine. The Dynamic Laws of Prosperity. Marina del Rey,
California: DeVorss & Company, 1993.
Ponder, Catherine. The Prosperity Secrets of the Ages. Marina del Rey,
Ponder, Catherine. Open Your Mind to Prosperity. Marina del Rey,
Ponder, Catherine. Open Your Mind to Receive. Marina del Rey,
Ponder, Catherine. The Secret of Unlimited Prosperity. Marina del Rey,
Ponder, Catherine. Dare to Prosper! Marina del Rey, California: DeVorss &
Company, 1983.
Ponder, Catherine. The Prospering Power of Love. Marina del Rey,
Ponder, Catherine. The Prospering Power of Prayer. Marina del Rey,
Remele, Patricia. Money Freedom: Finding Your Inner Source of Wealth.
Virginia Beach: ARE Press, 1995.
Ross, Ruth. Prospering Woman: A Complete Guide to Achieving the Full,
Abundant Life. San Rafael, California: New World Library, 1995.
Ryan, Paula Langguth. Giving Thanks: The Art of Tithing. Maryland:
Pellingham Casper Communications, 2005.
259
A Final Word From the Author
I hope you feel that this book has helped you reclaim your financial
security. The nicest thing about the work I do with my seminars, online newsletter, financial columns and podcasts is that people often
write to let me know how they‘re progressing. Please write me and let
me know how things are going for you! You can send a letter via snail
mail to me through my publisher at Pellingham Casper
Communications, Prosperity Books & Seminars, 1121 Annapolis
Road, Suite 120, Odenton, MD 21113. Or via email at:
paularyan@artofabundance.com.
Do you have other strategies that helped you get back on your feet
after bankruptcy? Have you run into a snag trying to use one of the
enclosed strategies? Have you come across any credit offers that are
outrageous scams or really great secured cards? Do you have a
prosperity story you‘d like to share with me? I‘d love to hear about
your experiences and hear how your progress is coming along. One
person at a time, we can stop being victims of creditors and start being
in charge of our own financial future.
I enjoy the time I spend helping people Bounce Back From
Bankruptcy and Break the Debt Cycle For Good!. I‘ve also really
enjoyed getting to know my readers better and learning more about
their experiences as they‘ve rebuilt their lives after declaring
bankruptcy. I hope you‘ll send me a letter and a picture, so I can
visualize you and your new prosperity. I wish you the best of luck with
your financial freedom!
Peace and prosperity,
Paula Langguth Ryan
August, 2007
260
:
Excerpt from the forthcoming
Break the Debt Cycle – For Good!
by Paula Langguth Ryan
Most debt-related books will tell you that the trick to getting out of
debt and staying out of debt involves three simple steps: cut your
expenses, increase your income and pay down your debt. As a result, most
people approach debt-reduction the same way they approach dieting.
They either don‘t do it, or they make drastic changes that are destined to
fail as long-term habits. They drastically cut back on everything to the
point that they are sacrificing their family‘s quality of life. At the same
time, they spend enormous amounts of energy chasing after the promise
of opportunities to make fast, easy money. Or they take jobs they hate just
because they pay well and wind up with stress-related medical costs. Or
they throw money at the lottery, thinking ―a million dollars‖ is the
bandage for their financial pains. And they use every spare dollar they
have to pay off as much debt as they can each month.
The challenge with this ―traditional‖ approach to debt-reduction is that
it‘s too drastic. In order to create lasting change, debt reduction – like
weight reduction – must be done in a way that creates a new way of living
for you. The only lasting solution is one that is a sustainable solution; one
you can live with every day of your life. The key to breaking the debt cycle
is to create a new way of relating to money, much like successful weight
loss is achieved by creating a new way of relating to food and a more
active lifestyle.
During my years of teaching people how to break the debt cycle, I‘ve
developed a straightforward 10-step strategy that anyone can use to create
a healthier way of relating to money. This strategy, which is contained in
the book you‘re holding, is the key to having what you truly desire in your
life – financial security and freedom from worry about money.
The first step is to stop the bleeding. Simply by making the
commitment to not take on any new debt, just for today, you move
yourself forward toward your goal in a big way. Next, you‘ll explore how
the way you think and feel about money – and other people – is actually
keeping you in debt. And I‘ll give you some concrete tools to free yourself
from the indebtedness in your mind.
Then we‘ll start gaining clarity about what you have in your life right
now. You can‘t get to where you want to be without knowing where
you‘re starting from. So we‘ll take a look at what you owe and to whom,
and we‘ll identify what resources you have that you might be overlooking,
so you can have a firm foundation to start with.
Armed with this information, I‘ll show you how to effortlessly create a
sustainable debt-reduction plan that won‘t keep dragging you back into
debt again, just when things start to look better. You will find that, even
though you are still paying down your debts, you have already broken the
debt cycle. Paying your monthly debt payments will become a routine part
of your life and will no longer feel like a hardship because you‘ll have a
monthly plan that actually works for your family.
261
In Chapter 5, we‘ll explore ways to help you become a better steward of
what you have. We‘ll look at areas where simple changes can create a
reduction in your expenses without sacrificing your family‘s well-being.
The process of breaking the debt cycle for good, of creating a
permanent change in your approach to interacting with money, is just
that: a process. And processes take time. So I‘ve included an entire
chapter on tools you can use to cultivate patience so you don‘t wind up
sabotaging your efforts.
Next, we‘ll look at ways you can begin to value yourself more. Having a
healthy self-image around money is an important step to helping you
maintain the new lifestyle that you‘re creating.
Everyone knows the saying ―knowledge is power.‖ Harnessing that
power involves learning about money – and how to make sound financial
choices. Many of us weren‘t taught how to do this at an early age. The
good news is: learning how to make smart money choices doesn‘t need to
be a scary or challenging task. Taking the mystery out of money will help
you easily and effortlessly move into a new world of financial freedom.
Next, we‘ll start your ―maintenance‖ program, where you decide what it
is you truly want, and set a course for obtaining it without taking on any
new debt. And, since life can sometimes be unpredictable, I‘ve also
included strategies to help you measure your progress, rather than
focusing on what hasn‘t been accomplished yet. Measuring progress, not
perfection, is the secret key to enjoying the journey called life.
Life was never meant to be a struggle. Somewhere along the way, you
may have gotten off track and lost sight of that truth. Today, by picking
up this book, you‘ve begun to claim a joyful, peaceful and secure future
for yourself; a future where your money no longer controls you – you
control your money.
The more you learn to work with the ebbs and flows that are a natural
part of life, the easier you‘ll find your journey – and the more pleasant
you‘ll find your surroundings.
Have you ever played with a Chinese finger puzzle? The puzzle is a
small sleeve that you slip over your two index fingers. Whenever you pull
away, trying to remove your fingers, the sleeve tightens, trapping you even
more strongly. The only way out of the puzzle – the only way to release
yourself from its grip – is to relax and bring your fingers closer together.
When you do this, the bondage of the puzzle falls away.
The same thing happens when you resist your debt, resist learning
about money, or pull away from the process of creating a spending plan
or budget, or reviewing your income, your expenses and your debt. You
remain trapped in the cycle. It is only by moving toward these elements
that you can break free from the debt cycle.
262

Bounce Back from Bankruptcy

Transcription

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