Expert Interview: Bankruptcy Considerations

Tamsen Butler

Are you wondering if bankruptcy is a good option for you, as well as how to repair credit after filing? John Ventura is the author of The Credit Repair Handbook published by Kaplan Publishing in addition to several other reputable personal finance books. He is also the director of the Texas Consumer Complaint Center at the University of Houston Law School. In this interview, he sheds some light on the sometimes confusing aspects to bankruptcy and the resulting aftermath of trying to repair and fix bad credit after bankruptcy.

What is the difference between a Chapter 7 and Chapter 13 bankruptcy?

A Chapter 7 bankruptcy discharges or wipes out most of a debtor's debts. It is usually filed by someone who cannot pay anything toward their debts and wants a fresh start. Presently a consumer can only file for a Chapter 7 liquidation bankruptcy if, after taking the means test the results show that the debtor cannot pay anything toward his or her debts. The means test is a calculation that includes looking at a consumer's averaged income for the six months before filing the bankruptcy and the consumer's expenses. The expenses are not the consumer's actual expenses but instead the expenses that the IRS tables say that a consumer spends on things like food, transportation and housing.

A Chapter 13 is a reorganization of debt. If a consumer can pay some money toward their debts they would file a Chapter 13 where they would pay all or part of their debts in monthly payments over a 3 to 5 year period through a Chapter 13 trustee. Consumers will also use Chapter 13 to pay the delinquent payments on a mortgage or car in order to have the chance to keep them. Also if the consumer owes money to the IRS, the consumer would have the chance to pay that debt over the five years of the plan.

Can all debts be discharged in a bankruptcy?

In Chapter 7 liquidation most debts are discharged. It would wipe out debts a consumer owes on credit cards, medical bills, and personal loans, and utilities, deficiencies owed when a car is repossessed or a home foreclosed or many others. This type of bankruptcy will not be able to wipe out most taxes, however some income taxes may be eligible to be discharged…child support or alimony, student loans unless you file a complaint with the court asking for a hardship discharge and the court grants your request, debts incurred through fraud and a few others.

In Chapter 13 any unsecured debts that are not paid in full will be discharged but it will not discharge many of the same kinds of debts not discharged in a Chapter 7.

How long is a bankruptcy listed on a credit report?

There is some confusion about this because some financial reporters have said 10 years and some have said 7 years. Part of the answer comes from the Fair Credit Reporting Act, the federal law that sets out the rules that govern credit bureaus. It says that bankruptcies are reported on a person's credit report for 10 years from the date the bankruptcy is filed. However, if the credit bureau is a member of the Associated Credit Bureaus there will be a different result. Members of this organization which includes the big three credit bureaus (Experian, Equifax and TransUnion) have decided they would report completed Chapter 13 reorganizations and Ch. 11 reorganizations for 7 years. This is to encourage people to file for reorganization of debt which means creditors will get some money rather than Chapter 7 liquidation which usually has the result of creditors getting no money.

Are there any good reasons to file bankruptcy?

There are times when filing a bankruptcy is the wise thing to do. For instance, if you are behind on a car or house payment and you do not want them repossessed or foreclosed on, filing a bankruptcy will stop the creditor from taking them away from you and you will have a chance to keep them in bankruptcy by being able to pay the arrearages out over a Chapter 13 plan. If your wages are being garnished and you do not have enough money to pay bare necessities, the filing of a bankruptcy will stop the garnishment, free up money and give you a chance to start over by wiping out most of your debts. If you are being sued by a creditor the filing of a bankruptcy will stop the lawsuit from going forward and in most cases allow you to wipe out the debt. If you owe money to the IRS and are afraid what they can do to you, you can file a bankruptcy and either get up to 5 years to pay them or perhaps even have some of the taxes discharged.

What is the best way to repair and fix bad credit after bankruptcy?

First, make sure the credit bureaus show that all the debts included in the bankruptcy are discharged. You can do this by sending them the schedule of debts filed your case and a copy of the discharge order. After you have done this get a copy of your credit reports and make sure the credit bureau did this correctly, sometimes they don't. Then make sure that all the information in your credit report is correct. Once this is done apply for some credit. You can start by getting a secured credit card. Use it and make sure you pay on time. This will cause some good credit to be reported with the bad. Over time you will be able to get more credit and if you use it wisely your credit score will rise and your credit report will look better. It takes time so be patient. Avoid any company that tells you they can get a bankruptcy wiped off your credit history. It can't be done; only waiting the required number of years will do it.

Which scenario typically yields a higher credit score: several delinquent bills on a credit report or a recently discharged bankruptcy?

The Credit Repair Handbook

You would have a higher credit score after you filed bankruptcy. Receiving a discharge in a bankruptcy means you do not have any obligations you have to pay and it will be a long time before you can file bankruptcy again. This makes a consumer a better credit risk for most credit grantors than someone who currently owes debt and who is having trouble paying it.

The Credit Repair Handbook

In The Credit Repair Handbook, trusted consumer debt and bankruptcy expert John Ventura counsels readers on how to identify problems with their credit, rebuild their credit histories and boost their credit scores, and protect their credit from identity thieves. Comprehensive, thorough, and up-to-date, this is the only guide readers will need to get their financial lives back on track.John Ventura's collection of useful books can be found on Amazon.com or through other book retailers.

Expert Interview: Bankruptcy Considerations