Phone: 717-304-1841   Email: cutaialaw@gmail.com

 

 

So - you got your discharge.  Now what?

Now that you got your bankruptcy discharge, you are on your way to getting your fresh start.  Below is some important information about what your discharge means, how to handle creditors who contact you after your discharge, and how to improve your credit.  

 

Creditors who claim your debt was not discharged

Even debts that were not listed on your bankruptcy petition because we forgot to list them by mistake or didn't know about them are STILL discharged in most Chapter 7 cases - assuming of course that you incurred that debt prior to filing your bankruptcy.  In a Chapter 13 debts that were not listed on your bankruptcy petition may not have been discharged - but don't take a creditor's word for it.  If a creditor calls you and tries to tell you that their debt was not discharged, unless they are a student loan or a taxing authority, you should NOT pay them and you should contact us immediately so we can let you know if that debt was in fact discharged.  If you are not sure if you should pay a debt, you should contact us.

If any creditor does contact you, be sure to get their name and phone number so we can contact them.  Sometimes we can sue that creditor in bankruptcy court, and you might be entitled to money damages.

 

Rebuilding your credit

Secured credit cards

A secured credit card is a great way to improve your credit.  A secured credit card is where you pay a security amount - might be $100 - and you get a credit limit of $200.  As you make payments on time, your credit limit will increase.  Be aware of annual fees and interests rates - be sure you know what the card will cost you.  You should always carry a small balance on your card but never go more than 60 days with a balance that is more than half your credit limit.  For example, you have a credit limit of $500; try to keep your balance at $50  to $249.  You need to show that you can manage credit, so paying your credit card off each month doesn't help your credit.  Having a balance of more than half the limit can hurt your credit.  For example, if you have two credit cards, each with a limit of $1000, it is better for your credit score to not have a balance of more than $499 on each card, than to have one care with no balance and the other card with a balance of $998.  Even though it is the same amount of debt, it looks like you are "maxed out" on the one card.

Debt to income ratio

When you file bankruptcy, your debt to income ratio is usually reduced because your income stays the same, but now your debt has been discharged.  However, as you rebuild your credit, a good rule of thumb is to keep your debt to income ratio below 36%.   Here is the formula for how to calculate your debt to income ratio:

Total Monthly Debt Obligations (mortgage/rent, car payment, student loan payment, minimum payment on any credit cards or loans) divided by your GROSS (meaning before taxes) Monthly Income.

Here are some examples:  Megan has a $1000 mortgage, a $300 student loan payment, a $75 minimum payment on a secured credit card, and a car payment of $280.  Her total "debt" is: $1655.  Note this does not include things like food or utilities.

  • If Megan's gross annual income is $32,000 a year, or $2,666 a month, her debt to income ratio is (divide $1,655 by $2,666): .62 - or 62%.  That's a very high debt to income ratio.
  • If Megan's gross annual income were $45,000 a year, or $3,750 a month, her debt to income ratio would be ($1,655 divided by $3,750) .44 or 44%.  $45,000 has been (approximately) the median income in Pennsylvania from 2012 to 2014 for a family size of one.  This is still a little high.
  • If Megan really wanted to get her debt to income ratio to be below 36%, we can figure out what 36% of her income is - which is $3,750 times 36% (or .36) and we get: $1,350.  Megan should pay off her credit card and apply for a loan modification for her mortgage, or explore options to reduce her student loan payments, and also look into refinancing her car loan, since her mortgage, student loan payment, and credit card total more than 36% of her income - and she still has a $280 car payment.

Pulling your credit

You should be pulling your credit six months after your discharge to make sure all debts that were included in your bankruptcy are shown as "discharged in bankruptcy".  No creditor should be reporting your debt as being past due if it was included in your bankruptcy.  Note that even mortgages and car loans are "discharged" as to you personally in a bankruptcy (you still have to pay the mortgage or car loan if you want to keep the property).  As such, even if you are making on-time payments to these creditors, these creditors still will not report them.  The reason is that they can't report the on time payments if they are not permitted to report the late payments, and reporting late payments has been interpreted by the bankruptcy court to be an "attempt to collect" a discharged debt - since you are getting penalized for not paying a debt you are technically not responsible for.  (Read about reaffirming certain loans in bankruptcy here).  The best place to pull your credit is www.annualcreditreport.com if you want to make sure that all bankruptcy included debts are properly noted on your credit report. This website will allow you to pull your credit report once a year, for free, from all three credit bureaus.  However, you will not get your credit score without paying for it.

Stay positive

Most people struggle with making sure their expenses are not too high and quite frankly, in today's consumerist society, where we are constantly bombarded with advertisements to buy new and better things, it can be hard to stick to a budget.  There are many programs and websites out there to help you keep track of your budget, give you ideas on how to reduce your expenses and help you rebuild your credit.  Just be aware of any fees or costs associated with using those websites; many are free but not all of them - which does not mean you shouldn't pay for such a service - just make sure you are aware of what you are paying before you sign up for anything.

Filing bankruptcy is not the end of your ability to get credit, but the beginning of a fresh start to get your finances in order and give you some breathing room.  No one should have so much debt that he or she can't sleep at night or meet basic needs.  Trust me - the credit card companies will be just fine.  Get over any embarrassment you might feel about filing bankruptcy, recognize that it was something you needed to do, and know you are in good company.  People from all walks of life and all income levels and jobs file bankruptcy.  There's a reason we have a law allowing a discharge of debts: we recognize that people shouldn't be spending their lives working to pay off overwhelming debt.  Life is more than just work.  So forgive yourself for any financial mistakes you may have made if that is what led you to bankruptcy, and enjoy your ability to start over.