Top 4 Credit Killers

1. Serious delinquency. Old accounts that have been on your credit report for a long time are the number one credit killer. Credit bureaus will assume (algorithmically) that you do not care enough about your credit to fix small problems. A three-year-old $75 LabCorp debt can drag your credit down by 100 points or more. This is why it’s important to routinely monitor your credit report and promptly address credit items.
2. Recent missed payments. Everyone misses a payment at some point. You may have been on vacation, or you may have changed card numbers and auto-bill didn’t transfer correctly. But realize that recently-missed payments count more against you than old missed payments. Avoid them if you can. If you do miss a payment, bring it current immediately. And in the future, if you are unsure whether you’re going to be able to make a payment, contact the lender. See if there’s some sort of forbearance they can offer. Try to get them to delay credit reporting for 30 to 60 days.
3. Bad payment history. Fixing a bad payment history is a two-step process. First, you must fix the items on your credit report in which you missed payments. Either get back on track by making at least three months of timely payments, or just pay the account off completely. Second, you must replace that bad history with good history. This means adding a newer credit account to replace that old account. Of course, you must stay current on new accounts, as well, for this technique to work.
4. High credit usage. The availability of credit can account for as much as 30 percent of your overall score. The trick here is to obtain — but not necessarily to use — as much credit as possible. Having credit in reserve is considered a positive attribute by the credit bureaus. If all of your credit is maxed out — not so much.

Wipe the slate clean

If you have multiple credit killers on your credit report, consider getting a fresh start with bankruptcy. Although a bankruptcy filing will definitely impact your credit, it also eliminates your debts and addresses all the credit killers on your credit report. If you have many creditors or deep debt, discuss your bankruptcy options with an experienced attorney.

In July 2019, the Consumer Financial Protections Bureau (CFPB) released a report on Third Party Debt Collections Tradeline Reporting, based on the latest data available, from Q2 2018. A “tradeline” is another name for an entry on your credit report. Tradelines are considered negative credit items and can remain on a credit report for seven years.

The debt buyer and debt collection industry

The CFPB estimates there are 9,330 debt collectors and debt buyers in the United States. The top four largest debt buyers reported 90 percent of all reported buyer tradelines on credit reports. Debt collectors often become debt buyers, as the CFPB notes:

Debt collectors usually work traditional,
non-buyer accounts
on a contingency fee basis
while they work buyer accounts
by purchasing portfolios of accounts
and keeping all of what they collect.

Market Snapshot,
CFPB (July 2019)

Debt in collection on your credit report? It’s likely a medical debt.

Two-thirds of creditor-collector credit report entries were for medical debts. And medical debts accounted for 58 percent of all third-party collections (debt buyers and debt collectors) as of Q2 2018. But debt collectors frequently report derogatory information for utilities and telecommunications, as well.

These types of credit entries particularly damage credit because they represent nonfinancial debts. Moreover, hospitals and cell phone companies do not report positive payment information to credit bureaus, so the only time these types of debts show up on a credit report are when the information is negative.

Medical debts are dischargeable in bankruptcy

If you have a bunch of medical debts on your credit report, you should consider filing bankruptcy to discharge them. Focus on your recovery — not on the debt. Call an experienced bankruptcy attorney to discuss your options.

Debt collectors don’t give up. They’re very motivated to hound you until the debt is collected. Why? Because collecting your debt is their source of income. Actually, they make money only if you pay the debt. Collection agencies get paid based on the amount they collect from you. Ignoring debt has many downsides.

Ignoring debt collectors won’t make them go away

Under new proposed rules, debt collectors could soon be able to send texts, emails and private-messages to collect on their debts — on an unlimited basis. Creditors will also continue to report nonpayment to the credit bureaus.

Verifying the debt is legitimate

You have the right to request validation of the debt under the Fair Debt Collection Practices Act. You should definitely find out if what they’re saying you owe as a debt is actually legitimate and whether the amount is correct. If you learn that it’s not legitimate, contact the collection agency right away to dispute the debt.

Missed opportunities to settle the debt

Interest, collection costs, and legal fees will be added and, of course, will increase with time. Seize the opportunity to make a payment arrangement with the debt collector. You may even be able to settle the debt for less than the original amount. But you must communicate with the collector to accomplish this.

Don’t get sued

A debt collector may file a lawsuit against you to collect on the debt. In most cases, this is just a matter of time. If you ignore the lawsuit, the creditor will obtain a default judgment against you. Wage garnishment is likely to follow. Any money in your bank account can also be garnished.

Debt doesn’t just disappear

Ignoring debt is like having a false safety net. It’s a progressively slippery slope. Obtain your credit report so you can make a comprehensive debt assessment. Prioritize your debt and make a realistic payment plan. You must contact the collectors and negotiate.

If you’re not able to reach an agreement or repayment isn’t feasible, then it may be time to contact a bankruptcy attorney. A legal professional can inform you of all of your options and help you obtain a new financial start.

Student lenders religiously report unpaid student loans to credit bureaus

Most student lenders report monthly — every month — to credit bureaus. Your personal payment history accounts for 35 percent of your credit score. Federal student lenders report payment history to credit bureaus monthly and without fail. Most private lenders also report to credit bureaus monthly, while others report every three or four months.

While on-time monthly payments to your student loans will improve your credit, missed or late payments will ding your credit. Student loan default invariably results in a lower credit score. In the eyes of the credit bureaus, unpaid student loans negatively reflect on your creditworthiness.

What if I can’t pay my student loans?

If you make income insufficient to pay your scheduled monthly student loan payments, you likely have options. Contact your lender and see what possible programs you may be qualified for, including deferment or forbearance.

Federal loans also have income-driven repayment programs available, including income-based repayment, PAYE, REPAYE, and income-contingent repayment.

Chapter 13 bankruptcy can help you get your student loans back on track

If no lender repayment program works for you, consider Chapter 13 bankruptcy to get your student loans back on track. You generally cannot discharge student loans in bankruptcy. You can, however, repay your student loans in Chapter 13 bankruptcy, often at a greater percentage than what other unsecured creditors receive.

Once you have a repayment plan in place, your creditors will be paid monthly and your balances will begin to decrease. Consequently, your credit score will improve. Addressing your debts, instead of ignoring them, will always have a more positive effect on your credit score.

Settle in and settle down

Lots of activity happens both before and after foreclosure. The process can be slow or can move very quickly. Sometimes months can pass without anything happening. Then much can happen within a matter of weeks.

Before the foreclosure takes place, you may be engaged in litigation. You may be attempting to prevent the foreclosure through loss mitigation, like modification or reinstatement. You may be exploring options for a new place to move.

After the foreclosure takes place, you must find a new place to move. And you must move. You have to update your driver’s license and change your address with banks and employers. Foreclosure can make it feel like your world has been turned upside down, or perhaps even inside out.

What comes next? You have to settle in and settle down. Take the time to settle in to your new home. Then settle down, take a deep breath, and take stock of what led to the foreclosure. Get all of the foreclosure documents together and put them in a folder. Then put that folder in a drawer and move on with your life.

Rebuild your credit

First and foremost, determine how to deal with any deficiency left on the mortgage balance. Your mortgage lender can either forgive the deficiency or pursue you for the balance. Dealing with the mortgage deficiency is an important part of rebuilding your credit. You cannot recover from foreclosure if you are still paying the mortgage for a home you no longer own. If a foreclosure remains on your credit report for more than seven years, you should request its removal.

And while you’re at it, clean up your entire credit profile. Do not rely on a credit monitoring service. You have to personally control the process of rebuilding your credit.

Qualify for another mortgage

You will be able to get another mortgage after a foreclosure if you take the right steps to recover from the foreclosure.

In today’s market and under current underwriting guidelines, you may qualify for a mortgage more quickly than you think. Take the time following the foreclosure to save up as much as you can for a down payment. The more you are able to bring to the table, the lower your principal and interest rate will be. And the lower your interest rate, the lower your monthly payment.

Following a foreclosure, you will qualify for a mortgage within 3-4 years.  Be patient, rebuild your credit, and save up your down payment. If your goal is to become a homeowner again, it won’t take forever. Keep your eyes on the prize and you’ll be in your own home again within a few years.

Recover from foreclosure

Often the most devastating effects of a foreclosure are psychological. If you can convince yourself that you can — and will — move on, often that’s the toughest part of the task. Settle in, settle down, rebuild your credit, and you will recover from foreclosure.

Each man’s life
touches so many other lives.
When he isn’t around,
he leaves an awful hole, doesn’t he?

It’s A Wonderful Life

What Happens to My Debts When I Die?

Here are some common types of debt and how each can affect your loved ones:

Mortgages. If a home is jointly owned or inherited by a loved one, they are responsible to continue paying the mortgage. Federal law prohibits lenders from requiring that the mortgage be paid off immediately in the event of death. If there is money in your remaining estate, it can be used to take over these payments until a decision is made about whether to keep or sell your home.

Auto loans. If your car payments stop, the lender can repossess the vehicle. However, whoever inherits the car can continue to making payments if they choose to keep it. Remember to officially transfer title of the vehicle, also, to avoid any potential penalties.

Student loans. Federal student loans are forgiven upon death. Private school loans, however, can take money from your estate. But if there are no remaining funds, private loans will also be forgiven. In the event of a co-signer or if you received the loans while married, he/she will be responsible for the remaining debt.

Credit cards and medical bills. These types of debts are considered “unsecured.” So if your estate runs out of money after paying mortgage and car loans these creditors will not get their money back. But if you have a credit card with a joint account, that person remains on the hook to pay off the debt. This general rule does not apply to authorized users, but it is advised for them to no longer use that card.

Taxes. If a deceased spouse owes back taxes and the couple filed jointly, both spouses are liable for the entire amount of the taxes. The IRS may attempt to collect back taxes from the deceased spouse’s estate, however, even if the couple files separately. The IRS allows for an exemption from spousal tax liability called Innocent Spouse Relief. This exemption can provide relief if your spouse failed to report income, reported income improperly, or claimed improper deductions or credits.

How can you avoid leaving a legacy of debt?

Get help now. Seek counsel from a bankruptcy lawyer or financial adviser to discuss your debt. Eliminating your debt through bankruptcy before you die may be the right option for you.

Prepare your estate so there are no surprises. Establish your will with an attorney in advance to avoid leaving loved ones in a lurch.

Alert your loved ones to the status of your debt. Debt collectors are permitted to contact your heirs to collect on debts. However the Fair Debt Collection Practices Act prohibits creditors from misleading your family about what they’re responsible for paying. Be sure to discuss what is and is not part of your debt with a trusted family member or friend.

Job loss

Unemployment benefits simply do not cover living expenses. Losing a job can leave you unable to meet your ongoing monthly obligations, which can lead to bankruptcy. You may expect to find new employment quickly. But you should not deplete your savings paying off unsecured creditors if you will eventually discharge those debts in bankruptcy.

Foreclosure

Bankruptcy stops any scheduled foreclosure auction. If you have fallen behind on your mortgage but have regained the means to make your monthly payment, Chapter 13 allows you to propose a plan to repay the missed payments over five years. If you cannot afford the monthly payment, Chapter 7 allows you discharge the mortgage and move on with your life.

Drop in income

Perhaps your employer has reduced your hours, or reduced your hourly rate, or cut your annual salary. Maybe you have taken on a job that pays less. Or your income may decrease if you lose a tenant renting your property, or if a tenant decides to stop paying rent. A drop in income can lead to bankruptcy if your income does not allow you to pay your monthly bills. Living paycheck to paycheck doesn’t leave enough room for investment, savings, paying down debt — or for real emergencies.

Divorce

Divorce, too, can lead to a decrease in household income. The process of legally divorcing can itself also be very costly. And assets are not always equitably divided. Divorced couples may not produce income sufficient to support separate households. And child support and alimony (domestic support obligations) can further squeeze monthly budgets. While bankruptcy does not discharge child support or alimony, bankruptcy can reduce the debt burdens of divorcees by eliminating unsecured debts.

Medical emergency

More so than in any other developed nation, healthcare in the United States is very expensive. Suddenly facing a medical emergency for yourself or a family member can leave you strapped for cash. And facing health issues while attempting to make ends meet can be overwhelming. Insurance costs are steep, and insurance doesn’t cover every condition and circumstance. Cancer patients are twice as likely as non-cancer patients to declare bankruptcy. But bankruptcy tends to be multi-causal. And the decrease in income following an illness is much more likely to cause bankruptcy than the resulting medical bills.

Student loans

Many young people today are saddled with student loans. And in most cases, student loans cannot be discharged in Chapter 7 bankruptcy. But a Chapter 7 can make paying your student loans much easier if you have other kinds of debts crunching your budget. And you can propose a Chapter 13 repayment plan that pays more on your student loans than on other unsecured debts.

Credit cards

Credit card debt is one of the main reasons people declare bankruptcy. Making the minimum payments on credit cards just won’t cut it. If you’re carrying balances that you cannot pay off in a reasonable amount of time, then consider discharging those debts in bankruptcy. Chapter 7 allows you to quickly eliminate your liability on credit cards. And Chapter 13 repayment allows you to cut the interest rate down to zero and possibly even reduce the principal balances.

Bankruptcy isn’t for everyone

Even if you experience one or more of the circumstances above, you may be able to recover without declaring bankruptcy. In this article we’ve listed the major reasons people declare bankruptcy. But just because you’re experiencing one or more of these doesn’t automatically mean that you should file bankruptcy.

At Lee Legal, we try to keep our clients out of bankruptcy. Schedule a free personal financial analysis and we can help you determine whether bankruptcy is the best choice for you.

A foreclosure will remain on your credit report for seven years. But the effects of the foreclosure begin to diminish immediately after the auction. If you want to rent a house or apartment after foreclosure, here are some strategies to help you make that happen.

Be honest and up-front

Many landlords (especially at upscale or “luxury” properties) automatically disqualify tenant applications with recent negative marks on their credit reports. But every landlord will reject an applicant who lies on the rental application. Accurately answer all of the questions in the application. If requested, do not leave off information about the foreclosure. Most landlords run a credit report, so they will discover the foreclosure either way. Starting a new relationship based on deceit is rarely advisable.

Before interviewing with a landlord, get your story straight on what happened with the foreclosure. Tell them what happened, take personal responsibility, and highlight what steps you’re taking to rebuild your credit.

Your other credit history matters, too

A foreclosure on your credit report doesn’t automatically sink your chances with a landlord. Your credit history for other accounts matters, too. If you had a good credit score prior to the foreclosure, make and retain a hard copy of that score prior to its dropping. Some credit score tracking companies also provide credit score history.

If your credit history indicates positive credit behavior despite the foreclosure, a landlord is more likely to look past the foreclosure. If questioned by a landlord or leasing agent, accentuate the positive aspects of your credit report.

Match your housing to your income

Do not attempt to rent a home that your income does not support. That wastes your time and the landlord’s time, too. Even if, for some reason, you get approved, you may not be able to comfortably maintain your lifestyle. A broken lease (or worse, an eviction) following a foreclosure will reflect very poorly on your credit report.

Instead, determine the appropriate amount for you to pay for rent after foreclosure before you even begin your search. That will make your transition to renting a much more pleasant process.

Be flexible

If you have your heart set on a specific property, remain flexible and work with your landlord to try and make it work. Offer a larger security deposit or offer to pay several months of rent in advance. Many landlords will also consider references, whether from an employer, previous landlord, or even a previous tenant. If you don’t have any of these, ask if the landlord would consider personal references.

Establishing trust with a landlord may take some work, but staying flexible and responding promptly to requests goes a long way. If you are declined for one property, inquire whether the landlord has any other properties for which you may be considered.

Rent before foreclosure

It’s easier to qualify for a rental before the foreclosure hits your credit report than it is to rent after foreclosure notes are added to your report. If you have the means and the timing is right, sometimes it makes sense to move well in advance of the foreclosure auction. Whether this is a smart option for you depends upon the number of missed payments, your lender’s reporting policies, your individual financial circumstances, and the prospective length of the foreclosure process for your property.

You can rent after foreclosure

Letting go of a home that isn’t worth what you paid for it may actually turn out to be a blessing in disguise. And renting relieves you of many of the hassles associated with homeownership. Generally speaking, landlords are sympathetic to personal history and will be flexible with tenant requirements. If your income is sufficient and you come across as generally trustworthy, you will be able to rent after foreclosure.

Credit card lawsuit

If you stop paying American Express, they will sue you. If a credit card company believes you are penniless, they will ignore you for the time being. But if they think you have the ability to repay them, they will sue you.

We routinely settle credit card lawsuits with Discover, AmEx, and Credit One. Oftentimes, you can save big by spending a little. Hiring a lawyer will help you to find the plaintiff’s bottom line. You can save thousands by hiring an experienced lawyer to negotiate settlement on your behalf.

Personal loan lawsuits

If you default on a loan repayment schedule with On Deck Capital, they will sue you. Choice of jurisdiction for On Deck is the General District Court of Arlington. If you receive a warrant in debt in Arlington or Alexandria, you have two choices.

You can represent yourself and try to settle the debt. Or you can hire counsel to mount your defense and negotiate a favorable settlement on your behalf. Doing nothing is not an option.

Companies now routinely use the courts
to pursue millions of people
over even small consumer debts.

The Color of Debt: How Collection Suits
Squeeze Black Neighborhoods, ProPublica

Navy Federal, Chase, and Citibank have lawyers working for them. So should you. You should strongly consider hiring an attorney if you are sued for a personal loan, signature loan, or line of credit in Washington, DC. Being right isn’t enough. You have to craft an argument convincing to the finder of fact, whether judge or jury.

Debt lawsuits in the Washington DC region

DC area residents also frequently face lawsuits for promissory notes, repossession debt, or lease balances on former rentals. You may not think you owe anything. Don’t let a creditor bully you into paying a debt you don’t owe. You have the right to tell your side of the story.

Or maybe you do owe the debt, but you can’t afford to pay it. Talk it over with an experienced consumer debt litigator to determine what your best options may be.

Bankruptcy stops collection efforts

At the start of every bankruptcy case, an order for relief is issued by the bankruptcy court. The order for relief informs your creditors that the automatic stay is in place. Your creditors must stop contacting you or pursuing any collection efforts whatsoever.

Creditors usually stop collecting when they know that your case has been filed. The sooner they find out, the sooner the phone calls and letters stop.

But until you file a bankruptcy, your creditors can continue to contact you. That’s where we come in.

Lee Legal will take your collection calls before you file bankruptcy

There are several situations where it makes sense to delay a bankruptcy filing. Sometimes, you just need to save up for the attorneys fees and filing fees. But generally speaking, if you know you have to file bankruptcy, start the process immediately.

If you have retained counsel and your filing is imminent, a good bankruptcy lawyer will take your creditor calls for you. Lee Legal will take your collection calls up to two weeks before your bankruptcy filing. That “breathing room” allows you to focus on your bankruptcy and get on with your life.

In those cases where there are many creditors, often there is at least one particularly collection agent. Don’t let aggressive debt collectors disrupt your life. We will reach out to them on your behalf to inform them of their rights in your bankruptcy. Most creditors back off at that point.

Student loans are not dischargeable in bankruptcy

Lots of different types of debts are not dischargeable in bankruptcy. You cannot discharge domestic support obligations — child support, property division, or alimony. Likewise, you cannot discharge fines, forfeitures, and criminal restitution obligations; debts arising from fraud or theft; or certain debts that you fail to schedule in your bankruptcy. But of course none of these types of debts are loans.

Most tax debts cannot be discharged in Chapter 7, but some can. Again, however, tax debts are not loans.

Student loans are unique in that public and private lenders are completely protected from the bankruptcy discharge. In the U.S. the only type of risk-free lending is student loans.

All lenders face risk — except student loan lenders

Unsecured creditors, including credit card issuers and personal loan lenders, invariably face the risk of default. Hospitals and clinics face the risk of nonpayment when they treat a patient without payment up-front. The debt collection process is expensive. Creditors often charge off debts that they deem too difficult to collect. Unsecured creditors face immense risk that their loans will be discharged in bankruptcy, or that they simply will never be able to collect.

Secured creditors like auto lenders and mortgage companies face lesser risk, but they face risk nonetheless. Most secured debt is, in fact, undersecured. That is, the collateral is more valuable to the borrower than it is to the creditor. Few creditors would choose to repossess, seize, or foreclosure rather than be paid per the terms of the security agreement. Even if the secured creditor does liquidate the property, the odds of recovering its loan in full are, in most cases, very low.

Student loans do not face such risk. If you take out a student loan, you will owe that loan until you pay it off or until you die. And even if you die, your student loan may still need to be paid from your estate. While federal student loans are cancelled upon the death of the borrower, private student loans are not.

Bring back the bankruptcy discharge for student loans

Betsy DeVos, Secretary of the Department of Education, is sending mixed messages. On the one hand, there are indications that Education is considering clarifying the meaning of undue hardship for the discharge of student loans. That is welcome news. Lee Legal has long advocated for the return of the student loan bankruptcy discharge. On the other hand, however, the DOE is arguing that the nation’s student loan servicers should be protected from state rules that may be far tougher than federal law.

No for-profit institution should be able to engage in risk-free lending. And the federal government shouldn’t make a profit by lending to student taxpayers. Student lenders should face the same risk of lending as all other creditors.

Bankruptcy has downsides

First the negatives. There are downsides to filing bankruptcy. A bankruptcy filing remains on your credit report for seven to ten years. Bankruptcy may also make it more difficult or more expensive to buy a home or car for a couple of years. Other types of credit, like credit cards or lines of credit, may be more limited for even longer.

Some people also feel embarrassment or shame and procrastinate filing bankruptcy, trying to delay the inevitable but in turn just making things even worse. In most cases, once you know what you have to do, you should file bankruptcy immediately.

Finally, bankruptcy isn’t for everyone and for every situation. There are certain circumstances under which you should not file for bankruptcy. Always discuss your options with a bankruptcy attorney before making any big decisions.

But there is a silver lining to filing bankruptcy, too

First of all, bankruptcy allows you to eliminate your debts. In most cases, you will also be able to keep all of your property. Once you are debt-free, how you choose to use your financial fresh start is up to you. Many people treat bankruptcy as a life lesson and become more responsible financially. Most people consider the biggest benefit to be the bankruptcy discharge.

The Automatic Stay is a bright silver lining to filing bankruptcy, too. The Automatic Stay is, in fact, automatic and goes into effect immediately when you file. The stay prevents creditors from contacting you. Bankruptcy provides breathing room, which is often all that you need to form a plan of action.

Bankruptcy has pros and cons, but in the end, bankruptcy could actually improve your credit score. The downsides of bankruptcy all happen when you file. But the positive effects to your credit all take place over time.

Yet in many ways, the greatest silver lining to filing bankruptcy is peace of mind. You are addressing issues instead of ignoring them. You are avoiding problems before they become unmanageable. And you are taking charge of your life instead of letting your creditors make the decisions.

1. A credit repair company can do it all for you.

No service or company can repair your credit for you. You basically have to do it yourself. Getting guidance is important, and the advice of a professional can be invaluable. But you cannot simply pay a monthly fee and magically repair your credit. That’s not how it works.

2. Having available credit will help repair your credit.

The availability of credit is a major factor toward your credit score, accounting for as much as 30 percent. If you have been through a catastrophic credit event, then you should strongly consider obtaining (but not necessarily using) as much credit as possible to help repair your credit score. Over time, however, the sheer amount of your available credit becomes less important than the sources of that credit and your credit usage and history.

3. Paying down a mortgage or car loan will repair your credit.

You can default on a credit card without immediate repercussions. But if you default on your car loan, your vehicle will be repossessed. If you default on your mortgage, your home will be foreclosed. Mortgage and auto lenders have security for their loans, they have collateral. As such, paying down these loans will not much help your credit repair efforts. The balances of these kinds of loans are irrelevant.

4. You shouldn’t ever carry a credit balance.

When a credit card company reports a recent balance, and you pay in full the next month, it can have an excellent effect on your credit. Most months (10 out of 12) you should have a zero balance and pay off your cards every month. But to have a reported balance on your credit report also signals to the credit bureaus that you are using your credit. Be sure to pay off any revolving amounts within 60 days, and do not employ this credit repair technique more than once every 12 to 16 months.

5. Bankruptcy will kill your credit.

Quite the opposite, in fact. Bankruptcy could actually improve your credit. A bankruptcy filing will remain on your credit report for at least seven years. But the effects of the bankruptcy filing immediately begin to diminish once your file.

Only one in four companies is still around 15 years after opening day. Entrepreneurs who fail often learn invaluable lessons that allow them to create better ventures. Academics have studied the effects of more and less forgiving bankruptcy laws on entrepreneurship.

In two studies cited below, the authors agree that more relaxed bankruptcy laws promote entrepreneurship. But they disagree on what level of protection should be provided.

How Bankruptcy Promotes Entrepreneurship

In Bankruptcy Law and Entrepreneurship (2008), authors John Armour and Douglas Cumming asses multiple bankruptcy variables, including exemptions, disabilities, and reorganization options, and find a strong correlation between bankruptcy protection levels and rates of self-employment. The authors use data from 15 countries from Europe and North America over 16 years.

Specifically, they find that jurisdictions with strong homestead exemptions have higher levels of entrepreneurship. This is intuitive. If a person isn’t afraid of losing her home in the event that her new business fails, she will be more likely to brave the trials and tribulations of entrepreneurship. In fact, the probability of owning a business increases a full 35% from jurisdictions with the weakest homestead exemptions to those with the strongest. A relatively predictable path to bankruptcy discharge, too, has a positive effect on entrepreneurship.

Armour and Cumming conclude that “more lenient bankruptcy law will, at the margin, stimulate entry by persons with lower levels of optimism to become entrepreneurs.” Moreover, they find, “a more lenient bankruptcy law will permit failed entrepreneurs to re-enter the marketplace [more] quickly.” They also find “no reason for thinking that the quality of their projects will be any less” if bankruptcy laws were more forgiving.

But Do Increased Bankruptcy Protections Promote the Right Kind of Entrepreneurship?

This is where David Primo and William Green, authors of the identically titled Bankruptcy Law and Entrepreneurship (2011) disagree with Armour and Cumming. Primo and Green agree that bankruptcy promotes entrepreneurship. But they find both moral hazard and adverse selection traps in more relaxed bankruptcy laws. Specifically, the authors questioned the quality of ventures approached post-bankruptcy. They found that “[c]ounter to the conventional wisdom . . . more generous laws are linked to lower levels of ‘innovative’ entrepreneurship.”

Moral hazard. According to the authors, because bankruptcy “reduces the costs of an unfortunate outcome and blunts the edge of failure, it may lead individuals to start enterprises that are unlikely to succeed and have little upside potential.” In other words, if bankruptcy is too easy to obtain, too many entrepreneurs will attempt too many businesses doomed to failure from the start.

Adverse selection (or lemon market). The authors argue that creditors will charge higher rates to entrepreneurs with low-risk business models because more entrepreneurs with relatively bad business models will self-select into the market. In turn, the authors note, this “may cause individuals with low-risk projects to drop out of the pool, leaving only those individuals with high-risk proposals.”

So What Level of Bankruptcy Protection is Best?

For entrepreneurs, bankruptcy acts a form of insurance. Bankruptcy insures entrepreneurs against the extreme downside of the inherently risky undertaking of starting a new business.

To the extent that moral hazard exists, I believe that society should err on the side of encouraging new ventures despite the downside risk of failure. And I also believe that innovation in and of itself should not be a barrier to entry. New business owners (by definition, self-selecting) are prone to opportunistic behavior. For entrepreneurs, I think that’s a positive attribute. The initial assessment of a business’s “innovation” may not accurately reflect that business’s likelihood of long-term success.

Individual and institutional investors alike can also overcome any adverse selection problems by offering variable rates based on perceived risk. Investors are better at assessing risk than the authors give them credit. Providers of credit should do their homework prior to investing.

So how much bankruptcy protection is enough to encourage entrepreneurship without incentivizing failure? As Primo and Green find, “bankruptcy laws . . . should encourage entrepreneurial behavior in part by reducing the stigma of failure.” A failed business is one thing. But the prospect of losing one’s home, savings, and personal property is enough to discourage many entrepreneurs from starting a business.

Globalization and technological advances have led to a dramatically shrinking pool of old economy jobs. As a society, we should want to encourage self-employment and make entrepreneurship more attractive. The comparative severity and forgiveness of our bankruptcy code affect how entrepreneurs assess risk. Scholars agree that the availability of bankruptcy promotes entrepreneurship. Where reasonable minds differ, however, it is over the level of protection that should be provided to entrepreneurs.

Instead of having a single credit score, however, you actually have three. Each of the the three major credit bureaus (Experian, Equifax and TransUnion) compile their own separate credit scores.

Yet every credit score uses the same basic Fair Isaac (or FICO) formula, with a few proprietary tweaks. Your credit score is calculated using these basic five factors, which are weighted differently.

Payment History ( 35% )

Your payment history is the single most important factor in how your credit score is calculated. This factor alone comprises 35% of your credit score. Paying your bills late will negatively impact your credit score. Credit bureaus also report the extent to which you paid late, whether 30 days, 60 days, or 90+ days. Besides late payments, bankruptcies, foreclosures, lawsuits, charge-offs, liens, and judgments are also negative items in your payment history. Timely pay your monthly bills and you have this credit score factor covered.

Credit Balances ( 30% )

Credit balances make up the second most important factor in how your credit score is calculated and accounts for 30% of your score. This factor calculates whether you have used up all of of your available credit. In other words, have you maxed out some or all of of your credit sources? Types of debt come into play here, too. Higher balances on revolving credit are more negatively scored than balances on installment accounts, like auto loans or mortgages.

Length of History ( 15% )

The length of your credit history comprises 15% of how your credit score is calculated. This factor looks not only at how long you’ve been using credit, but also at the average age of all of your credit accounts. Long-held and well-maintained accounts have a positive effect on your credit score, as does a long credit history. A short credit history indicates unknown risk to the credit bureaus and lenders.

Credit Mix ( 10% )

Credit mix makes up 10% of your credit score. This credit score factor looks to whether you have a single type of credit, or a varied mix. An excellent credit portfolio uses each of the different types of credit, including mortgages, auto loans, credit cards, store charge cards, and lines of credit. But it is important to remember that this is a small component of your credit score. Do not open credit accounts that you do not need.

New Credit ( 10% )

Like credit mix, 10% of your credit score is comprised of new credit. This factor attempts to calculate your credit risk based on how much credit you have applied for and/or opened recently. Consumers facing cash-flow difficulties often turn to new credit. Thus, a recent increase in applications may indicate greater credit risk. So may a rapid increase in use of previously available credit.

Other Factors in How Your Credit Score Is Calculated

Equifax generates scores ranging from 334 to 818. TransUnion’s scores range from 309 to 839. And Experian has scores ranging from 320 to 844. The credit bureaus also differently weight other factors, including the number of recent credit inquiries, balance-to-loan ratios, and the sheer number of open balances.

Will foreclosure affect my spouse’s credit if they ARE NOT on the mortgage?

If your husband or wife is not on the mortgage loan, then in most cases, the foreclosure will not affect your spouse’s credit. Your spouse will not have the mortgage debt reported to the credit bureaus, so a foreclosure on that loan will not affect your spouse’s credit score. Only positive or negative items appearing on a credit report affect a credit score.

However, if your spouse is on the title, but not the loan, your spouse’s credit score may be affected. The longer your spouse was title owner, the more likely it is that the credit bureaus will identify the foreclosure on a property owned by your spouse. Foreclosures appear as derogatory items in the Public Records reporting section of a credit report. Foreclosures are public records and are therefore routinely (but not always) picked up and reported by by the credit bureaus.

In addition, the foreclosure will limit your spouse’s access to secured credit post-foreclosure. Once the foreclosure is completed, your spouse will no longer be joint title owner. For that reason, your spouse will not be able to use the property as collateral to secure new credit.

Will foreclosure affect my spouse’s credit if they ARE on the mortgage?

If your spouse is on the mortgage, the foreclosure will affect your spouse’s credit. If you and your spouse are both on the mortgage, then you both owe the mortgage jointly and severally. The bank can collect against both of you separately. A foreclosure, in this case, will dramatically affect your spouse’s credit negatively.

Scenarios like these also happen in situations where real estate was not disposed of in divorce prcoeedings, or where separated spouses occupy different residences.

In short, if both spouses (or former spouses) are on the loan, foreclosure will affect both spouses.

Everyone has an individual credit score

You have your own credit score, linked to your individual Social Security number. Your spouse has a separate credit score. The credit bureaus do not link credit scores of married persons. A change in one score does not automatically affect the other.

If the foreclosure leads to bankruptcy for just one spouse, then the other spouse’s credit may be affected. If you had co-debts, the bankruptcy will discharge your spouse’s debts, but those debts will then accrue to the non-filing spouse alone. This may shift your debt-to-asset ratio and negatively affect your credit. If you have no joint debts with your spouse, then you don’t need to worry about this.

Learn your options

If you or your spouse is facing foreclosure, consider consulting with an experienced D.C., Maryland and Virginia foreclosure defense attorney. You have options. But generally speaking, the sooner you act, the better.

You Still Owe Charged Off Debt

A debt that has been charged off is usually over 180 days past due. When a debt on your credit report appears as charged off, that means the creditor has given up on you. They no longer consider your debt to be profitably collectible. Unfortunately, you still owe the debt.

Most often, the original creditor has sold your debt to a debt buyer, factoring company, or collection agency. Make no mistake. You still owe the debt. “Charged off” debt is not forgiven debt, and you are still liable on the debt. Instead of paying a charged off debt to the original creditor, you will be paying the company that bought the debt.

Now, instead of one creditor, your credit report shows two different creditors. Both items on your report are listed as negative. For this reason, charged off debt hurts your credit much more a than delinquency on a single debt.

Settling a Charged Off Debt is Complicated

The Best Case Scenario. The creditor may charge off your debt then sell it immediately to a debt buyer. And that debt buyer may then immediately report it to the credit bureaus. At that point, you know who you owe the debt to, and you know that they paid less for the debt than you actually owe. You may actually be able to quickly and easily settle the debt for pennies on the dollar.

The Worst Case Scenario. Unfortunately, life rarely follows the best case scenario. In most cases, the creditor charges off the debt then does nothing. For a while, the new creditor does not report the debt to the credit bureaus. In fact, you have no idea who owns the charged off debt. In those cases, you must first contact the original creditor to find out to whom they sold the debt. But by the time you do this, the company that bought the debt from the original creditor may have sold the debt to another creditor. And so on.

Sometimes paying off a charged off debt is quick and painless. More often, however, trying to pay off a charged off debt can feel like a wild goose chase. Debt buyers rarely immediately report to credit bureaus when a debt is charged off.

The Statute of Limitations on Charged Off Debt

The statute of limitations for contracts sets the time period within which a charge-off creditor can sue you for a debt. Statutes of limitations differ from jurisdiction to jurisdiction. The statute of limitations for most debts in the District of Columbia is three years. The statute of limitations for most debts in Virginia is five years. Like in D.C., the statute of limitations for most debts in Maryland is three years. The statute starts running from the date of the last default.

If a creditor attempts to collect on a charged-off debt prior to the statute of limitations, you should consult with an attorney quickly. In those situations, the creditor can extend (or “toll”) the statute of limitations if you take certain actions.

If the statute of limitations has already expired, then the creditor can attempt collection on the debt forever, but they cannot sue you. The debt will continue to affect your credit. But they will never be able to sue you.

What to Do When a Debt is Charged Off

Having good credit is so important. As with most debts, paying sooner will save you money and improve your credit score more quickly. Find out who owns the charged off debt and satisfy it. In the meantime, the charge-off creditor may be simply holding your debt until your ability to repay improves. At that point, you won’t get as good a settlement.

In many cases, when a debt is charged off there are several other negative items in need of addressing. You may even owe several different charged-off items. If a single, specific charged off debt is not your only credit problem, you may want to consider filing bankruptcy to discharge your debts.

A charged-off debt affects your credit report for seven years, while filing bankruptcy will remain for seven to ten years. Sometimes, protecting your credit requires choosing between two evils.

Make no mistake: the D.C. Small Claims increase is a big win for creditors. The increase will result in many more cases for debts between $5,000 and $10,000.

D.C. Small Claims Court

The D.C. Small Claims and Conciliation Branch is a branch of the D.C. Superior Court and is located in the same building as the Landlord Tenant Court Building B, 510 4th Street NW, Washington, DC  20001. The clerk is located in Room 120, and the courtroom is located in Room 119.

The Small Claims court does not offer jury trials; only the Superior Civil Actions Branch offers jury trials. Small claims is located to the left when you enter the courthouse, while landlord tenant claims are heard to the right.

D.C. Small Claims Increase is a Win for Creditors

We will have to see how effectively the D.C. Small Claims Branch will handle the caseload increase. But many debts, between $5,000 and $10,000, will now be filed in small claims, whereas they were not once worth filing in the civil division. The change represents a decided win for creditors, and they will now more frequently pursue claims up to $10,000.

Defendants in small claims do not have access to jury trial, and there is no discovery in small claims. Creditors’ case filing fees have dropped now, too, from $120 down to $45.

As a result, creditors with claims of $5,000 to $10,000 now have much shorter case timelines, making these cases more profitable. Predictably, creditors attorneys will now file many more cases for debts up to $10,000.

Any way you look at it, the D.C. Small Claims increase is a big win for creditors.

The Golden Rule

You may know of the so-called Golden Rule from the Sermon on the Mount: Do unto others as you would have them do unto you. But there is another, less-cited Golden Rule in the Bible.

The rich rule over the poor, and the borrower is the slave of the lender.

— Proverbs 22: 7 NIV

Thus, in the Bible, borrowers are slaves to the rich. In other words, he who has the gold makes the rules. This may be common knowledge today, but eight or nine thousand years ago it was hardly conventional wisdom.

Biblical ambivalence toward money is both prevalent and palpable. In fact, the Bible contains stern words for borrowers and lenders alike.

The Bible Warns Borrowers

Once a borrower has the money in hand, the Bible is silent. In the Bible, most people desire to repay what they owe.

On the other hand, only the wicked borrow with no intention of repaying. These debtors, according to the Bible, go to hell. Psalms contrasts them with the generous, who give instead of borrowing:

The wicked borrows but does not pay back, but the righteous is generous and gives.

— Psalms 37: 21 ESV

Yet the Bible visits its wrath upon borrowers with premeditated evil intent, and not upon borrowers in general. Instead, it advises the careful consideration of acceptance of credit:

It is better that you should not vow than that you should vow and not pay.

— Ecclesiastes 5: 5 ESV

While better not to borrow at all, it is even better not to borrow and not repay. God takes a worse view, however, of extortionate creditors.

The Bible Takes Creditors to Task

The Bible makes no qualms about the spiritual dangers of making money for money’s sake:

The love of money is a root of all kinds of evils.

— 1 Timothy 6: 10 ESV

And creditors are encouraged to earn the love of those to whom they lend.

Two men were debtors to a certain moneylender. One owed him five hundred, and the other fifty. When they were unable to repay him, he forgave both of them. Which one, then, will love him more?

— Luke 7: 41 NIV

And early in the Torah, the Bible makes clear that the exaction of interest from the poor is a sin:

If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him.

— Exodus 22: 25-27 ESV

So lenders should love their debtors. They should not love money. They should forgive. And they should not profit from the poor. Jesus put these words into action:

Jesus went into the temple of God, and cast out all them that sold and bought in the temple, and overthrew the tables of the moneychangers, and the seats of them that sold doves. And he said unto them, “My house shall be a house of prayer; but you have made it a den of thieves.”

— Matthew 21: 12–17 KJV

The expulsion of the moneychangers from the temple is so important in the New Testament that it is described in all of the first four books. See also Mark 11:15-19, Luke 19:45-48, and John 2:13-16. The moneychangers in biblical times exchanged one currency for another for a fee. Their profession was not favored by the Lord.

The Bible has plenty to say about employers, too. For instance, just to name one, look at Deuteronomy 24:14–15: “Do not take advantage of a hired worker who is poor and needy.”

Bankruptcy in the Bible

The first truly codified bankruptcy laws were the Statute of Bankrupts (1542) in England. But bankruptcy in practice has existed much longer. Approximately 3,300 years earlier, in Deuteronomy, a book in the Old Testament, it was written:

At the end of every seven years thou shalt make a release: Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.

— Deuteronomy 15: 1-2 KJV

This Biblical “release” is another word for bankruptcy. If a debtor can’t repay a debt in seven years, the lender should release the debtor.

Lenders should make better decisions about to whom to lend. Borrowers should make better decisions about when to borrow, and for what purposes. But after seven years, unpaid debts should be forgiven. The rationale for bankruptcy in the Bible translates readily to modern times.

Foreclosure Will Appear on Your Background Check

To obtain your background check, an employer or landlord must obtain your permission. Under the Fair Credit Reporting Act, you also have the right to dispute the report’s accuracy. The information provided in a background check differs from provider to provider. But most background checks provide the following information:

• Public records
• Court records
• Previous addresses
• Criminal records
• Property ownership
• Former employers
• Credit report

Most background checks entail the running of a credit report. If you have a bankruptcy or foreclosure in your past, that will appear on your credit report. A Chapter 7 bankruptcy remains on your credit report for ten (10) years, and a Chapter 13 bankruptcy will appear for seven (7) years. A foreclosure will stay on your credit report for seven (7) years.

Be Ready to Explain the Foreclosure

If you are going into a job interview, you should be ready to explain the foreclosure. You should not have a long, drawn-out explanation, even if what led to the foreclosure was a complicated situation. Instead, formulate a simple but truthful explanation of why you were forced into foreclosure. Focus on the lessons you learned since the foreclosure. Use the hardship of going through a foreclosure as an opportunity. Explain why you are a better person today as a result.