Robinson & Henry Partner and Bankruptcy Attorney Elizabeth Domenico hosted a live community event during which she answered some timely and compelling questions about bankruptcy and debt resolution options.
If you’re looking for bankruptcy and debt resolution answers, take some time to watch this informative and engaging video.
You’ll notice dots along the play recorder on the video. Each of those provides a quick explanation of the topic Liz will discuss.
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(please note: the following content is a verbatim transcript of the event)
Bankruptcy and Debt Resolution Q&A
Good morning. My name is Liz Domenico, I’m an attorney at Robinson & Henry and I’m here to talk today about some debt resolution options and bankruptcy.
With a lot going on with COVID-19, I’ve gotten a lot of questions about personal finances and debt management, so we are here to answer these questions.
I have had a few people actually send emails over the last few days with questions, so we’ll be addressing those for those of you who cannot make it here this morning. And then also we will be taking your live questions as well as we go forward.
And I’ll also be talking just about a few things that I think are a little bit time-sensitive and appropriate for what’s going on right now.
Question 1: Do mortgage forbearances hurt credit scores?
So it looks like I have a first question here from anonymous from Denver. Someone wants to know, do mortgage forbearances hurt credit scores?
So right now a lot of you may have had your mortgage company tell you there are some options for forbearance. If you get a lender approved forbearance part of it should be that they don’t impact your credit score.
Monitor Your Credit
However, I would recommend that you go ahead and monitor your credit, you get at least one free report. And during this time especially with dealing with finances and creditors with collections, you wanna make sure that they are not impacting it. Because if they are and you have gotten information from them that they are not supposed to, then they could be violating the Fair Credit Reporting Act. So two points of recommendation.
Create a Paper Trail
One, if you are gonna get a lender approved forbearance, get something in writing. Or make sure if you are on the phone with them and they approve it over the phone you get the name of the person you’re talking to, you make sure you have the time, date, and they should have some type of number associated with them at their office. Make sure you keep all of that information if you cannot get it over a copy, like faxed or emailed to you.
Writing is always better, but keep a paper trail at least on your end because we have seen things where, I don’t know if you saw the news, student loan companies who give these forbearances under the CARES Act have erroneously started to report delinquencies on credit.
And the single-largest detriments are late payments as a hit to your credit. So you wanna be up on whether or not they are doing that. So make sure you are watching that, but in the circumstances they are not supposed to be reporting that as a late payment or missed payment on your credit report.
Tip: What to Do if You Fall Behind on Your Mortgage
Let’s see we got… Also in relation to mortgages, we have options for you if you are falling behind due to lack of work.
The Chapter 13 Option
Chapter 13 bankruptcies are designed to allow people who have fallen behind on mortgage payments or even car payments or even your rent if you are in a rental to bring you up to date through a chapter 13 bankruptcy where you’re repaying that over a period of time so that you’re not losing your home to foreclosure because a lot of homes right now have equity and we would hate to see you lose that.
So we can also look at bankruptcy options if you’ve fallen behind on a mortgage and your lender won’t look at you for a forbearance or any kind of loan modification options.
Question 2: Is There Good or Bad Debt?
I’ve got another question here, Sam from Colorado asks, if there is a thing as good or bad debt and if so what is that?
So, I think a lot of that has to do with maybe credit reporting. So on your credit report one of the largest factors in determining your score is utilization of debt.
Credit Cards v. Mortgage & Car Payments
And there’s two types of debt that the credit report really encompasses, there’s installment debt, which is gonna be a secured debt payment like a mortgage or a car loan, and then there’s gonna be installment, or sorry, revolving debt which is going to be your credit card usage and anything other than a secured debt.
Installment Debt Can Boost Credit Score
And when you’re coming out of a time where you may have had a detriment to your credit score, the installment debt is gonna give you a bigger boost to your credit score because it’s a long-term loan typically on a mortgage or car payment and getting that good payment history which if you have a monthly payment and you’re making it on time is going to help reestablish that portion that shows your credit utilization.
How to Use Revolving Debt to Your Advantage
The credit cards and the revolving debt is fine, but it doesn’t have as much of a building impact on your score overall.
Now if you’re paying your payments every month on time and you’re actually not carrying a balance, a lot of people have run into this where you maintain great credit in terms of your payment, but when you go to purchase a vehicle or something and you haven’t actually had debt in your life, you don’t actually have a credit score or maybe you don’t have a high credit score.
So using one card to pay something monthly is great but actually carrying a small balance but paying it off each month is gonna be something that helps build that credit back up.
When Debt Turns Bad
But generally there’s no good and bad type of debt. Debt turns bad when you get into the position where you can’t repay it or you over encumber yourself to where your monthly payments are only going to interest.
So in reality, all debt if managed appropriately in terms of your credit score can be good to show that you are credit worthy in terms of the lenders looking at you to make sure you have positive payment history. Let’s see.
Tip: Credit Scores & Bankruptcy
And in terms of credit score, one question I always get asked quite a bit is, what happens to your credit score if you file bankruptcy?
So in terms of debt resolution options, bankruptcy is one to consider. There is a potential that if you have a high credit score before going into a bankruptcy that it will take it down significantly.
How Bankruptcy Can Actually Improve Your Credit Score
If you’re already in the position where you don’t have great credit, bankruptcy can actually be a tool to help raise that back up.
Within about two years of any chapter of bankruptcy, we’re usually seeing people with a credit score back in the 700s or so, which is good.
Buying a Home After Bankruptcy
The only thing after bankruptcy you can’t do is to get a home for two years, that’s an FHA lending guideline that really doesn’t have a lot to do with your credit score.
But certainly during that two years we wanna have things happen that help rehabilitate it.
How I Help You Repair Your Credit After Bankruptcy
And as part of my practice when a client goes through bankruptcy, we will take a look at what their post bankruptcy projection will be from their credit report that we pull and then we can use that to help give some guidance on things that can be done to help raise that score.
Especially if someone says I’d like to get into a new vehicle or I do have plans down the road to get a new home, we can do some planning on that rehabilitation.
The 10-Year Myth
So it’s not a seven to 10 year bad credit mark like a lot of people think. The seven to 10 years really has to do with how long it shows up on your credit profile as a public record.
Just like any other court proceeding like a divorce, a speeding ticket, foreclosure, but the credit impact really stops after two years, so it’s not as long or as negative as people think.
Question 3: Options for Credit Card Debt from a Closed Business
I’ve got another question about business credit cards. Hypothetical, an S corporation has about 50, $75,000 in credit card debt, the business is no longer active, what are the options?
Creditors Can Still Come After Debt
Things you have to consider when you have debt from a business that you owned that are no longer able to run. If the business entity is gone, the creditor can still try to proceed against them in state court. But if there are no assets and the business isn’t functioning, they could get a judgment but it really doesn’t matter.
What Kind of Assets Are Left?
Now if there are still assets that can be liquidated, they could try to get a court order and then possibly go after bank accounts or other assets to satisfy that debt.
Business Credit Cards & Personal Credit Score
The one thing you really have to be careful of as a business owner is whether or not any of those business debts have what we call a personal guarantee.
Things like a commercial lease space generally have a provision that you as the business owner take on personal liability if there’s a default.
A lot of these business credit cards use your personal credit to establish the ability for the amounts you can borrow and they do tie it to your personal credit report.
Question I’m often asked is, well, how do I know? There’s really only two ways to know.
Whether You’re Personally Liable for the Debt
One, if you pull your personal credit report and that credit card specifically or other business debt shows up on your credit report, that’s an indication that you’re gonna have personal liability on that.
If you don’t see it on your credit report and you’re still not sure, you can either look at your credit card agreement or call the bank that issued the credit card and they should be able to tell you whether they’re gonna hold you personally responsible.
What to Do if You Are Personally Liable
If you have a personal guarantee on that debt you’re gonna wanna talk about debt resolution options, whether it’s bankruptcy or settlement or negotiation because you are leaving your personal assets out there especially if you have real estate.
Your Bank Account & Home Could be at Risk
If they got a judgment, they can go ahead and put a lien on your home or they can garnish bank accounts. So you really wanna talk to a professional and see if there is any of that personal liability on any of these business debts.
So for small business owners it’s really good to maybe make a spreadsheet of all of the debts and then figure out what fall into the strictly business category and what may have that overlap with the personal liability to see, do you have funds available to try settlement or maybe you need to look at a bankruptcy route. All of which we can help to determine from you with the specifics of your case, that’s what we’re here for, to give you some guidance on your own specific personal needs on your debt situation.
Question 4: Options for Homeowners During COVID-19
All right, Jessica from Lakewood says, she’s taking a pretty big pay cut because of the virus, she’s still making her house payment right now, she wants to stay current but she won’t be able to keep that up for long.
So Jessica, you’re not alone here, so I think we talked a little bit about in the beginning there is a question about a forbearance.
I know a lot of the lenders right now are allowing perhaps a three-month forbearance option, they also are offering potentially not refinances typically but what we call a loan modification, where if you fall behind they may be able to push the arrears to the end of your loan. They may even be able to work with you on an interest rate. Loan modification is not typically something that is changing the amount of your payment.
So right now if you do fall behind I would contact your lender to see what options they have available.
Be Aware of Lump-Sum Forbearance Repayments
The thing you wanna be careful of that I’ve been seeing recently is that your lender will offer you a three-month forbearance. But what they may fail to tell you is that instead of pushing those arrears to the end of the loan so that they’re not due immediately after you come off of the forbearance that they are making them do immediately after, which doesn’t give you a whole lot of reprieve.
So if you are gonna ask for a forbearance, make sure you’re very clear on what the terms and expectations are from your lender once that three months is done.
Consider a Loan Modification
And I think the better option is looking at a loan modification. I will tell you, typically, you are gonna be told you have to miss three months of mortgage payments to qualify for a loan modification.
Your Credit Will Take a Hit, But…
So you always have to be cognizant that there is then gonna be a negative reporting on your credit, but in order to save your house perhaps that’s a lesser evil than having a foreclosure and being at risk of your house being lost.
Consider a Bankruptcy
The other option again that we can look at is a chapter 13 bankruptcy to try to help you through this time where your income may be lower. And if you do have to make the choice to stop making your mortgage payments to go ahead and when income does recover to look at setting up that chapter 13 payment so you can keep your home.
Because the only legal way to stop a foreclosure is through a chapter 13 bankruptcy.
Tip: Chapter 7 & Chapter 13 – What’s the Difference?
So check and see if we’ve got anything else right now. So one question that I get a lot is, what is the difference in chapter seven and chapter 13 bankruptcy?
Ch. 7 Liquidation of Debt
So if you’re looking at bankruptcy as a debt resolution option, on the personal side, chapter seven is going to be what we call the liquidation.
Based upon your household size you’re going to have to meet certain criteria to get the relief under chapter seven and also make sure you don’t have a lot of equity in assets like a house or a car. You’re going to want to also take a look at what type of debt you have.
Chapter seven is really designed to be a short period of time about three to four months between when a bankruptcy is filed and when you get what we call your discharge.
What Debt You Cannot Get Rid of in a Ch. 7
But there are certain types of debt that are not gonna be able to be encompassed in a chapter seven bankruptcy.
For example, if you’re looking for repayment options on a tax debt, you may not wanna be in a chapter seven. If you’re looking for a longer forbearance period on student loans, which while not able to be discharged in bankruptcy typically, you can get some reprieve through a chapter 13 repayment plan to have longer where you’re not having to worry about being garnished or pay those back.
Chapter 13 Debt Repayment Plan
A chapter 13 is typically designed for people who have income that exceeds the set amount for a chapter seven, who have assets perhaps like a, excuse me, a car or a house that have too much equity and you don’t want them sold.
Certain types of debt like tax debt, child support arrears, and then again I mentioned it’s a main mechanism to catch you up on a chapter 13 payment plan for mortgage or car arrears where a chapter seven doesn’t allow you to be able to do that and give you any time outside of working with your lender to do that.
So those are kind of some of the main differences between seven and 13. And some people have options between those and some don’t, but those are things that we evaluate on a case-by-case basis, that’s why we give those consultations to evaluate that for you.
Question 5: Options for Renters During COVID-19
Okay, someone in Colorado, anonymous asks, what are my options as a renter right now? So right now the moratorium on evictions in most counties did expire. So these evictions can start up again.
What You Can Do
Fight the Eviction
Generally, landlords we’ve seen are willing to work with renters, but in the event that they are not, a couple routes are that you can try to defend the action in state court if you believe that the eviction is incorrect and you are current on payments.
Or if they’re trying to evict you for something other than the past due rent, you can look at defending in state court.
File for Bankruptcy
And then also to just like with the mortgages, a chapter 13 bankruptcy can stop an eviction as long as you already haven’t had a judgment for possession entered against you. And even if you have there are ways if you put up certain amounts of rent to be able to do that.
But the chapter 13 would be a way to allow you to try to bring yourself current on that rent through a bankruptcy so you’re not just kicked out of the property.
Question 6: Small Business Owner & Commercial Lease in Jeopardy
A business owner in Denver asks, like many small businesses, mine is suffering too with a commercial lease space doesn’t wanna to lose the lease, will chapter eleven keep the brick and mortar store, do I have any other options?
Chapter 11 May Not be the Answer
So chapter 11 for business owners is an option to look at reorganizing the debt. A lot of the chapter 11s are meant for businesses that know they’re going to have continued cash flow. So if you still are able to generate an income, then a chapter 11 can look at helping out just like at chapter 13 with some of those rents. And maybe even able to allow you to renegotiate the terms of the lease with the landlord. It’s not a guarantee but sometimes going into the bankruptcy setting gives you a little more wiggle room to be able to work with the creditors.
Insofar as it’s a commercial lease, the landlord can look at whether the benefits of staying in there in terms of the bankruptcy outweigh what you’re behind. Because in a chapter 11 they’re considered a creditor and there’s a creditor committee.
There’s a lot of nuances at chapter 11 that are hard to understand. But long and short of it is is it could be an option to try to rectify that.
Chapter 11 Requires a Monthly Payment
If it’s just an issue where the main debt is a leased space, the chapter 11 is probably not the best recommendation if you don’t have other debt you’re trying to work through or you don’t think you’re gonna be able to have cash flow to make a payment. Because the chapter 11 is going to require a monthly payment towards your debt in some fashion based upon your income and expenses of the business.
Tip: A New Rule in Chapter 11
In that vein of chapter 11 I’m wanna talk about a new tool. So typically there were debt limits on a chapter 11. There’s a new subchapter of that title that allows what we call a subchapter five. And it’s designed to be more like a chapter 13 for small business owners.
Your Creditors Do Not Have to Agree to This Sub-Chapter
As long as you’re in the commercial business as your primary occupation, even if you’re an individual you can take advantage of the streamlined process of this chapter 11 subchapter five, whereby you have less input from your creditors. You can get a plan confirmed even without all the creditors agreeing.
This Sub-Chapter is More Economical for Small Businesses
It’s a much more cost-effective way to do a chapter 11 if you are a small business owner. Because in reality, a lot of times chapter 11s are very expensive, take a lot of time, and can be derailed by your creditors not agreeing on a proposal to repay certain debt.
So this [sub-chapter] will allow you to come in and propose a much more feasible plan based upon your budget more like a chapter 13 which is more friendly for these small business owners versus a large corporation.
Question 7: What Can I Do About Mounting Medical Bills?
I’ve got a question from Andy in Colorado Springs. I got a lot of medical issues that have accumulated medical bills, I’m trying to keep up with them but can’t right now. There has been a negotiation tried on the debt but no really luck with the creditors. What can be done? I’m afraid I’m gonna have to file for bankruptcy.
Medical Creditors Don’t Like to Settle Debt
So in terms of medical debt, I will say that medical creditors are one of the quickest to try to send you to collections and garnish you. We don’t have a historical record of being very lucky with trying to settle with the creditors. And unfortunately with medical debt, they’re typically not the type of creditors who are going to be benefited from debt resolution options like negotiation.
When a lot of people enter those consolidation programs it’s primarily designed for credit card use so that these medical bills are still left out there.
Try a Payment Plan if You’re Low-Income
Most of the time if you are lower-income there are some programs with the hospitals that you can try before considering bankruptcy to attempt to see if they will lower your amount owed or get you on a more manageable payment plan.
Bankruptcy is Typical with Medical Debt
If the creditor just won’t work with you, you may be needing to unfortunately look at bankruptcy as an option because, really bankruptcy is designed for the creditors to not be able to choose whether they sue you or not. Once a bankruptcy is filed you’re not gonna have the ability to be able to have them sue you anymore.
Repaying Some of the Medical Bills Over Time
Now if you are chapter 13, some of that debt might be paid back, but it does allow you a longer period of time and to propose a repayment schedule that works with your budget versus just being at risk of money being taken on your bank account, wages being garnished at 25% or a lien put on your home if they end up do having a judgment that they can get against you.
So again everybody’s different. When a person comes in and consults with me we take a global look at, what are all the debts, what assets you have, what’s your income? And we don’t really just say, here’s your only option, we say, here’s all of your options, but then maybe here’s my recommendation of the best option for you.
Sometimes it might be bankruptcy, most of the time with medical debt it tends to be that way but it is not the only resolution option.
Question 8: How Does Bankruptcy Affect My Spouse?
All right, Ryan from Broomfield wants to know, if one spouse incurs a lot of debt, maybe in a bad business venture, can that spouse file for bankruptcy without affecting the other spouses credit?
Really good question, a lot of times we do find that people enter either into a marriage where one has debt and the other is not responsible or one person even in a marriage is primarily carrying the debt due to business or maybe they have better credit at the time. And what would happen in a bankruptcy scenario if one person chooses…
In the Case of Joint Debts
So when you’re talking about joint debts, if it is truly joint where the other person incurred the debt and one spouse files and the other does not, a creditor does not lose the ability to go after the non-filing spouse once the bankruptcy is done. T
hey are afforded a little bit of protection while the bankruptcy is going on but they still are gonna be legally responsible for it.
So the bankruptcy itself won’t impact the other spouses credit other than a notation that the joint debtor file bankruptcy, but it does leave them out there for collection attempts.
One Spouse Responsible for Debt
On a debt where the other person was not legally responsible, a bankruptcy should not impact that credit. Now I say should not, I have seen it where if you have a bank where you have a joint account and one person and spouse has a credit card it impacts the other’s lending through their bank.
Both Spouses Should Monitor Credit Reports
It’s not supposed to happen, again it’s important if you’re going through this for the other spouse to still watch their credit and make sure that the credit company is not doing anything that it’s not supposed to.
So there is some risk, although in reality they are not supposed to be able to impact the non-filing spouses credit especially in the scenario where the debt doesn’t have anything to do and is not legally owned by the other party.
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If you’re facing mounting debt, you may have decided it’s time to find out what your bankruptcy and debt resolution options are. Schedule a free case assessment at 303-688-0944.