Lefkovitz & Lefkovitz
Nashville Office 615-686-2279 Cookeville Office 931-400-2218
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Nashville Bankruptcy Law Blog

Credit scores and the impact of bankruptcy

Tennessee residents whose credit scores have been negatively impacted by their substantial debt may not see a significant impact on their scores if they file for bankruptcy. However, depending on the type of bankruptcy that is filed, it may be 7 to 10 years before they may be approved for new credit accounts such as a home loan.

Individuals typically file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 filers will see the majority of their debts wiped away. Chapter 13 filers will use a payment plan based on their income to pay on their debts for a certain number of years.

How to recover quickly form bankruptcy

According to a report from Lending Tree, 43 percent of Americans who filed for bankruptcy had a credit score of 640 or higher a year after their filing. That number increased to 65 percent for those who were two years removed from a bankruptcy. One of the most effective ways to rebound after a bankruptcy is to pay bills on time. It shows lenders that a person has learned from his or her mistakes.

It is also a good idea to recognize why the bankruptcy occurred in the first place. This may make it easier to avoid making the same financial mistakes in the future. For instance, those who spent more than they earned will benefit from making changes to their budget. While it can be difficult to open credit accounts after bankruptcy, it may be possible to get a gas station or other retail credit card to build good credit.

How credit card debt impacts personal finances

According to a report from Experian, the average credit card debt in America is $6,354. In Tennessee, the average credit card debt is $5,975. On average, Americans carry 3.1 credit cards to go along with 2.4 retail cards. While many people use credit cards to accumulate rewards points or other perks, it is a good idea to pay the balance off each month. The report found that 43 percent of those who have a balance carry it from one month to the next.

Carrying a balance results in about $1,000 a month spent in interest charges, which makes purchases more expensive. Ideally, a person who carries a balance should aim to get it down to 30 percent of their available credit limit. Doing so can help to keep credit card balances from negatively impacting a credit score.

Bankruptcy's real impact on loan pricing

When people in Tennessee are struggling with insurmountable debt, they may consider personal bankruptcy as an option to find relief and escape from a crushing financial situation. However, they may also be concerned about the impact of bankruptcy on their credit and ability to borrow in the future. While 700,000 Americans filed for bankruptcy in 2017, there can be serious impacts, including a reduction in one's credit score.

In many cases, the practical costs of a lowered credit score after declaring personal bankruptcy may be less than people anticipate. For example, if people borrow a $15,000 loan for a car one year after their bankruptcy, they'll wind up paying around $2,100 more over the course of the loan on average than someone without a bankruptcy. But by waiting two years after the bankruptcy filing, the cost decreases dramatically to approximately $800 over the five-year loan period.

Bankruptcy and problem debt 101: Is my house too expensive?

It is not uncommon to find yourself facing debt that you know you can't afford to pay off. Many people end up in financial trouble because of a divorce, an illness, a job loss or something else outside their control. But others end up buried in debt and consider bankruptcy because they aren't living within their means.

We can be our own worst enemies when it comes to spending beyond what we can afford. In some communities, one of the most common areas of overspending is housing. Are you living in a house you know you can't afford?

When bankruptcy is a good choice

Residents of Tennessee might consider bankruptcy to be a last resort solution to debt. However, in some cases, bankruptcy could actually be a smart choice. The stigma associated with bankruptcy often causes people to avoid it by taking other steps to pay off debts. But some of those, experts say, could be more harmful than bankruptcy, like using retirement savings to pay bills.

With overall American household debt topping $13 trillion at the end of 2017, estimates are that 733,000 individuals and businesses will declare bankruptcy this year. Many people will go to great lengths to avoid bankruptcy, basically robbing Peter to pay Paul, and s sometimes 'Peter" is their own plan for retirement.

How tax debt is treated in bankruptcy

The rules associated with filing for bankruptcy in Tennessee can be complicated. For example, a tax debt can be discharged in a bankruptcy under certain circumstances. However, this depends on the type of taxes owed, the priority the debt is given and how old the debt is. As a general rule, a person cannot discharge tax debt if it is in an effort to evade taxes owed.

To be eligible for discharge, the debt must have been assessed 240 or more days prior to filing for bankruptcy. Furthermore, the return must have been filed at least two years prior to bankruptcy, and the debt itself must be at least three years old when filing for bankruptcy. Bankruptcy generally won't discharge a tax obligation if the debt is associated with a tax return that's fraudulent or frivolous.

Is it REALLY impossible to discharge student loans in bankruptcy?

It's no secret that millions of Americans are struggling to keep up with their student loan payments. It's not just recent graduates or young people who are dealing with this problem. In the U.S., according to Forbes:

  • As a category, student loan debt is now second only to mortgage debt.
  • About 44 million borrowers owe a total of $1.31 trillion.
  • The average 2016 graduate owed $37,172 on their loans.
  • More than two million borrowers owe more than $100,000.

The burden of student loans, combined with other obligations -- and the challenges of life events like a job loss, an illness or a divorce -- leads many consumers to consider bankruptcy as a way out of debt. The problem is that student loan lenders have enjoyed powerful, sweeping protections that have made it very difficult for distressed borrowers to discharge their loans in bankruptcy.

Effective tips to getting past a bankruptcy

While nobody wants to file for bankruptcy, it can be a way to help a person overcome financial issues such as a medical expense or job loss. Those in Tennessee or elsewhere who need to file should work with a financial adviser to make a plan that will help them get through the bankruptcy. Acknowledging that a filing is necessary can be better than allowing money problems to get worse.

Those who file for bankruptcy can improve their credit score simply by disputing the negative information on their credit report. As much as half of all negative items related to the filing could be removed by taking this step. Individuals who have gone through bankruptcy can also benefit from spending time reviewing their credit report. Doing so can make it easier to spot inaccurate information or potential identity theft.

How rising interest rates impact consumers

While a strong economy offers many benefits to Tennessee residents, it can also lead to higher interest rates and more debt. As the economy strengthens, individuals may first accrue more debt than they can actually afford to pay off in a timely manner. After they acquire the debt, rising interest rates push monthly payments higher, which can make them harder to keep up with.

On March 21, the Federal Reserve raised the benchmark interest rate to between 1.5 and 1.75 percent. The three-month Libor rate rose to 2.3 percent, which is the highest since November 2008. The Libor rate is a measure of what large global banks charge each other. As that rate increases, it could pose problems for businesses that are looking to refinance their debt. What lenders charge for adjustable rate mortgages can also be based on the Libor rate.

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Nashville Office
618 Church Street, Suite 410
Nashville, TN 37219

Phone: 615-686-2279
Fax: 615-255-4516
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312 East Broad Street, Suite A
Cookeville, TN 38501

Phone: 931-400-2218
Fax: 931-526-6244
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