Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

09/14/2009
What advice can you give me if I'm trying to obtain a loan in order to down size after filing bankruptcy?
"I filed Chapter 13 on the advice of a bankruptcy attorney, who said that I had no other options. As it turns out, this was bad advice; and not knowing, but tired of being harassed by bill collectors, I did. It was discharged in August 2007. I have a 2 family home that is paid-off and my husband is retired (credit pretty good)--we were attempting to down-size but we need my income to secure a loan. I cannot do this, even though my credit score has risen. I need some guidance and help. I cannot take the bankruptcy back and it will remain there for yet a little while.

In the mean time, I have been saving, and the biggest thing that I have to pay off is my student loans, which I plan to begin paying on the principal--if that is feasible. Any help would be appreciated and maybe someone else is in the same situation. My husband was not on the bankruptcy nor did he know about it--he would have stopped me."
Bettye J. Banks:
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Oh my! While I certainly know that from time to time a consumer has little option but to declare bankruptcy, it should never be the first option, nor the second for that matter.

You should have sought the services of a legitimate financial counseling agency affiliated with the National Foundation for Credit Counseling (NFCC). Their contact number is 800-388-CCCS(2227). They have over 50 years of credibility in assisting troubled debtors. You may have been able to work out a viable solution to the problem that did not include bankruptcy. (A bankruptcy has a terrible impact on your credit.) If they could not help you, they would have told you so, and then you would have been more at peace with your decision.

From your statement that your husband was not included in the bankruptcy, nor did he know about it, I believe you must not live in a community property state. He would almost certainly have been included if you did, because any debt incurred by either spouse in a community property state is the equal responsibility of both spouses. (The creditors would have come after him to collect once you filed.)

The problem then, is that since you need both incomes to qualify for what you need, your credit history negatively impacts BOTH of you. If they use your income, they must also use your credit.

I wish I had better news for you, but in the current economy, good credit makes a huge difference. Even those who have good credit do not always receive the loan they want, at a rate they want.

You may just have to wait it out on getting new credit, or be prepared to pay a higher interest rate than that with which you feel comfortable.

Lenders now want not just good, but excellent credit, usually with collateral; a low debt ratio (credit utilization under 50%), and a solid debt-to-income ratio (how much debt compared to how much income).

Start making those payments on the student loans and pay as much extra toward the principal as you can to bring the debt down faster. It will take some time, but you can overcome this.

Steps to take:

1. Save! save! save! Take this time to rebuild & stabilize your finances.
2. Pay for things with cash as much as you can.
3. Help him repay any creditors he might have. This frees both of you.
4. Stop using credit right now.
5. Downsize or right-size your life. Eliminate non-essential spending.
6. Take a free or low-cost budgeting class at your local NFCC affiliate office.

Gerri Detweiler:
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Bankruptcy is a serious thing to try to hide from your spouse. The fear that he will find out is probably very stressful for you. I'd urge you to tell him about it. After all, there is a good chance he will learn about it at some point.

Once that is out in the open, your next step is to focus on rebuilding your credit. The best way to do this is usually with a secured credit card. You put a deposit in a savings account which acts as a security deposit if you default. You don't have to carry any debt - just use the card for things you would buy anyway, then pay it off in full to avoid interest.

I am not sure what you need a new loan for. Is it for a home? Is it possible for your husband to qualify on his retirement income? If so, then you can still hold title to the home jointly without being on the note. Again, though, this is another situation where your husband may wonder why you aren't willing to allow your credit report to be reviewed, and you are probably worried your secret will come out.
I am concerned that you are talking about taking on new debt when you haven't been able to tackle the debt you already have. You may benefit from some financial counseling to help you come up with a plan - especially if you and your husband can get on board together.
Kris Freeberg:
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I would strongly suggest be honest with your husband.
Shauna L. Roberts:
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I am not aware of any mortgage products that are available that have less than a three-year discharge of bankruptcy requirement [Editor’s note: information about discharge of bankruptcy, including when the discharge occurs, can be found on the Web site of the U.S. Courts at www.uscourt.gov/bankruptcycourts/bankruptcybasics/discharge.html. You have two years behind you and will need to wait out another year. In the meantime, make sure that you have started reestablishing credit. You mention that you have been saving. Take out a share secured loan to help reestablish your credit. That way, when you have the three years behind you with the bankruptcy, you will have reestablished your credit as well. That will be important for future credit applications.
Vita S. Roth:
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I am going on the assumption that your husband now knows about the bankruptcy. The biggest thing you have going for you is the paid off 2-family dwelling. Are you renting out a portion of your residence and including it as part of your earnings? If not, this may be a viable option to increase your monthly income, pay off debt, and/or put money into savings or a retirement fund, while giving you time to raise your credit score and clear your credit history of the bankruptcy.

Another option is to get an appraisal on your current residence, find out how much it would sell for, and then look for something smaller that may not require a large amount of credit, making it easier to qualify for the amount you need. The move to a smaller house could possibly lower your monthly living expenses, leaving extra money for paying off other debt and putting money aside for savings or retirement. This would leave you in a stronger financial situation.

If neither of these suggestions is viable or applicable to your situation, you may require services from a professional financial counselor or counseling agency that could help you sort out your options. I would recommend that you read the section on Consulting with Financial Professionals in Chapter 3, and Developing a Comprehensive Financial Plan in Chapter 8 of the Wi$eUp curriculum at www.wiseupwomen.org; registration is free. The following link also has information on helping you find a reputable financial professional http://www.pueblo.gsa.gov/cic_text/money/financial-planner/10questions.html. I wish you the best.
Blake Allison:
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First of all, congratulations on being proactive about your financial situation and reaching out for help. This is one of the most important things you can do. It is a shame that is sounds like you got some ‘not so great advice’ from the bankruptcy attorney. Yet, you should also be proud that you have your home paid off. Not many people can say the same. Before jumping in and trying to give you advice on what you should do, let’s step back first and give some thought to some specific points/questions.

It is important to look back at why you ran into troubles that led to your bankruptcy. Are you clear what these issues are and are you confident that those are behind you? In other words, do you know the mistakes you made and how to avoid them?

• Are you and your husband now on the same page about your family finances? Do you both feel comfortable talking openly about the subject?

• Why is your husband's credit only "pretty good" at this point? What has dragged on his score? What is he doing to improve his credit score?

• If you are looking to downsize and your current home is paid off, is there not enough equity in the current home to make a substantial down payment on a new home, if not to buy it outright?

• Is there a need to downsize right now, especially if your house is paid off?

• If there is no urgency, would you benefit by waiting for your credit score and your husband's credit score to improve?

• If your husband is close to retirement, are you as well? Do you want to take on a mortgage at this point in time?

• It is great that you are saving and planning on paying off your student loans; however, what is the rest of your financial picture? Do you have an emergency fund? Do you have adequate funds in your retirement account(s)? When do you plan to retire? Among many other questions…

• You will definitely want to talk with a financial advisor(s) to help you navigate through your situation and help you plan for the years to come. With that said, are you comfortable knowing how to find a reputable advisor so you don’t find someone like the bankruptcy attorney who could give you bad advice?


I think it is important to consider your overall financial position and goals before trying to target one or two specific areas. Always keep in mind with money and finances – as with most things in life - that with every action there is a reaction. Everything is connected somehow. In other words, if you make decisions in one area of your finances, it will affect other areas, but it does not mean that it is always a negative reaction. For example, if you buy a home now with a lower credit score, your payment will be higher, so you will have less money left over to save, pay down loans, etc. On the other hand, if you wait for your and/or your husband’s score to improve, you will have saved that much more money before buying the home, you will be able to get a better interest rate, your payments will be lower, you will be able to save more every month towards other goals…dare I say retire earlier?! There are many, many more connections that can be made even in this simple example, but hopefully it helps to shed light on the importance of looking at the big picture first. I hope this helps.
Delores Lenzy - Jones, CPA, CIA:
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It sounds like you're in quite a dilemma. It's unfortunate that your attorney gave you the wrong advice. Some options to consider: Buying a foreclosure (they appear to be cheaper and less restrictive to purchase) Buy from an owner without going through financing (if you explain your situation, then you might get someone to understand and allow you to purchase). At this point, that's about all I could advise, as normal lending institutions will consider the fact that you had a bankruptcy. Also, normally as a married couple, you are viewed as one. As such, they would likely overlook your husband's credit rating and focus on yours.