Credit 411
Listed below are frequently asked questions that relate to credit history, credit scoring and bankruptcy. Click on the following questions for information and advise on that particular topic. |
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How to Improve Your Credit
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional.
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Your Credit Report
Understand how a mortgage company views your credit information.
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Your Credit Profile
A credit profile details your credit history as it has been reported to the credit reporting agencies by lenders who have extended credit to you.
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Credit Scoring and How It Works
Credit scoring, also known as FICO scoring, is a statistical method of assessing the credit risk of a loan applicant.
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Other Credit Factors
Mortgage companies look at other information besides your credit score and credit profile before deciding whether to approve your mortgage.
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Credit Inquiries
The Fair Credit Reporting Act (FCRA) outlines who can see your credit profile.
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Establish a Credit History
What to do to increase your chances of being approved for a mortgage.
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How to Fix Credit Report Errors
You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file.
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Steps to Take After Being Denied a Loan
It's never fun to be turned down for a loan, but before you think you won't be able to get credit anywhere, there are some steps you can take.
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Bankruptcy Issues
Read more about bankruptcy and its affect on qualifying for a mortgage.
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If you have had credit problems, be prepared to discuss them honestly with a mortgage professional. Responsible mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected and your payments have been on time for a year or more, your credit may be considered satisfactory. If you are currently in excess debt, there are four ways to control it: |
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1. If your credit is not in terrible shape, you can reduce your other expenses, even if it means making hard choices or changing your lifestyle to fit your income. Consider selling a second car, taking equity out of your home, applying for a non secured signature loan, obtaining a loan from a relative, selling your home and paying off your debts with the proceeds and then renting, cashing out your 401K/retirement benefits or selling family heirlooms, jewelry, etc.
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2. If your credit is already damaged or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. CCCS may be able to help you pay off your debts as if you were in a Chapter 13 bankruptcy, but you don't actually file for bankruptcy.
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3. If CCCS won't take you, you may want to consider bankruptcy. Claiming Chapter 13 bankruptcy takes longer than a Chapter 7, but your credit will end up in a little better standing. Chapter 13 bankruptcy gives you up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
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4. If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the least desirable from a credit standpoint, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy. Creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
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If your debts are under control now, but want to improve your bad credit history, the most important factor is to make your monthly payments on time. Use pre-addressed envelopes enclosed with your statements to mail your payments and call the company if you don't receive your usual statement. Also send your payment as early as possible if you carry a balance. Most companies calculate interest on a daily basis, so the sooner they receive your payment, the less interest you'll pay. |
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Don't procrastinate. It's the day your payment is received that counts, not the postmark date. Give the post office sufficient time (five business days is a good guideline) to deliver your mail. Late payments may mean late fees, higher interest, and/or a negative mark on your credit report. |
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Never send cash. Open a checking account if you don't have one, or spring for a money order and keep your receipt. Finally do not forget to tell your creditors your new address when you move. |
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Make a list of your debts and when the payments are due. Contact your lenders immediately if you think you will have trouble meeting the monthly payments to arrange a payment schedule. |
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Get advice from an expert before you take any major financial actions.
Taking money from your retirement account or tapping the cash value of your life insurance policy to pay bills or living expenses may have serious implications you have not yet considered.
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Credit cards can be invaluable in a crisis, but they can also be dangerous.
Since they allow you to charge items and pay them off over time, credit cards can wreak financial havoc if you charge more than you can afford. If you do use credit cards, choose those with the lowest interest rates and pay them back as soon as you can to cut your costs.
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Your credit report provides information to current and prospective creditors to help you make purchases, secure loans, pay for college educations and manage your personal finances. Credit reporting makes it possible for stores to accept your checks, banks to offer credit and debit cards, businesses to market products, and corporations to better manage their operations to benefit the world's economy.
Your credit report is only compiled when you or a lender makes an inquiry. Information supplied by lenders, you and court records is gathered from the credit reporting agency's file and presented in report format for the requester. Credit grantors send updates to each of the credit reporting agencies, usually once a month. These updates include information about how their customers use and pay their accounts.
Under the Fair Credit Reporting Act, you may be entitled to receive a free copy of your personal credit report if you have been declined credit, housing or employment in the last 60 days.
To request your free copy, ask your mortgage company or contact one of the credit reporting agencies directly:
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Equifax
PO Box 105873
Atlanta, GA 30348
800-685-1111
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Experian
PO Box 2002
Allen, TX 75013
Consumer Credit Questions
888-EXPERIAN (888-397-3742)
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TransUnion
Post Office Box 2000
Chester, PA 19022
(800) 888-4213
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Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (high risk) to 850 (low risk). There are a few types of credit scores; the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Different portions of your credit file are given different weights. They are as follows:
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35% - Previous credit performance (specific to your payment history)
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30% - Current level of indebtedness (current balance compared to high credit)
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15% - Time credit has been in use (opening date)
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15% - Types of credit available (installment loans, revolving and debit accounts)
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5% - Pursuit of new credit (number of inquiries)
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The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.
Your credit report must contain at least one account, which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
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Mortgage companies look at other information besides your credit score and credit profile before deciding whether to approve your mortgage. They also consider the following:
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Income stability
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Employment history
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Monthly debts in relation to your income
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Savings amount and methods
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Mortgage type
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Property type and value
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Down payment amount
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Timeliness of rent and utilities payments
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The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile. Businesses must have a "legitimate business need," and a "permissible purpose," as stated in the federal law to obtain your credit file. Otherwise, only you, and only those who you give written permission, can access your credit files. Your neighbors, friends, co-workers, and even your family members cannot have access to your credit profile unless you authorize it.
Some examples of those who can access your credit files are:
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Credit Grantors
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Collection Agencies
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Insurance Companies
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Employers
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Any company that receives a copy of your credit profile will be listed under the "Inquiry" section of your report. An "inquiry" is a listing of the name of a credit grantor or authorized user who has accessed your credit file. Credit grantors post an inquiry before offering you a pre-approved credit card application. These are listed as "promotional" inquiries on your credit file because only your name and address were accessed, not your credit history information. They are NOT sent to credit grantors or businesses for reasons of credit reporting. They are listed for your informational purposes only.
The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Experian, and TransUnion. It has been in effect since 1971 and undergoes periodic revisions by the Federal Trade Commission. This law protects consumer rights such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity.
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In order to establish good credit, you need a good credit history. If you have no credit history at all, it is easy to start creating one. Opening a bank account is the simplest and safest way to manage your finances. By opening a savings account or a checking account, you can build good credit by saving money and earning interest, easily paying bills and tracking expenses. Responsible use of a checking account or an Automatic Teller Machine (ATM) card will reflect favorably in your credit report.
If you have services in your name (telephone, gas, and electric), make sure you pay them in full and on time. Pay any loans and credit accounts on time each month. At least pay the minimum, if there is one.
Applying for a credit card and using it responsibly can help you build a good credit history. If you have been denied a credit card in the past, you may want to investigate a secured credit card, where you put a pre-determined amount of money in an account as a deposit in the bank. The secured card can be used in the same way as a credit card with the same convenience and payment flexibility. Gasoline companies and retail stores also offer their own credit cards
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You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant."
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If the credit reporting agency cannot verify a disputed item, it must delete it.
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If your report contains erroneous information, the credit reporting agency must correct it.
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If an item is incomplete, the credit reporting agency must complete it.
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For example, if your file shows that you were late in making payments on accounts, but fails to show that you are no longer delinquent, the credit reporting agency must show that your payments are now current. If your file shows an account that belongs to another person, the credit reporting agency would have to delete it. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.
For items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call up, or unexpected medical bills), you can send a brief statement to the appropriate credit reporting agency. The information will be placed in your credit profile and will be disclosed each time it is accessed.
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Lenders are required by a federal law, The Equal Credit Opportunity Act, to tell you in writing when you've been turned down for credit. Two important pieces of information must be included in the letter you receive when you are denied credit:
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The specific reasons why you were denied credit (or information on how to obtain those reasons); and
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If a credit report was used in making that decision, the name and address of the credit reporting agency that supplied it.
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If you don't understand the reasons given for turning down your application, ask for more information. Sometimes it can be hard to determine exactly why your application was not approved, because these decisions involve a lot of different factors. Don't be shy about asking, though, since the information you receive may help you improve your credit so you can qualify in the future.
You may be denied credit for various reasons, including not meeting the creditor's minimum income requirement or not being at your address or job for the required amount of time.
If your loan application was rejected because of insufficient income to afford the house you want or you have insufficient funds for closing costs and a down payment, you could consider loan programs for low to moderate income borrowers with lower down payment requirements, such as an FHA loan or VA loan.
If you requested the loan amount which is larger than 95 percent of the appraised property value, the chances are that loan will be denied. In this situation:
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You can try to renegotiate with the seller for the purchase price to lower the loan amount
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Make an additional down payment to cover the difference between the appraised value and purchase price
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If you think the appraiser undervalued the property suggest that the lender reexamine the appraisal
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If your loan is turned down because of a poor credit report, you are entitled to a free copy of that report. You must request it within 60 days, so don't wait to order it. Read your report carefully to make sure it is accurate and complete.
Once you have a copy of your credit report, you should check for errors and fix any errors by disputing them with the credit report agency. If you believe that mistakes on your report led to the rejection of your application, you can ask the credit bureau to send a corrected copy to the lender. Follow up with the lender to find out if your application can be reevaluated.
Finally, you can try again. All lenders have different approval standards. Just because you did not get a loan from one financial institution doesn't mean you can't get one somewhere else. Try again with another company. Just don't apply for more than four or five loans in a six-month period.
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There is just no easy way to get out of debt, you have to face up to the consequences. A bankruptcy is not always the answer, as the effects are long lasting. There are four ways to handle debts that are out of control, listed in best to worst in regards to the effect it will have on your credit:
If your credit isn't in terrible shape, can you reduce your other expenses, even if it means making hard choices or just change your lifestyle to fit your income?
Some ways to do this:
Selling the second car
Pulling equity out of your home
Applying for a non secured signature loan
Obtaining a loan from a relative
Selling your home and paying off your debts with the proceeds and then renting
Cashing out your 401K/retirement benefits
Selling family heirlooms, jewelry, etc…
If your credit is already gone or one of the above isn't an option, go through Consumer Credit Counseling Services (CCCS). Check your yellow pages for the local number. In this way you're paying off your debts as if you were in a Chapter 13 bankruptcy, but you don't file a bankruptcy.
If CCCS won't take you, you may want to consider bankruptcy. Filing a Chapter 13 takes longer, but your credit is in a little better standing than if you file a Chapter 7. In Chapter 13 you are given up to 5 years to pay off your debts. The disadvantage is that you're in bankruptcy for up to 5 years plus your credit report shows your bankruptcy for 7 more years after you have finished paying off your debts.
If you are so far in debt that you can never repay it, then the best solution may be a Chapter 7 bankruptcy. Chapter 7 is the least desirable credit wise, but you are typically out of bankruptcy in 6 months and you don't have to repay any debt. The disadvantage is that this shows on your credit report for 10 years from the date of filing your bankruptcy, and creditors are starting to tighten their credit requirements, and you may have a tough time getting future financing.
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When making financial decisions during the process, you should consult your attorney. In particular there are three items worth mentioning:
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Under bankruptcy law, certain luxury purchases over $1000 within 60 days of the bankruptcy filing are presumed non dischargeable.
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Under bankruptcy law, cash advances aggregating $1000 within 60 days of the bankruptcy filing are presumed non dischargeable.
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Debts involving materially false financial statements are non dischargeable under certain circumstances.
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If you file the bankruptcy yourself, you must fill out the forms. There are several forms. There could be between 30 and 60 pages in your petition, schedule and other papers filed at the time of your bankruptcy. You must follow the local and federal bankruptcy court rules in completing the forms. Preparing these forms requires an understanding of both bankruptcy law and local state law in order to enter the information correctly and accurately. The forms have to be typed and a certain number of copies must be included with the filing. Today, most attorneys use a computer system to prepare these forms because of there complexity and voluminous nature.
About 30 to 40 days after you file the bankruptcy you will have to attend a hearing presided over by the bankruptcy trustee. This hearing is called the First Meeting of Creditors. At this hearing the trustee will ask questions under oath regarding the content of your bankruptcy papers, assets, debts and other matters. After the trustee is done, your creditors will be permitted to question you. Do not worry, your attorney will be there to represent you and your attorney will help you prepare for the hearing. Sometimes, after your hearing is over, various creditors will approach you to discuss the status of secured property or your desire to retain a credit card. Your attorney will negotiate with them, with your knowledge and approval.
After this hearing you will normally not need to return to court. However, if a creditor files a motion or an adversary action, most likely you will have to return to court. This is the exception and only your attorney can determine if this is likely to happen.
Under normal circumstances, the bankruptcy court will automatically issue the discharge 60 to 75 days after the First Meeting of Creditors.
You can reestablish credit though and be back in "A" credit two years after the discharge of Bankruptcy. The bankruptcy is a judgment and will be listed for a period of up to 10 years after the discharge. You must wait 6 years to file again or if your bankruptcy was dismissed you must usually wait for 180 days to refile.
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I am a cosigner for a debt, how does bankruptcy affect my obligation?
If the debt is a dischargeable debt then you will not have to pay it. However, the cosigner will become primarily responsible for the debt. Be sure to list the co-signer as a creditor in your schedules as they have a contingent claim against you.
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Can I keep my house after bankruptcy?
Depending upon which exemption scheme is selected and your circumstances, you may exempt up to $100,000 in equity. When calculating your equity you should use a value that is based upon a forced liquidation as opposed to the best selling conditions to arrive at a value for your home. Once you know the value, subtract the amount owed plus selling and transfer costs from the value to calculate the equity. In a depressed market, liquidated properties are often valued less than what we like to think the property is worth.
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Can I keep my credit cards after bankruptcy?
Under some circumstances you may keep your credit cards. There are many factors which must be considered. Some of those include the credit card balance at the time of the bankruptcy, what the credit card company is willing to do and your ability to pay the present and future credit card debt.
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Will I lose my job?
No. Bankruptcy laws prohibits discrimination based upon a debtor filing for protection under the bankruptcy laws.
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Can I go to jail if I file bankruptcy?
No. There are no debtor's prisons in the United States.
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Will my employer find out about my bankruptcy?
Under normal circumstances, unless your employer is a creditor, your employer will not know.
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Will bankruptcy stop a wage attachment?
Yes.
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Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by bankruptcy.
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Will a bankruptcy remove a lien?
Under some circumstances once the bankruptcy proceedings have started, special motion can be filed to remove certain liens. It will take a bankruptcy court order to remove them. This is a complicated area of the bankruptcy law and an attorney should be consulted.
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Will bankruptcy stop an eviction action?
Perhaps. However, this will only delay the inevitable. The owner is entitled to possession of his property and at best you will be able to remain in the property until you have received your discharge from bankruptcy or the landlord obtains an order from the bankruptcy court. I must caution you that if the only reason you filed the bankruptcy is to stop an eviction then this might be considered an abuse of Chapter 7. If the bankruptcy court finds that this is true then the court can immediately dismiss the bankruptcy and impose other legal and monetary sanctions on you.
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Will bankruptcy stop a foreclosure?
Yes. However, a home is an asset usually secured by a deed of trust. The mortgage company is entitled apply to the court for relief from the automatic stay, the order preventing creditor action by virtue of the bankruptcy. Depending upon several factors, you may be able to prolong a foreclosure until you have received your discharge from bankruptcy. Usually, to keep a home that is in foreclosure you will have to make a deal with the note holder.
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I am divorced, will bankruptcy wipe out my obligation to pay community debts?
In general, you will be discharged from all dischargeable community debts. However, you should discuss this with your family law attorney to understand the other implications of the filing of a bankruptcy during the pendency of a dissolution action (divorce case). Also, remember that if you are discharged from community debts, your spouse is responsible for the entire balance owing on the debt. Put another way, they shift the responsibility on to you.
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Are there any debts that I can't wipe out in bankruptcy?
Yes, there are certain debts that are NOT dischargeable in bankruptcy. Generally speaking, the following debts will not be discharged: Taxes; Spousal and Child Support; Debts arising out of willful misconduct and or malicious misconduct by the debtor; liability for injury or death from driving while intoxicated; non-dischargeable debts from a prior bankruptcy; student loans and criminal fines, penalties and forfeitures. Those debts which are secured will be discharged, however, expect the creditor to take the necessary legal steps to take back the property. In most cases if the debtor's equity interest in the property is exempt, the debtor may retain the property by redemption or reaffirmation.
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This information deals with Chapter 7 consumer bankruptcy. Each state has its own bankruptcy laws, so you need to check with your state for details. Information dealing with Chapter 13 bankruptcy and consumer debt restructuring is not discussed in the above FAQs. The information contained in the following FAQs is provided for general information purposes only and is not intended to be a legal opinion nor legal advice nor is it intended to be a complete discussion of all the issues related to the area of Chapter 7 consumer bankruptcy. Every individual's factual situation is different and you should seek independent legal advice regarding specific information.
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