All kinds of debt and credit help and info from Michael

About Michael Bovee

Michael started CRN in 2004 with a mission to provide detailed debt and credit help and advice that encourages and allows people struggling with debt to solve their debt problems just like a pro - but without the high fees.

When Credit Card Customer Service Turns Bill Collector

May 3, 2013 by Michael Bovee 5 Comments

Welcome back to the core debt settlement section of the debt relief program. In this section I will get back into the details of setting the stage for negotiating credit card debt with your bank, and how after 60 to 90 days of nonpayment, your bank starts to resemble a bill collector.

I took the quick detour in the prior section to outline things debt settlement companies do not talk about, because that information is important for you to know when you are out on the internet looking for help, especially when there is an opportunity for you to settle one or more of your credit card debts directly with your bank. I will also refer back to some of what I covered in what debt settlement companies don’t tell, throughout the rest of the settling debt sections.

If you have found your way to this part of the settling credit card debt section, and you have, or will have, money ready to settle some/all of your accounts, but have not read about debt settlement and timing, or do not yet understand what it means when your bank charges off a credit card debt you owe, you may want to click back to the debt settlement section intro page here: Introduction to Debt Settlement. You will get the most from the negotiating and settling debt portion of the debt relief program by reviewing it in the order we set it up for you.

Best way to handle your banks internal bill collectors when you are settling credit card debt.

Before I stepped on to my debt settlement company soap box, I left off with the fact that you will get a ton of collection calls from your credit card bank once you miss a payment. Your credit card lenders collection calls begin with a customer service tone. If you pick up those early calls, more often they are reminders about missing a payment, or fist level account turnaround efforts from internal bill collectors at the bank.

Credit card bill collector calls are just part of the process. You know collection calls are going to occur, so you roll with it. There are technology tools to manage collection calls. You can read about some of them right now, before continuing with the rest of this page: tools for debt collector calls.

In the above linked report and several other places throughout the debt settlement program section, I have highlighted the importance of being in contact with your creditors, even when the bill collector for the bank, or you, are not ready to settle yet. I have recommended for more than a decade now, that you be the one to instigate calls, rather than pick up one of the many bill collector calls you receive. Your calling the bank, if nothing else, helps your mindset.

There is a short list of things you want to cover with bill collectors for the bank, and several things you want to avoid when speaking with them. Let’s hit the DO NOT list first.

Don’t ignore your creditor’s attempts to communicate with you.

Falling off the planet, or being completely unreachable when your creditors are trying to talk to you, can lead a bank to treat your account differently. Early placement with a collection agency, or bundling up your account with others and selling the collection rights off to a debt buyer, are couple of ways your bank may react when they have nothing else to go on.

Banks change up their recovery policies and goals from time to time – some more frequently than others. Not every credit card lender is going to have a trigger, or way to segregate your file as having potentially better recovery odds (some indication your are more collectible than someone else). Someone who is showing up in their system as being proactive in communicating a financial hardship is less likely to be viewed as a complete account loss. Good communication with your bank will also help you to stay in the loop with any payment reduction plans that your bank may offer that could fit your budget and overall debt reduction plan. Depending on the creditor, you may also get some early and attractive offers to settle your account by staying in touch.

There is a tendency to ignore bill collector calls and leave mail from creditors unopened when you have not been making payments. But that is a behavior more attributed to someone without a plan. If you are serious about resolving your credit card bills, and are reading through all of the debt settlement sections of the debt relief program, than you have a plan. A settle your debts as soon as possible and move on with your life plan. You understand how settling debt works. You have access to professional feedback along the way. You can even have a pro step in at anytime if you want to, but only when timed correctly.

Do not pick up every call collection call from your bank.

The calls will come with the type of frequency you may not be prepared for initially. The more creditors you have in your plan, the more calls you will receive. You may have spoken with a creditor in the morning only to see calls continue the next day. This is part of the process.

Remember that bill collectors have research and data showing them that they have better recovery rates the more often they call you. The more calls, the more stress you feel, and the more statistically likely it is you will make any payment in order to just stop the calls.

Making payments, even partial ones, that are not part of your plan, can delay your success. There are reasons to make some form of payment, even when you are trying to settle. But that payment would be made for a strategic purpose, not made because of bill collector calls and pressure tactics.

Picking up calls from a credit card bill collector is not even necessary. You need to feel as though you are (and in fact should be) in control of the calls when speaking to creditors, but we will get to the do’s in a moment.

Do not share too much with a bill collector.

There is sometimes a tendency to want to share too much with customer service reps who initially call you, and later the collection and recovery agents from banks. A good example would be taking a call in the second month of delinquency and initiating some type of settlement dialogue. You are wasting your time by doing this. The person at the bank you are connected to at 60 days late is not typically authorized to have any type of settlement discussion with you as you are not late enough at this point for many banks to consider settlement as an option to resolve the account. Even if a serious settlement discussion can be had, the offers are not as good as they will get later when you are closer to charge-off – where the bank will have to recognize the loss on the full balance of your account.

Commercial break: As a CRN member you’re assigned specialist will be identifying the strategy and priority of your creditors with you. This will help you target the maximum savings with each of your creditors using “right now” trends with your banks in order to settle as many of your credit cards in first stage collection as possible. You of course can get completely free insight by participating in the comments section of this and other pages of the CRN site.

2 important considerations when settling credit cards and speaking with internal bill collectors.

We have long recommended that you speak with your creditor once every month after you have fallen behind with payments by 30 days. I am not talking about a regimented schedule here, but many of our members have designated a certain day to make all of their calls.

Depending on how many accounts you have in this first stage of collection that you are targeting settlement with, you could get through your monthly “check in” calls in less than 15 minutes. The more accounts you are dealing with, the more time you will need to schedule. You may even want to make a few calls one evening after work, followed by the remainder the following day.

Repeat these monthly calls to your creditors at least once a month when your accounts have not yet charged off (180 to 210 days delinquent).

Why you should make the phone calls to a bill collector.

It is important that you feel in control of the calls when speaking to a bill collector. A good way to develop the correct mindset is by you doing the dialing. When you call, you are in control. You have a message to relay and when done, you politely end the call.

Bill collectors, whether working at the bank or with an outside collection agency, are very good at building your stress level. They know your level of stress often increases the odds they will get a payment from you. Staying on the phone and answering their questions is ill advised unless you are at the point where you are negotiating your settlement.

There are creditors you will be negotiating a settlement with, when the timing is appropriate, who will have a litany of questions for you, and that you will want to answer in order to get a deal locked in to place. But that is going to be during one of; if not the last phone call you have about that debt. I cover this in detail in the next section.

What you say to your credit card lender is short and sweet.

When speaking with creditors (and later with debt collectors), you only want to relay the information that helps you, and avoid giving information that helps them. Details to share that help you should be limited to what has caused you to fall behind with your payments.

What created the hardship? What hardships remain? This is your story. You are living it. Was there job loss or some other type of income loss? Was there, or is there currently a health issue with you or a loved one? Did your mortgage payment reset? Was there a pile on of unexpected expenses that caused your budget to be derailed?

These are the types of things you would describe briefly. What you say in these calls will often become part of your file notes. The next person you speak to at the same bank can see prior account notes. What you said prior, and what you are saying to them now, should be consistent.

You should keep your script to a minimum.

You could simply say: “I am calling to let you know I have not forgotten about this bill. I am having major difficulty right now because my job has mandated I take 3 unpaid furlough days a month. I am exploring options to supplement my income, and as soon as something comes through, I will be catching up with my payments. I have no available funds other than what I need to cover necessities at this time.”

In this example you have given all the information that you need to, and none of what you don’t. You established a hardship – your hours have been cut. You established that you want to be able to pay something – but right now you cannot. This will be your litany until the timing to offer settlement arrives.

What if you pick up a random call from a bill collector?

Because of how many calls the bill collectors make, and the fact that the calls will come from all manner of random toll free numbers, even numbers from within your area code (this is often spoofing), accidentally picking up a call can happen.

Settling debt, from start to finish, should be treated as a business transaction. You are involved in an effort to save your finances and avoid bankruptcy. Settling your credit card debt represents thousands of dollars in savings. For some, settling your debt is going to mean tens of thousands in savings. You do not show up for a job, where you earn thousands of dollars, unprepared and with a bad attitude. You show up prepared.

If you pick up a phone call from a bill collector and you are not prepared (making dinner, social setting, kids just got home etc.), be polite and quickly end the call. Here are some examples of what you can say:

“I cannot talk right now, I have my hands full. I can call you back.”
“I have a visitor and am not able to talk right now. I can call back tomorrow.”
“This isn’t a good time for me to talk right now. I will call later this week.”

The point is to be professional, and brief, while ending the call quickly.

I should also point out that when you sit down to make your outgoing calls to your original creditors, the same business mindset applies. Be courteous and to the point. Sit down to make the calls when you are prepared, and there are no distractions going on around you.

The general recommendation is to stay in touch once a month with your credit card lender until you enter the final month (cross over 150 days of consecutive nonpayment), which is where most settlements with your original credit card bank are going to happen – if you are prepared financially to lock in the deals.

There are some exceptions to targeting settlements after the 150 day mark. Settling a credit card debt with Chase earlier than this is a good example at the present time.

There are also exceptions to when a credit card issuer sends your past due account out to a collection agency. American Express is a good current example of a bank that sends unpaid credit card accounts out to an external bill collector after only a couple of months of missed payments.

If you have questions about making calls to bill collectors, or are concerned about something you should, or should not say, post them in the comments below for feedback.

The next section of the debt settlement section of the debt relief program will cover how to negotiate and get the deal with your original credit card bank. The next section will include insights into:

Establishing the amount of needed for a single lump sum settlement.
Settling with your bank using the allowable 90 day term payments with confidence.
Have you prioritized the right credit cards and balance for the earliest settlements?
How to prepare for a litany of questions that some banks have as a policy before approving a settlement with you.

Filed Under: debt settlement

Why Cleaning Up Your Credit Reports Improves Mortgage Options

March 13, 2013 by Michael Bovee 2 Comments

Home buyers who take the necessary steps to improve their credit scores prior to house hunting save significantly over the life of their loans, compared to buyers who wait to fix their scores until they’re ready to buy. Low credit scores negatively affect home buyers by reducing their available loan options and increasing their financial burdens. Home buyers who address credit concerns before they’re ready to purchase a home have the opportunity to clear flaws on their reports with time for their scores to rebound, avoiding the mortgage consequences when it comes time to buy.

How Do Credit Scores Affect Mortgages?

Potential home buyers should begin the house-hunting process by selecting a lender. Lenders evaluate borrowers’ financial histories to establish affordable mortgages, maximum loan amounts and appropriate interest rates for borrowers. When borrowers have pre-approval for a loan amount, they have clear direction to launch their house hunt on an affordable course.

In most circumstances, home buyers should work with the lender who offers the lowest interest rate. The lower the interest rate, the less expensive the mortgage is for the borrower over the life of the loan. Lenders use credit ratings to determine the interest rate the borrower pays on the loan.

What Are Mortgage Disadvantages of Poor Credit?

Having a bad credit score means a loan comes at a higher cost to the borrower. Home buyers who have a history of managing their credit poorly are more likely to default on their mortgages than buyers with an excellent credit history. Consequently, lower credit scores require lenders to absorb more risk. Therefore, borrowers with poor credit get quoted higher interest rates from lenders and end up paying more for loans than borrowers with good credit.

Another drawback for borrowers with poor credit is that fewer loan programs area available to them. Loan programs have set restrictions for borrowers’ debt-to-income ratios (DTI). Borrowers with excessive recurring monthly payments for their debts typically have higher DTI percentages. Generally, conventional loans require borrowers’ debts not to exceed 36 percent of their monthly gross income while FHA loans allow a maximum debt of 43 percent. It can be difficult for borrowers with poor credit and high debt to find lenders willing to loan them money. These borrowers may need to offer larger down payments to offset the risk to the lenders. Some lenders even require co-signers or additional paperwork to get a loan cleared by their underwriters.

When Should Borrowers Fix Poor Credit?

To avoid limited loan programs and high interest rates, borrowers should improve their credit scores before beginning the home-buying process. Correcting credit reports takes time. In general, fixing errors and issues on a credit report takes about three months, or 90 days. Therefore, people who are considering buying a home should begin repairing negative aspects of their credit reports at least three months prior to selecting a lender. It’s beneficial for prospective home buyers to correct past due collection accounts, dispute errors and pay at least the minimum balances on credit cards as soon as possible, because a borrower’s credit rating is commonly the most important financial information the lender uses to assign an interest rate.

How Will Poor Credit Affect Interest Rates?

Prospective home buyers who want to make sure their credit scores are aligned with low interest rates should consider these general credit guidelines. Credit scores range from 300 to 900. A score of 740 is the U.S. average, but a score of 850 is rare and exceptional. Lenders consider a 720 or above an excellent score, while scores of 660 to 719 are good credit scores. A fair score ranges between 620 and 659 while any score of 619 or less is considered poor credit. As a basic rule, prospective buyers can assume in a scenario where all factors are equal, with every 40-point reduction in credit score the interest rate offered by the lender could rise 0.25 percent. For instance, if a borrower with a credit score of 740 is offered an interest rate of 3.5 percent, then the same borrower with identical circumstances except a credit score of 700 can assume his interest rate might be 3.75 percent. Over a 30-year term, and dependent upon the loan amount, the borrower with lower credit might pay thousands of dollars more than the borrower with excellent credit.

How to Improve Your Credit?

One strategy for prospective home buyers to ensure they have good credit is to monitor their credit reports. Consumers have the right to access a free copy of their credit reports once per year without it penalizing their scores. AnnualCreditReport.com offers reports for the three major credit-reporting agencies: Equifax, TransUnion and Experian. Consumers should review their reports each year monitoring for inaccuracies, errors in Social Security numbers, account details, the spelling of names or even cases of identity theft. All of these mistakes can negatively affect credit scores, interest rates and mortgages.

Prospective home buyers should be extra responsible with their finances to protect their credit scores prior to purchase. One common sense option is to only spend on credit cards what can be paid back each month. It’s important to pay at least the minimum balance on time, but paying extra reduces debt faster and reflects positively on a credit report. Be sure to only use a small percentage of the available credit on an account at any time. It’s better to have a few accounts with low balances than one account where the majority of the balance is used. Conversely, it’s damaging to have numerous lines of credit or multiple inquires for new credit around the time when home buyers are seeking loans.

In conclusion, whether consumers are buying homes for the first time or refinancing, a higher credit score ensures a lower interest rate. Although unexpected collections notices may seem like irrelevant scams, it’s vital that future borrowers resolve mistakes and balances on their credit reports prior to seeking a loan if they want better mortgage options.

Zillow helped my wife and I find the perfect rental house in North Carolina when we moved there for a short project I was on.

Tali Wee lives in Seattle where she handles community outreach for Zillow. She is captivated by, and appreciates everything real estate-related. Tali is also a new homeowner and enjoys spending time on projects around the house.

Filed Under: credit reports Tagged With: credit reporting, credit score, loan approval, mortgage

Credit Reports and Credit Scores – How Debt Resolution Programs Hurt Both

February 25, 2013 by Michael Bovee Leave a Comment

A common concern you may have when searching for the best debt resolution program is what can happen to your credit score. What follows will help you understand credit rating impacts that relate to the most common and legitimate debt solutions. This page will also help to dispel some myths that get regurgitated across the web. There are far too many misconceptions (and incomplete summaries), about credit reports and the harm that comes from credit counseling, settling debt for less than what you owe, or how bankruptcy impairs your access to getting approved for credit.

There is way too much focus on the credit report and credit score, when what is being sought is relief from unaffordable debt. Focusing on getting out of debt with the right tools comes first. The credit report and the credit score heal and bounce back given time. How much time may surprise you.

Changes in lending mean you’re good credit score may not help you.

Along with the recession came more strict credit risk modeling by lenders. This has led to a reduction in lending because more attention is being given to lending criteria other than your Vantage and FICO credit scores. This means that you’re DTI (Debt to Income ratio), if unhealthy, will prevent you from getting approved for new credit, even if your credit score is excellent. If you have too much outstanding debt, no matter if you have always paid those bills on time, you get declined for new credit, where 6 or 7 years ago you would have been approved. Your 720 or higher credit score will be something you can wear around town and be proud of, but if your credit card debts have you stretched thin from one month to the next; your credit score has lost its utility function.

Maintaining a good credit score is part of the borrow and spend economy we live in. The message to society is “know your credit score” and “all things are possible with a great credit score“. We now have credit score related commercials that air during prime time television shows and major sporting events.

Yes, credit scores open doors, but to new spending.

If you are on this debt relief program page, chances are you’re reading because you want to know what happens to your credit report and credit score if you use credit counseling, debt settlement, or bankruptcy, as a way to resolve debt. That means you are in the least likely position to spend, or be seeking out new credit products, either right now, or for a couple of years to come. Depending on your perspective, I have good news for you.

The three most legitimate debt relief intervention options do indeed impact your credit report and/or credit score. Each method hurts your ability to get new loans, or certain types of loans, for close to the same amount of time. So stop thinking about your credit score, and start thinking about getting out of debt.

If your debts are out of hand to the point that you need to look for outside resources to help resolve them – You are not alone! If you are concerned about how each different type of debt relief program will work for you now, and still allow you to accomplish credit goals in the future, you will be well prepared after reading this page.

I am going to lay out the credit report, credit score, and access to new credit product impacts from debt relief programs in the order that most of the public perceives as the least confrontational, and end with the “B” word. Each comparison is generalized, but in a way that will help you compare your credit needs for the next 3 years, set beside the debt relief programs you are on this site to learn more about. The comment section at the bottom of this page is a great place to post your questions and concerns and get feedback in order to take the information and apply it to your specifics right now, with an eye on your credit future.

Debt Management Plans with a nonprofit consumer credit counseling agency will hurt your credit report – not your credit score.

Your accounts that are accepted into the credit counseling agencies debt management program will be closed. These previously active credit card trade lines will be updated to show the account was closed by credit grantor (unless they were already closed, or you get proactive and close them yourself prior to enrolling with a credit counseling agency). Recently closed accounts can have a slight impact on your credit score, but typically only a few points.

While enrolled in a credit counseling program it is generally very tough to get financing of virtually any nature in the first 12 months. This is because many creditors will inform the credit reporting agencies that your account with them is enrolled in a structured debt repayment plan. Because credit counseling agencies will normally want to have all or most of your credit card debts enrolled in the plan, this type of reporting will likely appear several times across your credit report.

Debt management programs with credit counseling companies run on average 4 to 5 years. This can mean you are locked out of new unsecured credit products, like new credit cards, for this entire period of time.

You may be able to get financing on a vehicle or even purchase a home, modify an existing mortgage, or qualify for a student loan (either your own or parental) shortly after enrolling and making on time payments in the debt management plan.

When you complete the debt management plan, and if all other payments were kept current (like an existing mortgage, student loan, car loan), you should find that your credit score stayed in good shape. You will have eliminated most, if not all of your unsecured credit card debt, after working with the credit counseling agency. But you will have also eliminated year’s worth of unsecured credit history, and have no recent unsecured credit activity. Credit “recentness” is one of the better attributes of open and active revolving consumer credit cards being on your credit report. This is one of the simpler aspects of your credit report and credit scoring factors to rebuild. Losing the long credit history when accounts are closed can be rebuilt over time too.

More detailed information about how debt management plans work to help you manage your credit card debt can be found in the credit counseling section of the CRN free online debt relief program here: Benefits of a credit counseling service.

Settling credit card debt can both hurt and help heal your credit report and credit score.

Settling your credit card debt for less than you owe requires you to have missed payments. This fact will give many readers pause if you are still making your payments on time. If you are reading this and are already 90 or more days late, and cannot afford a debt management plan with a credit counseling service, you may now realize that your options for debt relief could be limited to bankruptcy or settling debts.

For those readers who have not missed credit card payments yet, but know that you will soon fall behind, missing payments is how you set yourself up to settle later. Just know that this is going to:

Cause your credit score to fall significantly
Stain your credit report with late pays, potential charge offs, and can lead to later debt collection entries, for 7 years.

How debt settlement impacts your credit report and credit score will vary widely from one person’s situation to the next. Since another major portion of your credit score is factored on repayment history, your credit report and score is going to take a beating. The duration of the credit pain will be different for each person. But once you achieve zero balance reporting, your credit score can begin to improve. How long it will take to improve will depend on several factors.

5 ways your credit report and credit score can bounce back quicker from settling credit card debt.

How long it takes to settle your debts? Settling a credit card debt directly with your bank before the account goes 180 days without payment is best.
Did your account get sold to a debt buyer who is now reporting a collection entry on your credit report? This means your original lender reports your debt as a charge off, and the debt collector reports a new entry on top of that.
What accounts were current during the settlement process? Those who settle credit card debts while keeping current with their payments on a mortgage, car loan, and student loans tend to see their credit bounce back quicker.
Did you have much credit depth before settling debts? Those with paid off home loans, auto leases and loans, paid off credit cards etc., tend to recover faster than someone whose only accounts in their credit profile were the credit cards that got settled.
Were you able to take smart steps to improve your credit along the way? There are indeed ways to cherry pick accounts you settle, or pre-plan your settlement strategy in order to improve your access to new credit products sooner.

In general, when taking into consideration more than a decade of hands on experiences of working with people to resolve debts by settling balances for less, I see people’s credit score, and access to new credit products, recover in 12 to 18 months. This would be a year to a year and a half after the last account gets settled and the credit reports are updated to reflect there is no longer any balance owed. By recover I mean you are in decent credit shape again in order to qualify for home loans, auto leases and loans, and even new credit cards.

I have worked with people who have gotten approved using FHA underwriting on a home loan; able to get funding for student loans; and qualify for new auto financing, after completing settlements – who fit many of the 5 bullet items above – much earlier than would have been the case had they filed chapter 7 bankruptcy, or enrolled with a credit counseling agency.

A key factor for bouncing back from settling debts and accessing new credit comes from a healthier debt to income ratio. Your finances now reflect that you can take on new debt and successfully make payments with your income.

Watch this short video from the CRN Debtbytes channel about what settling debt means to your credit rating and access to new credit products:

How chapter 7 bankruptcy hurts your credit score and the long credit report shelf life.

Chapter 7 bankruptcy stays on the public record section of your credit report for 10 years. That is the longest shelf life of all debt relief options! But the long negative credit reporting and the initial Olympic ski slope credit score drop is misleading. The perception of chapter 7 bankruptcy is that your credit report and credit score is being sentenced to prison for 10 years. Not true!

There are a host of reasons to look at all of your options to stay out of bankruptcy. Your ability to access new credit soon after your debts are discharged in a chapter 7 is not as legitimate a concern as many would have you believe. If you are struggling under a heavy debt load, and can qualify for chapter 7, it should be viewed as an option of first resort, not the one that should be avoided at all cost. In fact, chapter 7 bankruptcy viewed from a pure cost basis, will beat the cost of debt settlement, and credit counseling, for the vast majority of people.

People discharging debts through chapter 7 bankruptcy find credit card offers in their mail within weeks or months after the bankruptcy is finalized. The credit card offers do not come with high limits, and are going to have higher interest rates attached, but they are there.

Chances are you would not see offers for new credit if you continued struggling your way through your debts, because you are carrying too much of it. Chapter 7 bankruptcy would wipe out your unsecured credit card bills and other debts. For many this will mean a healthier debt to income ratio than you have had for years! Well, there is also the fact the creditors know you cannot file chapter 7 bankruptcy again for 8 years….

Taking on new credit card debts after filing for bankruptcy relief in today’s economy, and with the lower credit limits that will be available, will make it harder to get in debt over your head for quite a while.

3 general credit and loan standards that you need to be aware of when filing chapter 7 bankruptcy.

FHA (Federal Housing Authority) underwriting for new home loans will put qualifying for a new mortgage or home purchase out of reach for a minimum of two years (some exceptions). This means you rent, or stay put for a short time. This certainly blows the 10 year credit report and credit score concern out of the water!
Underwriting for student loans, either ones you take out personally, or cosign for, will be out of reach for a few years – not 10.
You may be able to get auto financing within 12 months after filing for chapter 7 bankruptcy. See how that’s measured in months, and not years?

Filing chapter 7 bankruptcy, and getting a fresh start and new lease on your personal finances, is not the end of the road it is made out by some to be. It can actually be a necessary beginning to a new credit life. You simply need to know how lenders and underwriters view the bankruptcy, and be proactive and smart with rebuilding credit. The 10 year credit report stain is more like a coffee cup smudge within two to three years.

How Chapter 13 Bankruptcy hits your credit score and credit report is another thing entirely.

Chapter 13 is the worst of all debt relief solutions when it comes to credit impacts. The court trustee is going to be overseeing virtually every aspect of your financial life during your repayment plan. Chapter 13 bankruptcy plans go for either 3, or 5 years. The majority are 5 year plans. Chapter 13 will be on your credit report for 7 years. The bankruptcy trustee will have to approve and monitor your household budget and expenses for the life of the chapter 13 repayment plan. If you wanted to take on any new credit, no matter what it is for (virtually), you have to get the trustees permission, and that is not very common.

If there is any debt relief solution that is like a jail sentence to your credit, this would be it. There is really no flexibility to a chapter 13 bankruptcy. Historically about 70% of chapter 13 filers cannot, or choose not, to stick it out.

There are very real benefits to a chapter 13 bankruptcy. You do get the courts protection from creditors who could otherwise use aggressive collection strategies, like suing to collect. You get to keep personal items that may have not been permitted in a chapter 7. Your retirement accounts are nearly always protected. Chapter 13 can even make your home more affordable by helping to cram down an unaffordable second mortgage.

If you cannot muster up the cash to settle with creditors, or hold too much equity in your home, or have other assets to protect, chapter 13 will make sense. Just not from a future credit planning perspective.

Here is a brief video about bankruptcy and how it can impact your credit:

Your credit report and rating is a utility for consumption.

Credit reports and credit scores have a utility function for both you and lenders. Banks use your credit rating to price risk. You use your credit rating to get better pricing when accessing credit for consumption.

If you have a good score and healthy looking credit report, and are in the market for a loan, you are using your credit history and credit rating utility function. The better your credit rating, the lower the costs you will pay for making purchases using credit. Long term this will mean a savings of tens, if not hundreds of thousands of dollars. Just think about what a percentage point or two on an interest rate tied to a 30 year fixed mortgage can mean to you in savings over the life of the loan!

What if you are not in the market for new loans, or maybe would like to be, but have more debt than you can manage?

I mentioned above that lending in the national economy has gotten tighter. Lending markets have thawed a bit since the credit freeze hit the U.S. a few years ago, but sunny days are still a ways off. Even when the credit markets do fully break out of the current cold snap, lending standards , like those from 2005, are not going to come back… maybe ever. Applying for a credit card on line and getting a 25k limit, with limited employment and credit history, is probably gone for good.

Another example of the new normal are the increasing changes to credit underwriting standards for home loans that will impact most people. Beginning his year, the CFPB’s new qualified mortgage rules will start to impact your ability to get approved for a new home loan, or refinance an existing loan. I expect there to be student loan underwriting changes in the coming years as well (I am out on a limb with this one). What does this mean to you?

Your credit report may not have a single blemish. Your credit score may be over 700. But if you are carrying too high a percentage of monthly debt payments compared to your monthly income, your credit rating has lost its utility function. You cannot effectively use that excellent rating without first implementing a strategy to pay off debts and bring your DTI in line with the lending standards being used in the credit market you are interested in.

If you are on this web site and reading through the debt relief program, it likely means you are in an emergency situation with your debt, or you recognize you soon will be. The three options for debt resolution outlined above may be what you have to consider in order to put yourself back on track financially.

Putting aside the hyper messaging in society about the importance of your credit rating; What do you need your credit rating for right now, or over the course of the next 24 months?

If you have a debt problem, your credit rating has lost some or all of its utility function already. The utility function can be returned once the debts you are dealing with have been resolved, or paid down to a point where you’re credit utility returns.

Conclusion:

Credit counseling services, debt settlement programs, and bankruptcy are the 3 main debt intervention options. Each one of them affects your credit score and credit report in different ways. Even slugging it out month to month to pay your bills on time in today’s risk adverse lending environment – where your debt to income is going to prevent access to new credit – amounts to much the same as the debt relief solutions outlined above.

What may surprise you is that all of these methods for resolving debt track fairly closely with the other when it comes to being able to access new credit products.

Hopefully you are now better prepared to understand that when you are struggling with debts you can no longer afford, but are more concerned with your credit score, your attention is on the wrong thing. Focus on solving your personal debt and budget crisis first. Credit will be available again, and much quicker than you may have thought.

Do not let others sell you on the importance of maintaining credit when you cannot maintain payments on the debt you have. Especially when your debt to income means you are not going to be getting approved for credit – even with a high credit score.

Focus on the debt relief solution that is in line with your current financial ability, but with an eye on your future credit goals and needs in the next two to three years. A good process of elimination is to see if you can pay your debts back using a credit counseling agency and the debt management plan approach. Talking with a credit counselor in order to get an exact quote of how low your monthly credit card payments can be – is free. Just call: 888-948-4425. You can also schedule a time with a Cambridge credit counselor here: Credit Counseling Service.

If a credit counseling service cannot get your payments to a place where you can afford your credit cards (medical bills etc.), and contrary to the desire of most to avoid bankruptcy, I would next suggest speaking to a bankruptcy attorney about chapter 7 debt discharge. If you cannot qualify for chapter 7 bankruptcy, or learn something about filing that would cause you to cross it off the short list of workable debt relief plans, then get started reviewing the debt settlement section of CRN’s free online debt relief program here: An introduction to debt settlement.

If you have any questions about your specific debt issues, and how solving a debt problem relates to your credit report, credit score, or near term credit goals, post in the comments below for feedback.

Quick Note: This article is only a small part of the credit reports section of our free online debt relief program. I have attached this post to the main credit report navigation only temporarily. The credit report section will be the last resource page we complete over the course of the next few weeks. I recommend that you subscribe to the CRN RSS feed to get all of the many updates that will be published in this, and several other sections.

Filed Under: banking practices, bankruptcy, credit counseling service, credit reports, debt consolidation, debt settlement, economy