Editorial Policy

After bankruptcy filing, options to help are few

Erica Sandberg

June 7, 2016

Q Hi Erica,
I have a question that has to do with my sister, Anne. I didn’t know she was having horrible money problems. I knew some of what she was dealing with due to her divorce, but I definitely did not know it all – until now. She went to a bankruptcy law firm here in Chicago, and the firm set up a Chapter 7 filing. She is $48,000 in debt with her credit cards and assorted bills that are all very behind on payment. I have the money to help her out, and I told her I will gift the money to her to save her credit. But when she called the lawyers they told her it was too late, even though she has not appeared in court. Is this correct? — Victoria

A Dear Victoria,

It is a shame that Anne didn’t confide in you. The cash you so graciously offered could have not just saved your sister unnecessary credit damage, but a whole lot of stress. Then again, she probably had a damaged credit report anyway. Large balances plus many missed payments have a powerful and lasting negative impact on a person’s credit score.

It seems as if Anne has already filed for bankruptcy, and because of that the legal wheels have been set in motion. She might be able to cancel the ultimate action with a dismissal and not go through with discharge of her debts, but her credit report still will be affected. The lawyers gave her accurate information.

You see, the problem stems from her bankruptcy petition, which the lawyer submitted to the court. Once done, a public record was created and the credit reporting agencies were notified. Evidence of her filing will show up in the public records section of her credit reports for a total of 10 years. Why? Your sister officially filed for bankruptcy, so the agencies are required to report accurate and timely data.

Your sister has a choice now. She can appear in court and tell the judge that she does, in fact, want to repay her debts with your financial assistance — or she can go through with the bankruptcy. If she chooses the first way and the judge approves the dismissal, your sister will be free to pay her creditors. I don’t see why she would be denied this opportunity, but it could happen. She will find out when she goes to court.

In the event that Anne decides to go through with the bankruptcy, that’s OK. She will be relieved of her considerable financial obligations, and she can start over. Trust me, this is not the end of the world. Nearly $50,000 is a tremendous amount of money for you to gift to her, and paying off her debts is not your responsibility. Paying what’s owed on the cards and bills is your sister’s responsibility, even if it was the result of divorce. Separation and divorce often lead to terrible liabilities.

To rebuild her credit, Anne will need to add positive information to her credit reports, which begins with a credit card. If she doesn’t have an active credit account at this time, she may be able to get one. A secured card that supplies account activity to the credit reporting agencies will be her best bet. If she doesn’t have cash to put down as collateral, maybe you can provide it — that would be a nice gift. The collateral is usually a few hundred dollars, and as long as she has a job, she should qualify for a secured card.

After 24 months of using the secured card and paying the balance in full long before the due date, her credit scores should start to rebound, even with a bankruptcy lingering on her credit reports for eight more years.

Got a question for Erica? Send her an email.

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