The credit repair company proposed, “Let us fix your credit.”

The attorney advised, “File bankruptcy and get a fresh start.”  It’s confusing. What should I do, credit repair or bankruptcy?

On one hand, credit repair can be expensive and may take some time before you see its effect. The emotional cost of credit repair is low because few people will know that you used a credit repair company to get your financial house in order.  Your credit report does not reveal that you used a credit repair company.

On the other hand, bankruptcy is fast and generally less expensive than credit repair. Best of all, bankruptcy offers immediate relief from the harassing telephone calls and demanding collections letters. In just a few days you get a fresh financial start. Yet, the price of the fresh start can be heavy, social embarrassment and a reminder of that embarrassment every time your credit report is pulled for the next ten years.

You decided that your financial situation must change.  To accomplish that, you must do something.  What should you do?  Let’s see what I recommended to a recent client.

Linda’s Story

Last week the Credit Monkey met with Linda (not her real name) to review her credit report. She had $10,000 in cash, a steady job and hoped to qualify for a mortgage by the time her apartment lease expired in ninety (90) days. Unfortunately for Linda, her FICO scores screamed HELP! Her low score was 490 and her high credit score barely scraped 520. With scores like that, there was no mortgage in Linda’s immediate future unless we could quickly raise her credit scores.

Linda’s low FICO scores were no surprise. There was an entire page of collection accounts on her credit report. A closer look at those collections revealed that Linda’s credit score could easily be bumped with debt validation and dedicating a few thousand dollars towards Pay and Delete. The Monkey estimated that Linda’s collections accounts could be cleared up in sixty days. For more about Pay and Delete read the Monkey’s post from May 8, 2018. Here is the link. A post on debt validation is coming soon.

When Credit Repair Isn’t Enough

After pay and delete and debt validation, one problem would remain on Linda’s credit. She had a three year old judicial lien for an automobile repossession. A “[j]udicial lien is a lien obtained by judgment, levy, sequestration or other legal or equitable process or proceeding.” (August 26, 2018). In the Monkey’s home state of Pennsylvania, a judicial lien lives for five years unless revived by the lien holder before it expires. In simple terms, Linda lost a lawsuit for the amount she owed on a repossessed car after it was sold at auction and the financing bank holds a judgment against her for that amount.

Usually judgment holders permit judicial liens to expire rather than go to the expense reviving them. They reason that if the lien hasn’t been paid in five years, it will likely never be paid. When a lien expires, a simple Fair Credit Reporting Act dispute will remove the blemish from a credit report. In Linda’s case, two (2) more years remained on the lien before it expired and removed from her credit report. It would not be easy to remove.

The deficiency judgment was for almost $15,000. Unless Linda’s former auto lender is willing to play “Let’s Make a Deal,” she was stuck. Linda could only afford to offer a few thousand dollars to satisfy the lien. Generally, a low ball offer of a few thousand dollars will not settle a judgment for $15,000. The bank knows that a debtor is trying to make a deal because she/he needs the lien removed from her/his credit for a reason. The bank hopes to leverage the debtors need into payment believing that it, the bank, hold all the cards.

Linda’s income is about $38,000 per year. Her salary is not a pittance, but where Linda lives, $38,000 is barely middle class. Her salary doesn’t leave a lot of disposable income from which to pay a $15,000 judgment. Realistically, it would take Linda three years, or more likely, four years to pay the repossession deficiency. Under the present circumstance, there would be no mortgage until the deficiency judgment expired.

When Bankruptcy Makes Sense

After discussing possibilities, I recommended that Linda see a bankruptcy attorney. Using credit repair techniques, it would take four years and thousands of dollars for Linda to become mortgageable. With a Chapter 7 bankruptcy and the Credit Monkey’s help after the discharge, Linda would spend about $2000, wait only two years (in some cases only one year) and she would be mortgageable.

Under Linda’s circumstances , bankruptcy is the better option than credit repair. Regardless of what you hear in commercials or on social media, credit repair isn’t the solution for every low FICO score. Credit repair doesn’t always make sense. Sometimes credit repair doesn’t make financial sense, and other times, credit repair is just too slow.

In my next post, the Monkey will give you eleven questions to ask when you need to decide between credit repair or bankruptcy.

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