A last resort is bankruptcy, and you should never take the step without adequate legal advice before hand. The reason is that under the Fair Credit Reporting Act (FCRA) a bankruptcy will stay on your credit record for up to 10 years. (All other negative information will stay on your record for up to seven years.) Bankruptcy provides protection for you from your creditors – you have a way to start over, and your creditors may also be able to get at least some of their money back. There are generally two types of credit shedding methods under federal law – a Chapter 13 proceeding and a Chapter seven bankruptcy.

If you have an ongoing monthly income, you may be able to file for a Chapter 13 proceeding, which is a repayment plan sanctioned by the court under which you agree to repay part of, or all of your debts over an agreed-upon period of time.

A Chapter seven bankruptcy, or total liquidation, means that everything you have is sold to pay your debts except for certain allowances (these vary by State so what applies to you living in California may be different to other areas of the country) for various items.

Good legal advice regarding Chapter 13 vs Chapter 7 bankruptcy is key. Every situation is different, and the decision is too complex (and to the emotional) for you to make on your own. Whether you have a $1 or $1 million debt, it is smart to obtain copies of your credit reports so you can make changes if any information is wrong.

There are three principal credit reporting agencies you can write to obtain your credit report:

Equifax
Attention: Consumer Department
P.O. Box 105873
Atlanta, GA 30348
1-800-685-1111

Transunion Corp.
P.O. Box 390
Springville, PA 19064-0390
1-312-408-1400

Experian
Consumer Assistance
P.O. Box 2350
Chatsworth, CA 91313-2350
1-800-682-7654

You should check your credit reports every couple of years – and certainly, at least six months before you apply for a mortgage – so that inaccurate information can be corrected before your turned down for credit.

Several years ago, the Federal Trade Commission’s single biggest source of complaints was credit bureaus. In fact, one consumers Union survey showed that 43% of all credit reports contain errors. You may have to pay a small fee for your credit report (usually under $35), but the law requires that this fee be waived if you have been turned down for credit in the last 30 days so you can find out why.

If you are, or where married, you may be able to request that information regarding a joint account in your and your spouse’s names be considered in determining your creditworthiness.

Many people are confused (and rightly so) about the effect that marriage or divorce might have on their creditworthiness. The simple explanation is that your loan contracts and credit card agreements are not affected by marriage or divorce.

If the debt is in your name alone, it does not affect your current, future, or ex-spouse’s individual credit rating. Likewise, if a debt is in both your name, and your spouse’s name, as far as the lender is concerned you’re both still liable regardless of what your separation agreement states in the divorce.

Unfortunately, for many people these days the after-effects of the last recession still show up on their credit reports in the form of late or missed loan payments, or even loan defaults and mortgage foreclosures. Here is a practical look at how your creditworthiness can be affected by your spouse.

Marriage/Divorce/Bankruptcy

Julie from Bakersfield California had two defaults on a car loan three years ago. She recently married Brandon, who has an unblemished credit record, and they had decided to look for a house in Modesto (Brandon’s hometown). Julie is still paying off several credit balances that she ran up on the honeymoon.

Brandon’s credit record is not tarnished by Julie’s poor credit record because the loans were never his responsibility, even though some of Julie’s Credit Card charges were made during their marriage.

All the loans were in her name only. Brandon could apply for a mortgage in his name only and his credit report would look fine. The problem is that if he applies without Julie as co-applicant, he can’t count any of her income for purposes of qualifying for the loan.

They would have to settle for a much less expensive house than they could afford if Julie’s income was counted. During Brandon’s and Julie’s 10-year marriage, they bought a house together and Brandon cosigned Julie’s auto loan.

Brandon always handled the family finances, so Julie was shocked when she discovered that Brandon had been running up huge balances on their joint credit cards and was months behind on the mortgage and the car loan.

Brandon then announced that he wanted a divorce. Under the terms of their divorce agreement, they canceled all of their joint credit cards, and Brandon agreed to take over responsibility for the loan on his car loan and the mortgage. Julie got a house, and that’s what mattered, she thought.

Julie was subsequently shocked when their car lender sued her for repayment of the auto loan after Brandon defaulted on it. The bank did not care what her divorce agreement said; the loan contracts had her name on them.

Julie’s only recourse was to pay off the car loan and sue Brandon to recover costs. In order to pay off the car loan, Julie applied for a home equity loan. Even though she had made every mortgage payment on time since the divorce, she couldn’t qualify for a loan because of Brandon’s delinquency in making payments on those loans for which she had joint responsibility.

Julie had to borrow money from a relative to repay the auto loan, Brandon was nowhere to be found, and her credit record would be blemished for years because of his actions.

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It is not easy to get out of debt once you have dug yourself into a hole. And in today’s economy, there is no guarantee that you will be able to avoid incurring debt in the future. Loans are not necessarily all bad – they allow you to buy things you could not otherwise have (such as a home or a vehicle), they give you flexibility in an emergency, and they may allow you to take advantage of unique investment opportunities.

The key is to always use common sense so that you do not over-indulge in debt and compromise your financial future. By leaving as much as possible in your pocket after paying taxes, expenses, and debts, you will increase your annual savings and make sure that you have more money to invest in the years to come to meet your goals.

Getting out (and staying out) of debt is one of the best ways to increase your future financial stability.

This concludes our rather lengthy series on California Loan Find regarding consolidation loans, bankruptcy, interest rates, debt reduction strategies, prepayment penalties, and minimum payment problems.

I hope this has helped you in making decisions regarding your personal finances.