After Bankruptcy Beware Those Easy to Get, Unsecured Credit Cards

Bankruptcy tanks your credit score

One of the most common questions I used to receive from clients was "How do I fix my credit after this bankruptcy is over?" I answered that question so many times I seriously considered typing up and printing leaflets and just pushing them across the desk every time I heard that one. While I'm not going to go too deeply into fixing your credit after your bankruptcy, I will tell you this: Beware the credit card offers you get immediately following your bankruptcy's discharge.

Unsecured Credit Cards After Bankruptcy

Just about anywhere you look on the internet you'll see piles full of drivel about how consumers who received a recent bankruptcy discharge don't have the credit to qualify for traditional, unsecured credit cards and should aim for a secured card if they want a jump start on rebuilding credit. The reason this misconception is sung from the mountaintops is because, in a logical world, that's how business would work. Even if your bankruptcy was the result of circumstances outside of your control, that doesn't change the fact that a bankruptcy within your credit history practically screams "I can't manage debt! If you lend to me I will default on payments, file bankruptcy again and you won't get a penny of your money back! I AM A BIG RISK!"

But, as you probably know by now, credit card companies are anything but logical.

Why Credit Card Companies Target You After a Bankruptcy

Believe it or not, credit card companies don't make much profit from "good" customers. Customers who pay their bills on time, qualify for a low interest rate and carry low balances – in otherwords, those that play the game right – are little more than an irritation for the credit card company.

After bankruptcy, you're the perfect target

Credit card companies make the most profit off those who are struggling. If you accrue late fees, run up high balances and have a hellacious interest rate, you can rest assured that your credit card company loves you. It's milking you dry and you can barely keep your head above water. Score!

So now that we've established the type of customers credit card companies aim to attract, lets discuss why these creditors target people with a recent bankruptcy discharge.

You're Not a Bankruptcy Risk 

Once of the major factors credit card companies examine before approving your application is your "bankruptcy risk score." A variety of factors contribute to this score but the score itself is self-explanatory. The company wants to know exactly how likely you are to file for bankruptcy. Unsecured debt, such as credit card debts, are the last in line for payment in a bankruptcy, and credit card companies hate to lose money.

No matter who you are or how stable your financial situation is, you carry a bankruptcy risk – regardless of how remote that possibility may feel. The only people who are not a bankruptcy risk are those who cannot file for bankruptcy. Who can't file for bankruptcy? Why, those that just received a bankruptcy discharge, of course!

That's not entirely accurate. You can file for bankruptcy any time you wish, no matter how recently your previous bankruptcy was discharged, but that doesn't put your current creditors in danger becuuse while you can file bankruptcy, you cannot have your debt discharged. 

The Post-Bankruptcy Credit Card Trap

If you are not eligible for a bankruptcy discharge because of a recent discharge, you are the most attractive person in the world to unsecured creditors. You have a history of incurring too much debt and you have absolutely no way (for two to eight years, anyway, depending on what type of bankruptcy discharge you received) to escape that debt. The credit card company is banking on the fact that you'll incur too much debt, miss payments, incur higher interest rates and fees and take on the roll of cash cow for the company. Sure, you can get rid of the debt after the waiting period for re-filing bankruptcy passes, but in the meantime the credit card company can milk you dry.

And the Unsecured Credit Card Offers Arrive...

Do you really think the credit card companies are going to let a sweet deal like a person who can't manage money and can't get a bankruptcy discharge slip through their fingers? Not a chance. So don't be surprised when you start getting unsolicited credit card offers in the mail. Secured, unsecured, doesn't matter – they'll be there.

You've got mail

If you're positive that you're in a stable financial state that will allow you to apply for and manage a new credit card account, go for it. Keep in mind that the interest rates on these cards are often astronomical. Rather than use them as your everyday purchases card, its better to make very small purchases and pay them off in full each month. This way you don't incur scary interest charges and you're rebuilding your credit at the same time.

If the unsolicited credit card offers are too tempting or just an annoyance, you can stop them from arriving by visiting the website of Opt-Out Prescreen, a joint effort on behalf of the credit bureaus and the Federal Trade Commission. Opt-Out Prescreen lets you stop unsolicited credit in its tracks and rebuild your post-bankruptcy life on your own terms.

Re-aging Delinquent Lowe's Credit Card Account

Reader Question:

Lee,

I recently moved to a new area. I have a credit account with Lowe's. I called Lowe's and gave them my new address. I know they had the proper address because I got a credit card statement from them a couple weeks after I moved in. That statement in May was the last one I ever got. After that I got nothing from them, no bills, no statements, nothing. I am not signed up for automatic bill pay, so I should have been getting bills but the bills never came! 

It took me a while to realize that I should have been getting bills and wasn't. I know its my responsibility to pay whether I get a bill in the mail or not, but the bill itself is what reminds me to pay. Anyway, as soon as I realized I hadn't been getting bills I called Lowe's and asked about it. As it turns out my account was over 60 days late and had racked up tons of late fees and interest fees. 

The customer service rep for Lowe's said that they had been sending mail to my new house but that most of the mail had been returned. That makes no sense since I received the first bill with no issues. The rep waived the interest charges and late fees on the account and brought it current. When I asked how this would affect my credit score, she said that a 30 day late takes 90 days and that she had re-aged the account anyway so it didn't matter. 

I felt good about it when I got off the phone but now I'm getting nervous. I'm not sure if I believe that a 30 day late takes 90 days, and isn't re-aging accounts a bad thing that would hurt my credit rather than help it? 


Brooklynn



Brooklynn,

I can't explain why some of the Lowe's credit card bills and statements are arriving in your mailbox and some are being sent back to Lowe's headquarters, but I can explain about the late payment notations and the account re-aging.

30-day lates are notoriously misleading. For companies that send reports to the credit bureaus every 30 days, a 30 day late appears on the credit report of any cardholder whose account was 1-30 days late when the credit card company sent in its report. The kicker here is that not all companies file reports with the credit bureaus every 30 days. From what the Lowe's credit card rep is telling you, it sounds like Lowe's only  makes credit bureau reports every 90 days. If this is the case, however, your credit report would reflect a 30 day late, a 60 day late and, if you passed the 90 day mark, a 90 day late. You definitely don't want that to happen. Each late payment notation builds on the one before it. By the time you reach a 90 day late, your credit has been decimated.

As far as your account being re-aged is concerned, there is a big difference between collection agency re-aging and credit card company re-aging. When a collection agency re-ages an account, it alters the original dates on the account to make the account appear more recent. Not only does this mean the debt knocks out a bigger chunk of your credit score (since recent items carry a greater weight in the credit scoring formula) but it also tricks the credit bureaus into leaving the bad debt on your credit report for longer than the 7-year reporting period. Collection agency re-aging is a nasty business, and very illegal.

Credit card company re-aging, however, is beneficial. When a credit card company re-ages your account, it brings the account out of delinquency and erases the delinquent history. Depending on how the Lowe's credit card company's computer reporting system is set up, this can eliminate any late payments that have already been reported to the credit bureaus.

Keep in mind that customer representatives at credit card companies often know little to nothing about credit scores and reporting practices. They will often say whatever they need to say to get you off the phone – especially if you're asking questions they don't have the answers to. I'm not saying this was necessarily what happened in your case, only that its possible.

If Lowe's actually did clean up the mess, then good for them. It's not often that customer service representatives are willing to help a customer out without that customer taking drastic action or demanding to speak with a supervisor. If I were in your situation, I would go pull a copy of my credit report from each of the three credit bureaus and review it, just to be safe. If you find late payments, its time to call Lowe's credit card services again, but skip the customer service representative and ask to be immediately transferred to a supervisor. It's awesome that they re-aged your credit card account, but if they didn't erase the late payments as well then they still have work to do.

Best of luck,
Lee


*Do you have a question for Lee? Send an email containing your question to LeeEdwards@mail.com and your question may be the subject of an upcoming post. 

Tolling Debt and the Statute of Limitations

Around the world, thousands upon thousands of U.S. citizens sit around waiting on pins and needles for the statute of limitations to expire on their debts. When the statute of limitations expires, a collection agency loses the right to sue you (be careful, some do anyway) and use a judgment to take such drastic action as garnishing your paycheck, putting liens on your property and seizing your bank accounts. Unfortunately, by leaving your home state or the country, you're giving debt collectors the right to "toll" your debt. This disrupts the statute of limitations – giving the collection agency much longer to file a lawsuit against you.

How Collection Agency Tolling Works

Tolling protects collection agencies from losing their rights to sue a debtor simply because the debtor is unavailable. Lets look at the following example:

Bobby owes $2000 to Collection Agency X. The statute of limitations for open accounts in his state is four years. It's been two years since Bobby defaulted on his payments. Bobby is deathly afraid of being sued by Collection Agency X. Bobby knows that it will be nearly impossible (and almost certainly too much trouble) for Collection Agency X to sue him if he is in another country. Because he has family in Russia, Bobby decides to wait out the remaining two years on his debt's statute of limitations there rather than at home, where he feels like a sitting duck. 

Bobby's situation can have one of three potential outcomes after he returns home: 

1. Collection Agency X never sues Bobby.

2. Collection Agency X sues Bobby. Bobby responds to the court summons using an expired statute of limitations as his defense. Because Collection Agency X was not aware that Bobby ever left the country, it is forced to drop its lawsuit. 

3. Collection Agency X is aware that Bobby left the country for a period of two years. It files suit against Bobby. Bobby responds by claiming an expired statute of limitations as his defense. Collection Agency X does not drop its lawsuit. Instead, it submits documentation to the court demonstrating that Bobby left the country for two years. Because collection accounts are "tolled" when an individual leaves the U.S., there are still two years left on the debt's statute of limitations. 

You can't always run and hide from collectors.

In the third scenario, leaving the country to wait out the statute of limitations didn't do Bobby a lick of good. The debt was tolled and when Bobby came back to the states, he was right back where he started with two years left on his debt's statute of limitations. I know that seems brutally unfair, but as hard as it is to get our heads that far up our butts, lets look at the collection agency's point of view. The collector is out to collect a debt. Collecting debts is how the company makes a profit and remains in business. Bobby was trying to cheat the system (not that debt collectors don't try to cheat the system too, just in different ways).

You could argue that leaving the country to escape debt collectors isn't technically "cheating" since the collection agency could go through the time and effort of pursuing the debt internationally if it really wanted to, but the collection agency would argue that the same rules should apply to everyone and debtors shouldn't be rewarded for running away from their debts. Thus, the company tolls your debt.

Not All Accounts Get "Tolled" When the Debtor Leaves the Country

Now, let me say straight up that I am not giving anyone instructions on how to hide from their creditors. That being said, a creditor can only use tolling as a defense to an out-of-statute lawsuit if the creditor knows that you left the country.

One of the primary ways creditors find out that you are living abroad is by your forwarding address. Keep in mind that these companies want to track you down, and if you've given your friends, family, current creditors and the post office your new international address, its a fair bet that the collection agency will have it before long. Remember, debt collectors can call your family members in an effort to locate you. Although collection agents aren't supposed to lie to your loved ones, it happens all the time and your brother/sister/cousin might be more than happy to give your long-lost "friend" your new contact information.

Your debt may still be there when you return.

Another way debt collectors find out that you're no longer in the U.S. is by pulling your credit report. Because debt collectors define themselves as legitimate business associates, they have the right to pull and review your credit report any time they like without obtaining your permission first. If your current creditors have your new address, they will update your file and the updated address will appear on your credit report. As soon as the collection agency discovers that you are no longer in the U.S., its a fair bet that it will toll your debt.

Running Away From Debt

Lots of consumers who are really and truly desperate opt for a new life abroad rather than staying in America and facing their creditors. Keep in mind, however, that because of a collection agency's right to toll your debt, even leaving the country isn't a guarantee that one day you'll be able to return home to a peaceful, debt-free existence. Thus, you should think long and hard before packing your bags and catching the next plane to Timbuktu. Your debts may not follow you, but a tolled debt never truly dies.

Related Posts:

How Debt Collectors Find You

Lawsuit Statute of Limitations

How to Respond to a Bill Collector's Lawsuit