The collapse of the real estate market has had many unforeseen consequences.  Multitudes of  previously solid gold credit worthy individuals have plunged into financial ruin, and now these very same people are among the least credit worthy around.  The guilt and shame runs very deep for the newly minted credit pariah, and bad credit impacts many fundamental aspects of modern life.  Credit is pulled for almost everything; cell phone contracts, utility service, car insurance, even job applications.  It affects interest rates on credit cards, car loans, and pretty much rules out buying a house.  This is the long term personal impact of the collapse of the real estate market, as former homeowners defaulted on their mortgage payments, and either sold their home for less than the face value of the loan, or went all the way to a trustee sale.  Nevada leads the nation in foreclosure activity, but that’s only the public face of the crisis as businesses shed employees and homes have lost over 65% of their value.  Former homeowners and laid off employees are left with shattered lives amid the financial meltdown. 

Most people who find themselves in mortgage default have at least nine months before the trustee sale.  During this time, since you are no longer paying your mortgage, the best strategy is to pay down your other debts, especially credit card debt.  The interest rate on your credit cards is going to go up to the maximum (29% or so) as soon as the mortgage company reports your late payment history, so it’s in your best interest to pay down that debt or re-negotiate that debt as quickly as possible.  The worst possible thing a homeowner can do facing default is to use their credit cards to try and pay their mortgage. Eventually the card maxes out, the homeowner still defaults, and now there are thousands of more dollars of unsecured debt added onto your personal balance sheet.

Mortgage debt is secured debt.  If you don’t pay your mortgage, the bank can force you to sell your house, or take your house and sell it for whatever they can get, but they cannot hound you for life for the money you didn’t pay them- unless that debt becomes personal.  That happens after the bank forecloses on the house and sells it- the difference between what you owed and what they collected can now be turned into personal debt by a court action called a deficiency judgment.   For a homeowner facing foreclosure, a short sale process whereby the bank agrees to take less than the money owed is far better, as the bank will actually discharge the remaining debt and now report to the credit reporting agencies that your mortgage has been “paid as agreed”.   Eventually the “lates” age and the homeowner’s credit recovers.

So, just how low can your credit score go?  Well, the answer is really really low.  FICO scores start at 300 and go as high as 850.  What actually determines a FICO score anyway?  This is more than a bit of a mystery, because it’s a trade secret and there is no actual information about how the score is computed.  Yes, as inconceivable as this is, no one actually knows how this algorithm computes, yet one’s life is greatly impacted by this number!  So, the usual advice on how to improve your credit score is very general in nature: pay your bills on time, don’t run up accounts to the credit limit, don’t open a lot of new accounts, don’t close older accounts either.  This general advice is very useful for people that don’t have 24 months of mortgage lates on their credit report, and a foreclosure to boot, but not very helpful to those that have had a major credit impacting event and now need to come back from the brink.

One of the most important aspects of credit for the newly impaired is a feature called “aging”.  It turns out that as time passes, negative information (such as late payments) that is reported stays on your report for a long period of time, but it tends to not matter as much.  It turns out that aging, and managing aging of negative information is the key to successfully recovering your credit worthiness.

The Fair Credit Reporting Act (FCRA) requires data furnishers to report the date the account commenced the delinquency leading to its charge-off status, also called the FCRA Compliance Date.  Credit reporting agencies are required to list the FCRA Compliance Date within 90 days of the tradeline being placed in your credit file.  It is a violation of the act for a creditor to report a newer date than the actual FCRA Compliance Date.  Sometimes consumers unknowingly “re-age” a debt and restart the statute of limitations by making a payment, or promising to make a payment, entering into a payment agreement, or making another charge on the account.  All these actions will restart the clock to zero, no matter how much time had actually elapsed on the account.   Beware of inadvertently re-aging your bad debts, because that will continually drop your FICO scores!

Fact is, you will not be able to remove truthful negative information on your credit report.  Late or missed payments; collections; charge offs (when your creditor simply gives up trying to get paid); closed accounts with money still owed; child support judgments; small claims and civil suit judgments; student loan defaults, foreclosures are all reported for 7 years.

Some negatives are reported for even longer.  Bankruptcy is generally reported for 10 years, and the accounts included within the bankruptcy will be reported for 7 years.  Unpaid tax liens remain on for 15 years, paid liens for 7.

There are statutes of limitations regarding debt in Nevada.  This limits the time in which a creditor can collect on a debt.  It does not affect how long a credit reporting agency can report the debt, but once the statute of limitations has passed, the creditor can no longer sue you to collect on it.  It doesn’t prevent a creditor from suing, but it will prevent them from wining if you can show that that the statues have passed.  Nor does it erase the debt- if it’s a legitimate debt, you still owe the money.  oweverHowever, if lkjlkj;lkj;lkj;lkjThe statute of limitations in Nevada for oral contracts is 4 years, written contracts 6 years; promissory notes 3 years, and open ended accounts (such as credit cards) 4 years. Some debts are not governed by statues of limitations; such as IRS tax liens and federal student loans.

So, as soon as the calamitous event has passed it’s time to start repairing your credit.  First, on some items you can actually make an arrangement with your creditor to pay part of the money owed and get them to remove all the information regarding that debt from your credit report.  This is called a “pay for delete”.  It works by entering into a contract with your creditor agreeing to pay part or all of the debt in return for the creditor quickly deleting the negative information from your credit report.  You need to actually pay the money offered.  This is a particularly effective method of dealing with credit card, retailer, medical debts, and charge offs if you have a lump sum of money to offer in return for the quick deletion of negative information.   Your FICO scores will immediately lift when that bad debt goes away!

In order to dispute a debt, or a compliance date, you will need meticulous records.  If you can prove it in writing, it will be more likely that you will be able to force a credit reporting agency to remove wrong information.  But if the information is actually true, you can repair your credit by a combination of payment for delete, paying your remaining debt on time, not obtaining more credit (which will not be much of an issue with a FICO score of 380 anyway), and letting time pass.

There are slews of advertisements for companies that purportedly can “cure” your bad credit report, or “fix” your credit for a fee.  They are all scams.  If the information reported on your credit report is true, just bad, well, there is no way to remove it.  So, save your money for paying your bills because there is no magic bullet in bringing up your FICO score.