Fong Law Group

How Much and How Soon Credit Scores Can Rise After Bankruptcy

After bankruptcy, you should be able to concentrate on improving your credit score for the next 12 to 18 months. When they take the correct actions, most people will experience some improvements within a year. You won't be able to get a bankruptcy removed from the credit record unless it was added in error. Bankruptcy has a greater impact on high credit scores as compared to low credit scores.

The higher the FICO score is for filing for bankruptcy, the greater the impact on the credit rating:

 

Credit Score Ranges

• (850-800) Excellent  200 points
• (740-799) Very Good  200 points
• (670-739) Good  200 points
• (580-669)  Fair 130-150 points
• (300-579) Poor

Regardless of your starting credit score before bankruptcy, you will most certainly not drop a significant drop after bankruptcy. Although your bankruptcy filing will be on your credit report, credit bureaus would like to make sure you take steps to repair your bad credit prior to taking on further debt and new credit. This will handle credit scores and bankruptcy.

This sliding scale system would deduct as many points as it takes to demonstrate that you have bad credit. If you also have poor credit, the score might barely improve (less than 579). Even post a bankruptcy filing; credit ratings of less than 500 are uncommon.

What Impact Will Bankruptcy Have on Your Credit Score?

When you file bankruptcy, as well as businesses, see the unfavorable information on the credit report, you might well be concerned about:

• Obtaining a vehicle loan
• Purchasing a home or renting an apartment are both viable options.
• Financing with high-interest rates
• Unsecured credit cards have low credit limits.
• Repayment schedules for student loans
• Late fees are subject to penalties.
• Credit should not be used for anything other than basics.
• Obtaining substantial cash deposits
• Obtaining loans without the assistance of a competent co-signer
• Some credit cards can have authorized users added to them.
• Deposits and refunds of security deposits

Whether you have credit or debt problems, you have solutions for all of these situations. Each issue can be addressed on your own or with professional assistance. It is possible to start over, particularly after filing for bankruptcy.

Post a bankruptcy, how do you rebuild your credit?

You can rebuild your credit with the following aspects:

• Post the bankruptcy stay prevents creditors from taking action against you, you can begin restoring your credit score. Bankruptcy stays on your record for seven to ten years, but the more you try to rebuild your credit each year, the less it will affect you as well as the financing you seek.
• After receiving the final discharge, you should wait 30 days. This implies that most (if not all) of the accounts will have zero balances, and creditors will no longer be able to contact you regarding obligations.
• If you still have credit cards, make a plan to pay off at least 70% of the balance each month. Every 6 months, doesn't open more than a new credit card (and solely when you can make the payments).
• To gradually establish a diverse mix of affordable debts, work towards that car loan or similar major loan.

Conclusion

If you try to restore your credit over 12-18 months, your FICO credit report could go from bad credit (often less than 579) to acceptable credit (580-669). This will take significantly longer to get a very good (740-799), decent (670-739), or exceptional (800-850) credit score.

Call Fong Law Group at (626) 289-8299 for a free consolidation, and talk to an attorney today. We are here to help you get through this difficult time in your life, and help you with a Fresh Start.

Repossessions and Bankruptcy

Repossessions and Bankruptcy

Repossession occurs when a lender takes back property that was used as collateral or leased in a transaction.  If you are behind on a car payment, the lender that financed your vehicle can repossess it at any time. California law does not require any special notice of repossession.  This is a unique area of the law, and one of the more aggressive collection actions in California.

When you purchased your vehicle, you probably signed a purchase contract or credit contract to finance the car.  In these contracts, the buyer agrees that the seller, also known as the “lien holder,” may repossess the property if the buyer falls behind on payments at any time.  Most lenders allow for a small grace period, but some jump at the chance to repossess your vehicle.  These contracts may also include fines and penalties the buyer must pay to cover the costs of the repossession, as well as the depreciated value of the vehicle, and most of the time they also can get awarded court costs associated with the repossession.

Repossession Process

When your lender chooses to repossess the vehicle, they will usually work with a repossession agent.  Most repossession agencies focus on auto repossession.  The agent typically uses a tow truck to repossess the vehicle, although some agencies will notify the owner and try to facilitate an amicable return without any surprises.

Many of our clients have lost their vehicles through the repossession process.  Some of them were only late by a few days. Small lenders and banks are typically very aggressive and will exercise their repossession rights in a timely fashion.

Bankruptcy Can Save Your Vehicle

Once your car is repossessed, your options are extremely limited.  You can try to pay the balance owed at that point (which is probably not an option) or you can file an emergency Chapter 13 bankruptcy.  Unfortunately, time is not on your side once they repossess your car.

You have ONLY 10 DAYS usually after the repossession to file for Chapter 13 bankruptcy and save the vehicle.  After this window expires, the vehicle will be sold at auction.  If the lender fails to recoup the amount owed on the vehicle at auction, you may be responsible for the balance owed.

To maintain possession of your vehicle and avoid repossession, please contact Fong Law Group today for a free consultation at (626) 289-8299.

Can an IRA Affect Medicaid Eligibility?

For many Medicaid applicants, individual retirement accounts (IRAs) are one of their biggest assets. If you do not plan properly, IRAs can count as an available asset and affect Medicaid eligibility.

Medicaid applicants can have only a small amount of assets in order to be eligible to receive benefits ($2,000 in most states). Certain assets -- i.e., a house, car, and burial plot -- are exempt from eligibility determinations. Whether your IRA counts as an exempt asset depends on whether it is in "payout status" or not.

At age 72 (or if you turned 70 ½ in 2019 or before), individuals must begin taking required minimum distributions from their IRAs, which means the IRA is in payout status. You may also be able to choose to put your IRA in payout status as young as age 59 ½ if you elect to take regular, periodic distributions based on life expectancy tables. If an IRA is in payout status, depending on your state, it may not count as an available asset for the purposes of Medicaid eligibility, but the payments you receive will count as income. Medicaid recipients are allowed to keep a tiny amount of income for personal use and the rest will go to the nursing home. 

If the IRA is not in payout status, the IRA is a non-exempt asset, which means the total amount in the IRA will probably be counted as an asset, affecting your Medicaid eligibility. In order to qualify for Medicaid, you will need to cash out your IRA and spend down the assets. Alternatively, you could transfer the money to your spouse or someone else, although there will likely be an income tax penalty for doing this. (Roth IRAs have no required minimum distributions and cannot be put in payout status, but they are usually counted as assets.)

The rules for a 401(k) are similar to an IRA. If the 401(k) is not in payout status, Medicaid may count as an asset any funds you are eligible to withdraw from the 401(k)--even if you have to pay a tax penalty to withdraw the funds. 

Note that the rules for a Roth IRA may be different. If you have a Roth IRA, depending on the rules in your state, it may not be exempt at all because Roth IRAs do not require minimum distributions.

The rules regarding IRAs and Medicaid are complicated and vary from state to state. You should talk to your attorney about your IRA to determine the best course of action for you.

Ability to Withdraw Money Early from Retirement Plan Without Penalty Expires at the End of the Year

If you are experiencing financial hardship due to the coronavirus pandemic, you may want to consider withdrawing money from your retirement account while you still can. The special exemption allowing early withdrawals without a penalty ends soon. 

Passed in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows individuals adversely affected by the pandemic to make hardship withdrawals of up to $100,000 from retirement plans this year without paying the 10 percent penalty that individuals under age 59 ½ are usually required to pay. This exemption is only for withdrawals made by December 30, 2020.

If you decide to withdraw money from your retirement account, you will still have to pay income taxes on the withdrawals, although the tax burden can be spread out over three years. If you repay some or all of the funds within three years, you can file amended tax returns to get back the taxes that you paid. 

To qualify for the exemption, you must meet one of the following criteria:

• You or a spouse or dependent have been diagnosed with COVID-19
• You or your spouse have suffered financial hardship due to the pandemic, such as a lost job, a job offer rescinded, reduced pay, business closed, or inability to work due to lack of childcare. 

This step should not be taken lightly. Withdrawing money now means your retirement funds will be reduced and limits the retirement plan’s ability to grow. But for some people, it may be the best option to pay bills and avoid running up high-interest credit card debt. 

For information from the Consumer Financial Protection Bureau on how the withdrawal exemption works, click here.

Transferring Assets to Qualify for Medicaid

Transferring assets to qualify for Medicaid can make you ineligible for benefits for a period of time. Before making any transfers, you need to be aware of the consequences. 

Congress has established a period of ineligibility for Medicaid for those who transfer assets. The so-called "look-back" period for all transfers is 60 months, which means state Medicaid officials look at transfers made within the 60 months prior to the Medicaid application. 

While the look-back period determines what transfers will be penalized, the length of the penalty depends on the amount transferred. The penalty period is determined by dividing the amount transferred by the average monthly cost of nursing home care in the state. For instance, if the nursing home resident transferred $100,000 in a state where the average monthly cost of care was $5,000, the penalty period would be 20 months ($100,000/$5,000 = 20). The 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) he has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer. Therefore, if an individual transfers $100,000 on April 1, 2017, moves to a nursing home on April 1, 2018 and spends down to Medicaid eligibility on April 1, 2019, that is when the 20-month penalty period will begin, and it will not end until December 1, 2020.

Transfers should be made carefully, with an understanding of all the consequences. People who make transfers must be careful not to apply for Medicaid before the five-year look-back period elapses without first consulting with an elder law attorney. This is because the penalty could ultimately extend even longer than five years, depending on the size of the transfer.

Be very, very careful before making transfers. Any transfer strategy must take into account the nursing home resident's income and all of his or her expenses, including the cost of the nursing home. Bear in mind that if you give money to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce, or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks.

In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren's eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property they will have to pay a much higher tax on capital gains than they would have if they had inherited it.

As a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid and (2) feel comfortable and have sufficient resources to maintain your present lifestyle.

Remember: You do not have to save your estate for your children. The bumper sticker that reads "I'm spending my children's inheritance" is a perfectly appropriate approach to estate and Medicaid planning.

Even though a nursing home resident may receive Medicaid while owning a home, if the resident is married he or she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows the spouse to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at the community spouse's death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.

Permitted transfers

While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:

• Your spouse (but this may not help you become eligible since the same limit on both spouse's assets will apply)
• A trust for the sole benefit of your child who is blind or permanently disabled.
• Into trust for the sole benefit of anyone under age 65 and permanently disabled.

In addition, you may transfer your home to the following individuals (as well as to those listed above):

• A child who is under age 21
• A child who is blind or disabled (the house does not have to be in a trust)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home

A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

Medicaid's Asset Transfer Rules

In order to be eligible for Medicaid, you cannot have recently transferred assets. Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed a penalty on people who transfer assets without receiving fair value in return.

This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.

Example: If you live in a state where the average monthly cost of care has been determined to be $5,000, and you give away property worth $100,000, you will be ineligible for benefits for 20 months ($100,000 / $5,000 = 20).

Another way to look at the above example is that for every $5,000 transferred, an applicant would be ineligible for Medicaid nursing home benefits for one month. In theory, there is no limit on the number of months a person can be ineligible.

Example: The period of ineligibility for the transfer of property worth $400,000 would be 80 months ($400,000 / $5,000 = 80).

A person applying for Medicaid must disclose all financial transactions he or she was involved in during a set period of time -- frequently called the "look-back period." The state Medicaid agency then determines whether the Medicaid applicant transferred any assets for less than fair market value during this period.  The look-back period for all transfers is 60 months (except in California, where it is 30 months).  Also, keep in mind that because the Medicaid program is administered by the states, your state's transfer rules may diverge from the national norm.  To take just one important example, New York State does not apply the transfer rules to recipients of home care(also called community care).

The penalty period created by a transfer within the look-back period does not begin until (1) the person making the transfer has moved to a nursing home, (2) he has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer. 

For instance, if an individual transfers $100,000 on April 1, 2017, moves to a nursing home on April 1, 2018, and spends down to Medicaid eligibility on April 1, 2019, that is when the 20-month penalty period will begin, and it will not end until December 1, 2020.

In other words, the penalty period would not begin until the nursing home resident was out of funds, meaning there would be no money to pay the nursing home for however long the penalty period lasts.  In states that have so-called "filial responsibility laws," nursing homes may seek reimbursement from the residents' children. These rarely-enforced laws, which are on the books in 29 states, hold adult children responsible for financial support of indigent parents and, in some cases, medical and nursing home costs.  In 2012, a Pennsylvania appeals court found a son liable for his mother's $93,000 nursing home bill under the state's filial responsibility law.

Exceptions

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include the following:

• A spouse (or a transfer to anyone else as long as it is for the spouse's benefit)
• A blind or disabled child
• A trust for the benefit of a blind or disabled child
• A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).

In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

• The applicant's spouse
• A child who is under age 21 or who is blind or disabled
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home
• A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

Congress has created a very important escape hatch from the transfer penalty: the penalty will be "cured" if the transferred asset is returned in its entirety, or it will be reduced if the transferred asset is partially returned. However, some states are not permitting partial returns. Check with your elder law attorney.

Medicaid's Gift to Children Who Help Parents Postpone Nursing Home Care

In most states, transferring your house to your children (or someone else) may lead to a Medicaid penalty period, which would make you ineligible for Medicaid for a period of time. However, there are circumstances in which transferring a house will not result in a penalty period.  

One of those circumstances is if the Medicaid applicant transfers the house to a "caretaker child."  This is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's entering a nursing home and who during that period provided care that allowed the applicant to avoid a nursing home stay.  In such cases, the Medicaid applicant may freely transfer a home to the child without triggering a transfer penalty.  Note that the exception applies only to a child, not a grandchild or other relative.

Each state Medicaid agency has its own rules for proof that the child has lived with the parent and provided the necessary level of care, making it doubly important to consult with your attorney before making this (or any other) kind of transfer.

Others to whom a home may be transferred without Medicaid's usual penalty are:

• Your spouse
• A child who is under age 21 or who is blind or disabled
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home

How Much Will It Hurt to Tap Retirement Savings?

“If you are looking to pull cash from your 401(k) plan or traditional IRA without getting hit with a penalty, the IRS will allow you to do it.”

This is a move of last resort. You’ll need to do all the research to be sure this will not do more damage to your retirement savings than absolutely necessary. You are allowed to take a series of equal payments from your IRA or a 401(k) account, without being subject to a 10% penalty—but only under certain circumstances, advises CNBC in the article “How to tap your retirement savings without getting hit with a stiff penalty—but only if you absolutely have to.”

Taking an early withdrawal from a qualified retirement account before age 59½, results in a hefty 10% penalty in most situations. You must also add the taxes that you have to pay on the distribution itself. Yes, it’s your money but you agreed to keep it in the account under certain distribution limitations and the rules are not very flexible.

Except, when they are.

There are very specific sets of circumstances, when the IRS will let you take the early withdrawal and not have to pay a 10% penalty. One of these is receiving a series of equal payments from your IRA or 401(k), known among tax advisors as a “72(t) distribution.”

However, be careful: just because you can do this, doesn’t mean you should do it.

There are rules (of course!). You have to commit to take at least one payment a year for five years or until you reach 59½, whichever is the longer period of time. After that period is over, you can change your payment amount or stop the withdrawals.

If your money is in a 401(k), the rules are a little different: you must separate from service during or after the year you turn 55, in order to start taking payments.

However, if you make changes to your payments or if you go into the account for an additional withdrawal, you’ll get slammed with that 10% penalty retroactively for payments received plus interest.

What if you roll a 401(k) into the IRA after these series of payments? Don’t do it. That is a big mistake that could cost you plenty.

The numerous ways you can make a mistake and end up with a costly bill in penalties and taxes, makes this a no-no for practically every CPA.

Your alternatives: have an emergency fund or even take out a home equity line of credit. A 401(k) loan would be even better, as long as you know that you can pay it back.

Depending on the circumstances of your emergency, there may be some instances, where the IRS may waive your 10% penalty. But look, this is not a do-it-yourself project. Make sure you have excellent advisors on your team, if you need to take this step.

Reference: Financial Planning (Sep. 10, 2018) “How to tap your retirement savings without getting hit with a stiff penalty—but only if you absolutely have to”