There are so many issues to deal with when you start up your own business. There are the initial basics like naming the business, hours that the business operates, choosing inventory of products and/or services, and then pricing them. There are operational issues like writing a business plan, developing your marketing understanding, advertising campaigns, and so on. It impartial gets crazier and crazier with every phase, and then, just when you thought there was a light at the end of the tunnel, it turns out to be another snort. And that train is the LI., A., and T. line — Legal Issues, Accounting, and Taxes.
For the sake of the subject matter at hand, the content obviously deals with the famous legal issue and that is the type of business that you are going to legally classify yours as. There are so many choices, yet for the most part, only one category that you can choose. It will require tons of due diligence, hours of research, and possibly costly legal counsel to play it safe. In fact, I would highly recommend the legal counsel for safety reasons if for no other (only if you can afford it, of course). There are five basic categories that businesses fall under:
— C Corporations
— Sub-chapter S Corporations (S Corporations)
— Puny Liability Companies (LLC’s)
— Partnerships
— Sole Proprietorships
Then there are three other types of businesses — Consumer’s Cooperative, Not-for-Profit (non-profit) corporations, and Trust Companies. There are also 11 sub-categories to be aware of (actually 12, however one of them applies to companies of Norway), as if I hadn’t dumped enough potential brain frying information on you already. Since these sub-categories really get detailed in nature, they may be covered in another article, should I decide to tackle that content.
C Corporations
A C Corporation is a United States business entity that is subject to federal taxes under the Internal Revenue Code, for lack of a simpler definition. Most of the major companies fall into this category. However some smaller companies are listed as C corporations as well. The tax boom is the most significant contrast between C and S corporations. Another major difference is that there is no limitation on the number of domestic or foreign shareholders with a C corporation.
Nolo Press of Berkeley, CA is a company that publishes tons of do-it-yourself guides and software so that the average Joe (such as me) does not have to pay for an attorney’s services. Wills and business incorporation issues are Nolo’s two primary money-makers, but there are others. According to Nolo, there are seven steps involved in forming a C Corporation.
First, the name of your business must conform to your state’s corporation rules. Second, if you are going to have a Board of Directors (and it may be required in some states), now’s the time to appoint them. Third, file your “articles of incorporation. Depending on what state your business is located in, this will run anywhere from $100 to $800 (or more). Fourth, you will need to make the operating rules for your corporation or “bylaws” as they are referred to. Fifth, schedule and conduct your first board of directors meeting. Sixth, if there are other owners, and if they are stockholders, it is time to issue their stock certificates. Finally, go accept business licenses and permits that are applicable to your business so you can open your doors (or website) and start earning some revenues.
Sub-chapter S Corporations
An S corporation does not pay federal income tax — its shareholders do. However, it can elect to be taxed under Chapter 1, sub-chapter S (hence the corporation name) of the Internal Revenue Code. If left as an S corporation, then the shareholders must report their income or losses on their individual income tax returns.
To be treated as an S corporation, there are five criteria that must be met in order to be classified as such. First, the corporation must be either domestic or a limited liability company (LLC). Second, the corporation may not have more than 75 shareholders. Under this criterion, there is also a clause about spouses and family members being counted as individual shareholders, but this is only if the family member elects to be treated as such. Third, your shareholders have to be real people. Not only that, but they must be US citizens or residents. In other words, a corporate shareholder or a partnership is excluded from the mix. Fourth, you can only offer one class of stock in the company. And finally, the profits and/or losses must be distributed to each shareholder based on their percent of interest in the company.
Here is a huge caution when it comes to incorporating as this type of corporation. If, at any time, the corporation fails to meet any of these criteria, the region will revert back to a C corporation status and be subject to federal taxation. Also, the issue only applies to federal taxation and does not have anything to do with FICA (Social Security) or federal Unemployment tax issues. You still have to pay this one way or the other for your employees.
Limited Liability Companies (LLC’s)
This type of company offers more flexibility than the corporation (though it is similar to one in nature) in some instances, but it is referred to as “limited” in that its owners are offered limited liability where the debts of the entity are concerned. Also, it is a more suitable form of incorporation for smaller companies with a tiny number of owners and can be managed by one or multiple members. It can be “member managed” or “manager managed.” If it is member managed, it becomes a partnership structure. If it is manager managed, it becomes a two-level management structure that can be easily converted into corporation plot.
With an LLC, the members are the owners, although the percentages of ownership are not always in equal amounts. The LLC can also lose its tax advantage without a partnership structure being in place. In addition to the articles of organization, it is also common to have an “operating agreement” that is designed by the members. This is basically a form of contract between the members of the LLC, and mandates such things as distribution of income, management, membership, and operation issues of the LLC.
Most of the states require that the name of the company contains one of three terminologies — Limited Liability Company (LLC or L.L.C.), Limited Company (LC or L.C.), or Ltd. Co. Conversely, the company may not use terms such as Company (Co.) and Limited (Ltd.). The Diminutive terminology is reserved for corporations located in Texas, with the sole exception of Nevada which allows the use of the term Tiny or Ltd.
Partnerships
This type of business entity is exactly what the name implies in that it is owned and operated by two or more partners. However there are four different degrees of partnerships — General Partnership, Limited Partnership, Limited Liability Partnership, and Limited Liability Limited Partnership.
I’ll try to elaborate the differences as clearly as I can and not run the risk of embarrassing myself in the process.
Basically, in a GP, there are two or more partners as previously mentioned and they all share in the company’s profits and losses. The major difference with a Limited Partnership is that like the GP, they have general partners wherein the LP, there are one or more limited partners. They are only liable for the firm’s debts based on the percentage of their investment out of the total.
The LLP is similar to a Corporation in that it contains some of the same elements. The partners in a LLP are somewhat protected by a limited degree of liability in much the same arrangement that shareholders in a corporation are. But in this case, the partners all have equal management rights and can manage different levels of tax liability, unlike with a corporation.
The LLLP is unique on the legal scene for all practical purposes. Recognized under U.S. Commercial Law, the LLLP like the LLP has general and petite partners. The incompatibility is that the general partners manage the LLLP, while the limited partners manage the financial end of the business. There is also a difference in the way the debts and liabilities are managed. In the LP, the general partners are “jointly and severally” liable for the debts of the company. The slight partner’s liability ends where the debts have equaled what they have contributed in the way of capital. With all four, there are very minute but critically sure differences.
Sole Proprietorship
In this type of business, unlike Corporations and Partnerships, the business and the owner are joined at the hip, so to protest. They do not exist separately and neither do the debts, liabilities, and other obligations. It is called a sole proprietorship in that there is only the single owner and no partners. It also means that business is done in the name of that sole owner as well, hence the “dba” connotation and a trade name.
Since it is not considered a corporation, the SP does not pay any corporate taxes. Instead, the owner files his business taxes on his own 1040 doing the long form with all the proper attachments. Best of all, the SP does not have the worry of double taxation unlike the corporation. The exercise of the dba enables the owner to conduct the business in a name other than their own, and also makes it easier to open a business account with most financial institutions.
Before closing, I wanted to cover one more area about the different types of businesses. There have always been contentions between the General Corporation and the Sub-chapter S Corporation. The advantages of the General Corporation are:
— Any deductions for plans such as insurance, retirement, or move are TAX FREE
— The ownership is easily transferred.
— The ownership has no effect on the current management.
— Personal assets of the owners are protected from debts, liabilities and subsequent legal action should any arise.
— Raising capital/funds through the sale of stock options is simplified for all parties concerned.
— The life of the corporation extends beyond the death(s) of any of the owners. In other words, it is perpetual.
The only three disadvantages that I could find were that the corporation is more expensive to form than the partnership or sole proprietorship, the corporation must abide by Federal and State regulations and rules, and there are additional legal formalities.
As mentioned earlier, the main difference between a General versus a Sub-chapter S Corporation is in the area of tax liability. But there are five restrictions with the Sub-chapter S Corporation. They are:
— Every one of the stockholders must be a citizen of the United States. This type of business entity is the only one listed in this content that carries that stipulation.
— Only individuals can be classified as stockholders.
— There cannot be more than 75 stockholders.
— There can only be one class of stock offered or one type of option.
— The corporation can only be domestic — not foreign.
In closing, my recommendations are be very thorough and cautious as to the type of business entity that you eventually define yourselves as. More often than not, business owners, partners, and others have suffered disappointments in their choices of partners, types of businesses they chose to be, etc. Just remember that the decision could be a costly one if not thought through properly and with due diligence and common sense.
Sources:
Incorporate U.S.A. http://www.inc123.com/index.html
Incorporate.com http://www.incorporate.com/business_structure_comparison_chart.html
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Filed under Sole Proprietorship Bankruptcy by on Jan 26th, 2012. Comment. 
Olieva the shameful budget television manufacturer has declared chapter 11 bankrupty. Add this to the massive list of companies that have entered the world of bankruptcy. However unlike the mega corporation giants like Myril Lynch and AIG, Olieva’s bankruptcy comes with an advantage for consumers in the form of a really cheap television set.
Thats right the bankruptcy of this company may help anyone in the market for a television. Several websites are offering this companies 55 inch LCD 1080p televisions for as low as One thousand two hundred and ninety nine dollars (1299!!!). That price is a whopping twelve hundred dollars off of the retail price. THAT IS NEARLY HALF THE PRICE. There are many disadvantages to purchasing these tv’s however as the manufacturer warranty will likely not be upheld in the midst of Olieva’s chapter 11 bankruptcy.
Get your checkbooks out and get ready to perform the cheapest television purchase of your life. If you are already in the market for a stout high definition television than why turn down this offer. At the expense of Olieva’s bankruptcy this may be your chance to get a television of your dreams for a brand that can be afforded. Pay nearly half of the retail trace! You can’t beat that.
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Filed under Sole Proprietorship Bankruptcy by on Jan 19th, 2012. Comment.
In late 2001, a company filed for bankruptcy. This would not have been unusual, had this company not been one of the top ten fastest growing companies in America. How could such a successful company go down so quickly? The answer is simple: they cheated. Now, the responsibility falls to the government and the SEC to clean up the mess left behind. This is their fable.
Enron was formed in 1985 when Kenneth Lay became CEO of the Internorth Corporation. Lay shifted the headquarters of the company to Houston, Texas from Omaha, Nebraska. He quickly changed the name to from Internorth to Enteron, then quickly changed it again when he realized that “enteron” means intestine. Enron won Fortune Magazine’s award of “America’s Most Innovative Company” 6 years in a row, from 1996 to 2001. In 2000 is made Fortune’s list of the “100 Best Companies To Work For In America.” It continued to be one of America’s best and brightest companies until December of 2001, when it filed for bankruptcy amid accusations of insider trading and fraudulent accounting practices. It would later reach to light that most or all of Enron’s massive success was based on fraud. This is the story of a safe company that lost its way.
Before the Enron scandal came to light, it enjoyed a very good financial and political site. They not only enjoyed huge profits and financial successes, but also had many allies in the Bush administration due to the huge campaign contributions they made to him. Vice President Dick Cheney drafted an energy belief in early 2002 that relied heavily on advice from Enron CEO Kenneth Lay. Many beget this energy plan was an attempt by the Bush administration to reward Enron for its massive campaign contributions.
The beginning of Enron’s shady practices dates back to 1988, when it was discovered that millions of dollars had been moved from the company into the personal accounts of two employees. These two employees were later found to be participating in insider trading and stealing from the company. Insider trading is the act of making security-trading decisions though the use of non-public information. It is outlawed by the SEC. When these issues were brought to light, top Enron officials told investigators to drop their investigation. The two guilty employees had brought millions to the company; millions that Enron did not want to lose regardless of the moral standards of these employees.
Enron’s success continued through the 1990’s. When Enron stock hit its peak of $90 in August of 2000, investors were told to buy, buy, occupy! At the same time, top Enron executives were unloading their Enron stock. Investors were told that the sky was the limit for Enron stock, but top executives who knew the truth were selling their shares as fast as they could. While the Enron stock dropped as a result of this massive unloading, investors were reassured that it would soon skyrocket yet again. By the middle of August, that stock had sunk to $40.
Enron’s stock continued to slip. By the end of October, it had hit $15. Enron continued to reassure investors, and dump stock, until November 28, 2001. The stock value finally fell to less than a dollar when Enron finally came public with information indicating that the company was actually worth 1.2 billion dollars less than it had previously reported. This admission prompted the SEC to inaugurate a full scale investigation into the Enron Corporation that is still in progress. Enron filed for bankruptcy in December of that year.
But how were Enron executives able to hide their company’s huge losses from the public? Through the use of partnerships with other companies, groundless book keeping, and questionable loans, Enron was able to conceal the fact that it was losing money hand over fist and note itself to the public as profitable. Here are a few partnerships that Enron used to do this, courtesy of securitiesfraudfyi.com.
ە RADR- a group of entities secretly funded by Enron that purchased electricity-generating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.
ەChewco – a company formed by executives of Enron in order to buy out the shares of California Public Employees’ Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDI’s off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not entitled to. In addition, when Enron bought out Chewco’s interest, Chewco’s note was driven up, reaping huge benefits for the novel investors (Enron execs).
ە Southampton- Enron bought the shares of National Westminster Bank (NatWest) in a runt partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.
Enron not only former these companies to hide its losses, but also to line the pockets of top executives.
Enron also created “dummy” companies outside the US to conceal its debt in. Technically called “offshore entities,” allowed Enron to shift its depts. around, and off of Enron itself, tax free. However, as Enron continued to use these offshore entities, it became more and more difficult for them to hide the huge debts that the company had incurred, until finally the company spiraled out of control and was forced to bring its losses public.
The SEC investigation revealed many conspirators in the Enron scandal. Many of these conspirators have been charged with “wire fraud, money laundering, securities fraud, mail fraud, and conspiracy (securitiesfraudfyi.com).” A short list, again courtesy of securitiesfraudfyi.com, is below:
ە Kenneth Lay – old CEO and Chairman of Enron.
ە Andrew Fastow – aged CFO of Enron. Fastow was indicted on 78 counts of securities fraud, money laundering, wire and mail fraud, as well as conspiracy to inflate Enron’s profit.
ە Michael Kopper – former director in the global finance unit.
ە Kopper pleaded guilty to financial wrongdoing in August 2002.
Jeffrey Skilling – former CEO of Enron.
ە J. Clifford Baxter – former Vice Chairman of Enron. Accused of securities fraud, Baxter died in an apparent suicide in January 2002.
ە Arthur Anderson – the accounting firm that was responsible for auditing Enron. Arthur Anderson was found guilty of obstruction of justice for shredding documents related to the Enron scandal.
ە Timothy Belden – former head of trading at Enron’s Portland, OR office. Belden pleaded guilty to one count of conspiracy to commit wire fraud related to Enron’s activities during the California power crisis.
ە Gary Steven Emigre, Gilles Robert Hugh Darby, David John Birmingham – three former employees of NatWest (National Westminster Bank). These men have been charged with wire fraud that defrauded their employer but benefited themselves and executives at Enron.
To this date, the Enron Corporation is still under SEC investigation. Ken Lay is still in trial, and is pleading not guilty to all charges. He claims that he was manipulated by those around him and was unaware that he was doing anything wrong. Lay’s demeanor at trials and his ability to make people like him have served him well, though there have been times when his amiability has broken down, In July of 2004, “he raised his philosophize, scowled and snarled repeatedly at the prosecutor who secured an indictment against him (Hays).”
Enron Corporation is in the process of liquidating its remaining assets to pay its creditors.
As you can eye, the Enron scandal was one perpetrated by dishonest, dishonorable men. These men, however, were quite possibly economic and business geniuses. They’re ability to hide billion dollar losses and illegal securities trading practices from the SEC and the public for so long is amazing. While what they did was certainly ghastly, one cannot dispute the economical genius behind their actions.
Works Cited
“Behind the Enron Scandal – Multiple Articles.” TIME 2002. 27 Apr. 2006 .
“BBC NEWS | Business | Enron Scandal At-a-Glance.” BBC News. 22 Aug. 2002. The BBC. 27 Apr. 2006 .
“Enron Scandal – Information on Enron.” Securities Fraud Fyi. 2003. 27 Apr. 2006 .
Hays, Kristin. “Prosecutor Questions Lay At Enron Trial.” Business Week 27 Apr. 2006. 27 Apr. 2006
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Filed under Sole Proprietorship Bankruptcy by on Dec 19th, 2011. Comment.
Petitioners filing for bankruptcy have to indicate under which chapter of the bankruptcy law they’re filing. It’s usually under either Chapter 7, Chapter 11, or Chapter 13.
Before considering the differences between the three, let’s take a minute to review the reasons why an individual, a partnership, or a corporation would find itself having to file for bankruptcy. In all cases, it’s usually a situation where cash outflows are larger than cash inflows. No matter how simple or sophisticated the financial dealings of the petitioner, boiled down to the essentials of the case, it’s usually an instance where the petitioner has assumed financial obligations which far outweigh the income available to cover those obligations.
Caught between the proverbial rock and a hard station, most petitioners turn to the Bankruptcy Court (a federal court) as a last resort. The U.S. legal system allows for petitioners to seek relief from the claims of their creditors through bankruptcy. Every entity–individual or business–has the factual to do so once every seven years. While some would never even consider filing for bankruptcy, others have regularly found themselves headed for the court over and over again in order to put their financial houses in order.
As mentioned earlier, petitioners have to indicate the type of bankruptcy relief they’re seeking. That’s why bankruptcy Chapter 7, Chapter 11, or Chapter 13 are used to distinguish among filings. Each allows for a certain type of relief for the petitioner.
A Chapter 7 bankruptcy filing indicates the petitioner (usually an individual) is asking for liquidation. Place another away, it means that whatever assets the petitioner possesses will be sold and the proceeds used to pay off creditors (sometimes for pennies on the dollar). It’s important to ticket that in a Chapter 7 filing, individuals are able to keep some of their possessions. Each state has identified certain exemptions which a petitioner can use to hold on to certain possessions. They include, for example, tools used to work in a trade, homes, household furnishings, etc.). Therefore, depending upon the state where petitioners reside, they’ll be allowed to spare certain of their assets from being sold off.
A Chapter 11 bankruptcy filing usually occurs when a business, especially a corporation, is filing for bankruptcy. Once again, the petitioning business or corporation has to list all of its assets. Those assets will be sold and the proceeds used to pay off the creditors of the business. Since in most cases the assets available for sale do not amount to enough to cover outstanding indebtedness 100%, creditors have to state themselves with receiving only a partial repayment of all the money owed them.
To handle the sale of assets, as well as to monitor the financial condition of a petitioner, the Bankruptcy Court appoints a trustee to oversee each case. Usually an attorney, the trustee’s responsibility is to keep the court informed of the particulars of a case, accomplish sure that petitioners identify fully and completely not only all of the indebtedness they have, but also all of the assets which can be used to pay off that debt.
Unlike bankruptcy filings under Chapter 7 and Chapter 11, Chapter 13 bankruptcy filings ask the court essentially to have creditors back off and give the petitioner time to develop a view to pay off outstanding debts. In other words, petitioners mediate (in most cases) that they can continue to operate on a sound financial basis, but due to an unexpected development, they find themselves temporarily short of funds to meet their obligations. Thus, with a Chapter 13 bankruptcy filing, the court can say to creditors (1) cease asking for payment for the time being, and (2) you’ll get your money once the petitioner has a chance to carry out a new financial plan approved by the court.
Recently, a number of big corporations in the United States, especially airlines, have resorted to bankruptcy in order to retain themselves afloat. While they are perfectly within their rights to do so, what some have found objectionable is a tendency on the part of some companies to expend bankruptcy to jettison long-term outstanding obligations, such as pension plan payments.
While arguments can be made on both side of that issue, the fact remains that bankruptcy is an integral part of the U.S. legal system. And entities–either individual or corporate–which find themselves in financial difficulties are able to obtain relief–either temporary or permanent–from their financial woes.
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Filed under Sole Proprietorship Bankruptcy by on Nov 16th, 2011. Comment.
You’ve made an important, and positive, step to regain you and your family’s financial future by taking charge of your situation and filing for bankruptcy. This is not a time for sorrow; instead, bankruptcy should be looked at in a positive way. After all, you now have the power to completely change your financial habits and start over.
You have, without a doubt, learned a lot about fiscal responsibility through your bankruptcy proceedings. By taking what you’ve learned, you can be on your procedure to higher credit scores and a clean credit report in only a matter of time.
1. Make a Budget – and Stick to It
We live in consumer society where possessions are status symbols. Having the nicest car, the biggest house and expensive clothes are nice, but where does that leave your finances? If you have to put those items on a credit card in order to pay for them, you cannot afford to buy them. Unfortunately, this is how many people end up on the path to financial hardship.
Instead, you should take a survey at your income each month and make a budget that allows you to pay your bills while and save money while giving you the ability to have some fun. As a general rule, you should start by budgeting for the most important expenses.
First of all, you should take a clear percentage of your monthly income and put it into savings. The amount you should save should be at least 1-2% of your take home income; but ideally it should be at least 10%. That way you won’t have to set emergency expenses on your credit card.
Second, budget for your monthly rent or mortgage payment. Your rent or mortgage payment should not be more than 30% of your monthly income. If you’re payment is more than that, consider downsizing to a home with a smaller monthly payment.
Third, budget for groceries. Consider your family’s size and average monthly food expenditures and work that into your monthly budget. Next come utilities and other bills. Finally, work in any miscellaneous expenses that you have each month.
This is an example of a budget you can set up for you and your family. Take note that this can be adapted to your current situation; the most famous thing is that you are taking care of financial responsibilities while leaving room for the fun things in life!
Expense
Monthly Income $3000
Rent
$800
Groceries
$500
Electricity
$200
Gas
$200
Transportation (Gas/Public Transportation)
$200
Credit Card/Loan Payments
$450
Savings
$350
Miscellaneous (Entertainment, Clothing)
$300
Another thing to think about when making a monthly budget is for ways to save money whenever possible. It’s a good idea to start clipping coupons to build on your grocery bill and to cook at home more rather than eating out all of the time. These runt penny-pinching techniques can save a lot of money over the course of a month – money that you can save or use to pay off bills.
2. Learn to Pay Yourself First
Paying yourself first each month is a great step to building a better financial life. By routinely taking out money each month, you’re decreasing your risk of falling into the cycle of debt. Instead, you’re building a fund that can be kept to pay for unexpected expenses as they arise. Think about it: how nice would it be to have the money to pay for car repairs in cash rather than putting them on a credit card? Radiant good opinion, right? That’s why it’s so important to have an emergency fund of savings at your disposal.
You may be wondering how much money you should set aside each month to achieve into savings. The general rule of thumb should be to place as distinguished money as you can comfortably afford. If you can afford to state aside 15% of your paycheck each month, do it! If not, think about saving at least 1-2% of your pay. The most important part is to effect something.
Once you build up that nest egg, leave it alone! Don’t tap into it unless it’s absolutely essential. Car repairs or medical expenses are essential expenses; a sale on Coach purses is not.
3. Open a Checking and Savings Account
If you don’t already have a checking and savings chronicle, prefer the time to head to your local bank and open one. Having a checking and savings account, and using them responsibly, is an valuable step on your road to credit recovery.
There are many benefits to having a checking account. Most banks offer free checking accounts, and some even offer interest on their accounts. So, you could be essentially earning money for putting your money into the narrative. In addition, many banks allow you to direct deposit your paychecks into your account, saving you a trip to the bank to deposit your check. Plus, funds that are directly deposited in your fable are available right away. Paper checks are generally held for several days until the funds clear. This hold-up on your money can cause you to get behind on your bill paying schedule and hamper your efforts to pay your bills on time.
Another relatively-recent innovation to checking accounts is bill pay. Banks usually offer their checking account customers the option to have bill pay on their accounts. This is a wonderful option because the bill pay allows you to set up the bills you need to be paid and then your bank automatically sends them a check on the date you specify. What does that mean for you? It means you don’t have to expend the time writing out checks and mailing them – it’s all done for you. Also, because you set them up to go out on a certain date, you don’t have to worry about forgetting to send a bill. This is an excellent way to ensure that you’re paying your bills on time!
A savings epic is another must-have. We discussed the importance of saving money each month for the future and for emergency expenses. You’ll need a dwelling to put that money. A savings story will generally earn you interest, so you’ll make a shrimp bit of money while saving your money. Many banks will also let you set up your accounts so that a set amount is transferred from your checking to your savings sage each month. This is a no-hassle way to ensure you’re saving money because you don’t have to remember to do it.
Outside of the personal benefits, having a checking and savings account is an important step in credit repair because lenders will want to see that you have a place to keep your money. It’ll also explain that you have money in the bank to repay them with – an necessary thing for lenders to know!
4. Get a Free Copy of Your Credit Report and Examine Closely
Now that you have your financial house in order, it’s time to start thinking about the actual mechanics of credit repair. To start, you should accumulate a free copy of your credit report from the vast three credit reporting agencies (TransUnion, Experian and Equifax.) You should also engage your FICO score from The Radiant Isaac Corporation. What is a FICO score? It’s a number that takes into account several different credit factors that give lenders an idea of your credit worthiness. Your FICO accept will fall somewhere in the range of 300-850. As you may have guessed, the higher your credit score is on the range of scores, the better. Most lenders prefer that you have credit scores above 700. You’ll have to purchase it because while the reporting agencies are required to give you an annual credit report for free, they aren’t required to give your FICO gather for free.
Next, you need to go over your credit report with a fine-toothed comb and ensure that all of the information on there is accurate. It’s not uncommon for pre-bankruptcy debts to be listed on a credit report after a bankruptcy is discharged. However, these accounts should be removed as soon as possible. To pick up them removed, you must write a letter to the credit reporting agencies with your bankruptcy papers asking them to be removed immediately. If you’re not sure what to put in your letter to the credit agencies, ask for legal advice.
In addition to inaccurate account listings, you’ll want to acquire sure your personal information is listed correctly. If your name is misspelled or address information is wrong, you’ll want to dispute that with the credit reporting agencies to make sure your credit reports are as right as possible. You don’t want any misinformation on your report while you’re trying to rebuild your credit post-bankruptcy.
5. Get a Secured Credit Card
One of the keys to rebuilding credit is to show a history of responsibly using credit. One of the best ways to do this post-bankruptcy is to open a secured credit card and exercise it to make small purchases that you pay off each month.
How does a secured credit card work? You make a cash deposit, usually anywhere between $200-500. This is the “secured” part of the credit card. The amount you pay in deposit is the line of credit on the card. You’ll be able to charge purchases to the credit card and then you’ll receive a bill at the demolish of the month for those purchases, honest like a regular credit card. The only disagreement is that if you default on the payment, the lender that issued the secured credit card will keep your deposit to offset your non-payment.
You also shouldn’t grab just any secured card. Look for the following:
• A secured credit card with no application fee and a reasonable annual fee. You don’t have to pay immense fees to help rebuild your credit; there are plenty of secured credit cards on the market that charge affordable fees.
• A secured credit card that reports to the three credit reporting agencies each month. You’re defeating the purpose of a secured credit card if it doesn’t report. Originate sure that you ask before you apply.
• A secured credit card that converts to an unsecured card after 12-24 months of on-time payments. A benefit of these credit cards is that many lenders will reward you for good payment behavior.
$200-500 on a secured credit card might not seem like considerable, but it’s a start. You’ll want to remember that a secured credit card is reported to the credit reporting agencies like a regular credit card. However, it can be a catch-22: max out your secured credit card on a regular basis and you’ll damage your credit score even more. A FICO score takes into account several different factors, including the ratio of your debt to available credit. Max out your secured credit card on a regular basis and it’ll characterize that you are overextending yourself. Avoid this by making itsy-bitsy purchases and paying them off right away. For instance, construct a gas purchase and then send in the payment immediately afterward. Doing this will get you in the habit of paying off your credit card balances in full each month, a habit that saves you money and stress.
6. Take Out an Installment Loan
Another key to rebuilding credit is to explain consistent payment of a set amount each month. This also helps to build a positive payment history that has a direct impact on your credit score. If you have student loans that weren’t discharged in your bankruptcy, continue to pay them regularly and on time each month. This especially helps your credit because paying down debt helps your credit score just as much as a obvious payment history does.
If you don’t have student loans, consider taking out an auto loan to accept the benefits of an installment loan on your credit report. However, you need to be prepared to pay an incredibly high interest rate. It’s not uncommon for people just out of bankruptcy to pay as considerable as 22% on an auto loan. However, after some time has passed, and you’re able to improve your credit, you can refinance your auto loan for considerably lower rates that will save you money.
7. Piggyback on Someone Else’s Good Credit
Piggybacking is a little-known and underutilized credit technique that can improve your credit score. What does piggybacking mean? It’s basically means that you are added as an authorized user to someone else’s credit and revolving accounts. In return, the information is reported on your credit reports, including the amount of credit available and the payment history. How does this help your credit report? Because it adds a positive credit account to your credit report and the clear payment history and amount of credit available is weighed into the formula that determines your FICO credit score.
Seems too good to be lawful, right? It’s not. However, before pursuing this, you should know the credit history of the person you’re asking. The process can instantly increase your credit bag, but it can also decrease it as well if the person has bad credit.
In addition, it’s important to note that not all credit card issuers allow you to import the card user’s account history so you should check to see if they allow you to be an authorized user (what you need to be in order to piggyback and increase your credit) or a simply a joint user. The introduction of the new FICO 08 credit scoring model that was introduced in February 2009 requires they only people that can benefit from piggybacking are spouses and children.
8. Keep Your Debt-to-Income Ratios Low
As mentioned before, your FICO score is measured with a formula that takes several different factors into account. One of these factors is your overall debt-to-income ratio. But, what is this exactly?
Your debt-to-income ratio, or DTI, is your debt load versus the amount of income you bring in each month. The higher your DTI, the bigger the hit your FICO acquire will assume. So, to improve your credit net, you’d want to keep your DTI as low as possible.
You’re probably wondering what that magical percentage is that will help you improve your credit. Naturally, the lower the percentage, the better affect it will have on your credit score. Ideally, you want your DTI to be no more than 33% at the most. This means that for every $100 you make, the most that should go toward paying your debt should be $33. That’s still a lot of money. That’s why it’s important to preserve your debt load as obscene as possible.
9. Safeguard Yourself From Late Payments
A titanic part of your FICO credit score is weighed on your payment history. That’s why it’s so important to build a positive payment history while rebuilding your credit after a bankruptcy. After all, what’s the point of doing all the work of opening a secured credit card and obtaining an installment loan if you’re not going to beget on-time payments.
That’s why you need to set yourself up on some sort of schedule to ensure that you are paying your bills on time, every time. As mentioned earlier, many checking accounts now offer bill pay that allow you to set your bills up to be paid on a recurring schedule each month. You just build sure there’s money in the account and your bank takes care of the rest.
If bank bill pay isn’t your thing, then develop your own system and stick to it. Maybe have a certain day you sit down each week to pay all of your bills for the upcoming week. Or, maybe you like Excel spreadsheets and manufacture a chart of your payments and when they are due. Just create sure you give yourself enough padding before the due date: the mail can be unpredictable. You don’t want to take a hit on your credit report, and pay a hefty slack fee because of the Post Office.
In addition, paying your bills on time, even to utilities and the cable company, is important for lenders to see, even outside your FICO score. A positive effort after a bankruptcy can elicit goodwill from lenders who behold that you are making an earnest effort to improve your credit, even when your current FICO gather does not reflect that.
10. Monitor Your Progress
Anything worth doing is worth waiting for. This is especially true for credit repair after a bankruptcy. Unfortunately, the road to a high credit score won’t happen overnight. That’s why it’s very, very well-known to take a step back and monitor your progress every few months.
How can you monitor your progress? By doing a few things, including:
• Looking over your credit reports and FICO score. The best way to chart your progress is to eye at your credit information to see how much it has improved over time. You’ll be motivated to continue on your path to financial freedom because you see the direct result of your efforts: a high credit net and clean credit describe. Checking over your reports every few months will also let you definite up any inaccurate information that may have popped up that can affect your credit scores negatively.
• Checking your savings accounts. How are you doing with the emergency fund? Are you finding yourself saving more, or are you dipping into that fund too much. If it’s the latter, you may want to reevaluate your budget and make changes before it becomes a bigger problem.
• Check you payment history. Are you making payments on time, every time? If not, why not? Your credit score is weighed heavily on your payment history, so produce sure you remedy this situation promptly. Again, if you find it’s because you’re running out of money each month, you need to execute changes to ensure that this isn’t happening any more.
• Explore at your credit card usage. Are you paying your balances off each month? You should be. If not, again reevaluate your budget and financial picture to ensure that this is happening.
• Be sure to treat yourself. Sure, rebuilding your credit after a bankruptcy is about discipline and budgeting, but it’s also about making it fun so it becomes a lifelong commitment. That’s why you should treat yourself to a nice dinner out, or a new outfit, every once in awhile to keep yourself on track. Have you heard the saying that the forbidden fruit is always the sweetest? Well, deny yourself any of life’s simple pleasures long enough and chances are that you’ll find yourself on a slippery slope back to your financial past.
Declaring bankruptcy isn’t the end of the world: it’s the start of a new life – one without debt and the stresses that it brings. Take this positive opportunity to open fresh and assign agreeable financial habits and you’ll be on your way to high credit scores and a clean credit report before you know it – likely great faster than the 7-10 years that your bankruptcy will remain on your credit report.
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Filed under Sole Proprietorship Bankruptcy by on Nov 15th, 2011. Comment.