Individuals and small business owners should be aware of the possible credit score implications in Obama’s Health Plan (the ‘Plan’).

This is the health insurance reform bill passed by both the U.S. Senate and House of Representatives combined with the House passed reconciliation bill, known as H.R. 4872.  We are assuming the Senate will pass the reconciliation bill as is and President Obama signs it.

We will not be discussing the merits of the Plan, just the possible effect on your credit score.

Your credit score will be safe and unaffected as long as you or your employer is paying for your minimum health insurance as required by the Plan.  If you are self-employed and paying the minimum insurance required, your credit score will be unchanged.  Even if you are unemployed, but have the minimum insurance required, your score will be unchanged as well.

However, unless you are fully compliant with the Plan your credit score may be negatively affected.  Being compliant with the Plan will not show on your credit report, nor will it increase your credit score.

According to the Plan, individuals are personally subject to a civil penalty for non-compliance.  Meaning you must buy, your employer must buy for you, or you must get a government subsidy to get the minimum required health insurance.  In many cases, the subsidy will be partial.
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Ah, Bankruptcy.  How terrible of you!  Society, friends and neighbors boo you. Debt consolidators tell you this as they promote their program.

But, what are the real issues with “both” bankruptcy vs debt consolidation?

1. Your credit score
2. Getting rid of your debts
3. Keeping key assets

Let’s closely examine what happens to your credit score in bankruptcy vs debt consolidation.  In both cases, your credit score will have suffered tremendously.

IMPORTANT: Because this is a detailed examination, please read my previous blog: Credit Score Perils of Debt Consolidation

Here are three important rules to understand with bankruptcy:

Rule #1: Bankruptcy stays on your credit report for ten years. True, however, see rule #2.
Rule #2: Credit scoring considers a bankruptcy mainly for two years.
Rule #3: Many creditors deem bankruptcy as a fresh start with debt cleared away for their lending.

This will be our sample starting point:  Your credit score is 700. You have a stable job and you are paying your bills on time.  Suddenly you lose your job, use up your savings and start to fall further behind on your bills.  Creditors are pounding you and you have to do something.  Your credit score is now at 590.

At this point, you are considering bankruptcy chapter 7: liquidation of debts, bankruptcy chapter 13: restructuring your debts, or using a debt consolidator.

Lets chart the differences:

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What happens to your Credit Score in Debt Consolidation?

There are four big problems with most debt consolidation programs:

1. FEES. Your payments go to fees first. In fact, for the first 6 to 8 months of a 24 month program, 100% of your payments can go to fees (the ‘fee period’). After this fee period, you still pay a monthly management fee for the remainder of the program.

Sure, your creditors are put on notice that you are in a debt program at the beginning, however, that means nothing. They are not legally obligated to wait until your fee period has ended, nor stop collections. Fees and interest still accumulate.

2. NO NEGOTIATION. There are NO negotiations with your creditors until you complete the ‘fee period’. Your creditors are left in the dark and ignored by your debt managers. This is bad for them and for you.

As a result, your creditors do not stop collection attempts. The phone calls and letters keep coming. They even sell the debt to collectors who can get more aggressive in their collection attempts.

Liens, lawsuits, wage garnishment and asset seizures can still occur during this fee period. Some debt consolidation programs will charge you an extra fee to intervene at this point, but by then it may be too difficult and too late.

When your ‘fee period’ is done, you have to help the debt consolidation company identify which collection agency bought your debt. It can go from your creditor to several collectors during your fee period.

Read more and see the impact on your Credit Score… >>