Bankruptcy and Credit

Most people we meet with are very concerned as to how a bankruptcy would effect their credit. Usually, they are very surprised at the answer.

In the vast majority of cases, our clients’ credit scores actually improve, by as much as 200 points after the bankruptcy is discharged. For a Chapter 7 Bankruptcy, the discharge usually occurs around 100 days after the case is filed.

I have been told by mortgage brokers that typically a person’s credit score is around 600 after the discharge in a Chapter 7 case. A discharge in a bankruptcy indicates that the case is complete and the debts have been eliminated.

If one examines their credit report after the bankruptcy they will observe that the balances of their debts are “zeroed out.” This is one of the reasons for the increase in the credit score. Because our client’s debt load has been reduced or eliminated, their debt to income ratio has dramatically improved. A consumer’s debt to income ratio, or the amount they owe compared the amount they earn, is a component of the credit score formula. When the debt goes down, the credit score goes up.

It is true that the fact that one files bankruptcy can be reflected on a credit report for up to ten years but that does not mean that credit is unavailable! Many years ago, that was the case, but not any more. In fact, most clients receive credit card offers within a month of filing bankruptcy.

Well, why on earth would a credit card company offer credit to someone who has just filed bankruptcy? Because they are smart! They understand, that as a result of the bankruptcy, the consumer will be debt free and can probably afford to pay them. Also, they understand the person who filed a Chapter 7 Bankruptcy cannot file another one for 8 years. That consumer is a very safe bet.

Now I am not suggesting that our clients go out and get in debt trouble all over again but credit is rather strange. It is easier to get credit if you have credit!

My mortgage broker friends have told me to advise clients to accept two credit card offers. The brokers suggest that the cards be used sparingly for small purchases and that the balance should not exceed 1/2 of the credit available. For maximum effect, the balance should not paid off every month, but rather, every other month.

By staying current on any remaining debts, like mortgage payments and car payments, and with the new payment history created with the credit cards, within a year and one half, a credit score in excess of 700 is quite possible.

In the current lending climate, as long as a home has not been surrendered to the bank through foreclosure, a person who has filed bankruptcy can qualify for a good interest rate on a mortgage two years after the bankruptcy.

Car loans can be obtained immediately upon discharge but at a premium rate. As time time passes, the interest rate available will become more competitive.

The discussion so far has referred to Chapter 7 bankruptcies. The other common type of consumer bankruptcy is a Chapter 13. Chapter 13 bankruptcies are payment plans which go on typically for 3 to 5 years. After the payment plan is completed, the discharge is received. Our clients who file under Chapter 13 build credit while they are in bankruptcy as the payments they make in that bankruptcy are reported to the credit bureau. However, they will generally be limited to a score of around 650 until the case is over and they are discharged.

Even in a chapter 13, automobile loans are easily obtained and some other types of financing is available.

Bankruptcy is not really the “kiss of death” for your credit you may have been told. If you are not making all of your payments on time or paying the full minimum payment due, your credit score is dropping. Things are not getting better, only worse.

Let me tell you a story to illustrate the difference between filing and not filing bankruptcy. Every now and then I will have an initial consultation with a husband and a wife. They both have alot of debt and neither can afford to make their payments on time. One of the spouses decides to file, the other refuses.

Often, a year or so later the spouse who didn’t file comes back to see me. They are very unhappy that they did not file with their spouse. They complain about how the other’s credit is so good and theirs is so bad. Things are just not getting better for them so now, they decide to file.

So, don’t be afraid. Credit is available if you need it after a bankruptcy.

Visit Us On Facebook