Will my credit be ruined from bankruptcy?
The following scenario happens regularly during my consultations:
- Potential Client: “I know bankruptcy would really make my life easier, but I want to avoid it at all costs, because I really want to protect my credit.”
- Me: “Oh, how is your credit right now?”
- Potential Client: “It’s not …great, but I heard that after bankruptcy…that’s it, you can’t buy a car, you can’t buy a house, you can’t get a credit card. Your credit is ruined for the next ten years. That just won’t work for me.”
- Me: “It is clearly a very common misconception, and therefore I am not surprised you believe it, but after helping people file for bankruptcy for over 6 years, I can tell you with certainty, it is completely false. Here is why and how I know…”
I wish I could record the following portion and just play it for all my clients so that I don’t have to repeat it as often as I do.
Here it goes…
Most people who are considering filing for bankruptcy already have bad credit or credit that is tittering on the brink of being bad and one more opened credit card with outstanding balance will make this credit score crash. The truth is that mostly filled up credit cards, missed payments, lots of inquiries for new credit look very suspicious to creditors and at the very least obtaining new credit will be very hard for the simple reason that given your income and the outstanding balances on your current cards, it doesn’t appear that you can handle any more debt. In fact, when obtaining an FHA mortgage loan, they will take a look at your current obligations and take those into account when they determine your eligibility. On the other hand, 2 years after bankruptcy you will be able to apply for the FHA loan, but because your other debts will be discharged, it will be easy to qualify for these loans that are optimal for low/middle income home buyers.
If your credit is already bad, bankruptcy will likely improve it.
What? Was that a typo? Did I mean to say that bankruptcy will improve your credit score. Yes. Yes, I did. I have seen it over and over. People come in and their credit is in the high 500s or low 600s and within a year of their bankruptcy filing, credit score goes up by 85-120 points.
How is that possible? Well, let’s think about this. When you have $40,000 in outstanding debt, and you want to buy a new car, do you think you are a great risk? Risk is basically what determines your credit score. The lower of a risk you are as a borrower, the higher your credit score will be and the lower interest you can generally obtain. If you are a highly risky borrower, the credit score will be low and the cost of borrowing will be higher. So someone with outstanding debt will have to use that same sum of money to repay the car loan and other creditors. Whereas a client who filed for bankruptcy and had all his debts discharged, is a less risky borrower, for 2 reasons. A bankruptcy client is a less risky borrower because they can’t file for Chapter 7 bankruptcy for another 8 years, whereas a person with lots of outstanding debt and no bankruptcy might very well file and discharge this obligation as well. A bankruptcy client is also a less risky borrower because they don’t have other creditors and therefore can use all the remaining money to repay the new creditor, rather than having to split the same available pie into more pieces.
I repeatedly hear stories from my clients who were able to refinance for a better interest rate, who got a 0% interest loan on their vehicle, as well as clients who got new credit cards with better interest rates than before. I have clients who purchased a house and obtained a favorable loan only a few years after bankruptcy. That’s how I know that what I am discussing here is not just what I hope the truth is, but is a fact. When I just started practicing bankruptcy law, I was a lot more hesitant to answer the question about credit, because I didn’t have actual facts from my own clients who filed. I heard from other attorneys, but just didn’t know if it was hype or truth. Now I do and I have no problem making these statements, because I know them to be true.
It’s not all great news. The reality is that if your credit is great before you file for bankruptcy, it will certainly go down for a period. Also, finding an apartment to rent may be harder after you file for bankruptcy and for those people that need to move, I usually recommend that they complete the move before we file. At the same time, it may be impossible to predict the future. There are so many people who are going through foreclosures, short-sales, and bankruptcies these days that I don’t think landlords have the option of being as picky as they once were, but I want my clients to be aware that their ability to obtain a rental may be hindered by the bankruptcy filing without obtaining a co-signor, etc.
If you have questions about your credit, I am able to pull up your credit report that will give us your current credit score as well as estimate what your credit will be a year after bankruptcy.
Feel free to call my office for a free initial consultation at (310) 481-5098.