In America, your credit rating matters.
Amongst other things, it affects:
- The interest rates that you pay for loans
- Your insurance premiums
- Even job applications
Therefore anything that lowers your credit is dangerous and should be avoided.
Most people still think that Chapter 7 bankruptcy or Chapter 13 bankruptcy is bad for credit.
So is filing for bankruptcy bad for credit?
Most people have heard things like:
- “Bankruptcy is a 10-year mistake” or
- “You will never be able to get credit again”
This is not true.
Most of my clients get new offers for credit in the month between when I file their cases and when their hearing is scheduled.
All of my clients are surprised to see these offers, but to me it makes perfect sense.
Here’s why.
WHY BANKRUPTCY OFTEN HELPS CREDIT
Bankruptcy is often good for your credit.
Why?
Because before a person files for bankruptcy, their credit report is a mess.
The accounts are all listed as:
- Late
- Missed payment
- Collections
Lots of people even have judgments on their credit reports.
- When you file bankruptcy, then all of the accounts on your credit report get marked as “included in bankruptcy.”
That’s right, they are not late or in collections any more.
The balance on these accounts also goes to $0 and the judgments get voided.
What does included in bankruptcy mean for you?
t means that after many months or years of bad things like missed payments happening on your credit report, there are no more bad things happening.
This is GOOD for your credit rating.
- The bankruptcy also improves your debt-to-income ratio because your income will stay the same, but your debt will decrease
It is true that having a bankruptcy on your credit report is worse than not having one, but the bankruptcy filing removes the problems in your financial situation that are causing bad credit.
It discharges the debts so you don’t owe them anymore.
WHY?
Think about it like this.
Credit rating is supposed to measure how likely it is for someone to repay a new loan.
Who is more likely to repay a loan:
- Someone who has $15,000 of credit card debt, is being garnished and could file bankruptcy at any moment? Or
- Someone with no debt, who is not being garnished, and who cannot file bankruptcy for several years, but just filed a bankruptcy?
If I were making the loan decisions, I would lend money to the person who just filed the bankruptcy.
Why?
Because:
- No other creditors are taking this person’s money
- They can’t file bankruptcy again for a long time
- They are a much safer risk than the person with debts
WHAT HAPPENS TO YOUR CREDIT RATING AFTER FILING BANKRUPTCY?
It is true that filing for bankruptcy lowers your credit rating quite far.
Because credit rating is different for everyone, I cannot say by how many points a bankruptcy lowers your credit, but it goes down pretty far when you file for bankruptcy.
The more important question is:
- How quickly does it recover after filing for bankruptcy?
Based on my experience from filing tens of thousands of bankruptcies in Minnesota, people often have a 700 credit score about 2 years after filing bankruptcy, assuming that nothing bad happens in the meantime.
This observation is confirmed by this discussion on the MyFico website.
I know this because my clients often call me up and ask for their bankruptcy paperwork a few years after filing for bankruptcy. I make them a copy of the documents they need and send them on their way.
I know that the mortgage works because they never call back to say that everything fell through. I have also researched the FHA guidelines, and they say that you can get a mortgage only two years after filing for bankruptcy.
You can get car loans even more quickly than mortgages.
My clients tell me that they get pre-approved car loan offers within 1 month of filing bankruptcy.
- They get the offers even before their cases are finalized and before they have received their discharge orders.
- They tend to get better interest rates and terms than before the bankruptcy also
One recent client told me a story that stuck in my mind. – she said that she was able to get a car
This car:
- was 10 years newer, and
- had the same monthly payment and more equity than the vehicle she had before the bankruptcy
SHOULD YOU FILE FOR BANKRUPTCY?
If you have debts that are eating up your budget and holding you back from your financial goals, don’t let the fear of a bad credit rating hold you back in life.
I talk to lots of people who spent 10 of their working years trying to pay back debt from a financial hardship.
When I ask why, they say that it was because they didn’t want a bad credit rating.
- What people don’t understand is that in the long run bankruptcy is usually GOOD for your credit rating
WHAT TO DO NEXT
If If you want to talk with a professional today about how bankruptcy might affect your credit, then why not not speak to us now at 612.824.4357?
We’ll give you all the help and advice you need.
Alternatively, fill out our free Bankruptcy Evaluation Form to see if filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota is right for you.
We’re looking forward to helping you.
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