Bankruptcy & Your Credit
The starting point for determining how bankruptcy will affect your credit is to realize that your credit report most likely reflects everything that you have done up to this point. If you’re considering bankruptcy as means to get debt relief, then it’s safe to say that your credit is not perfect. Chances are, if you ever want to borrow money in the future, whether to buy a car or to buy a house, you are going to have to get out of debt and save money to prepare for those purchases. If that’s the case, then you need to get out of debt as quickly as possible, and then begin to save money as quickly as possible after you get out of debt.
Here are some points to consider when determining whether bankruptcy is the best and quickest way for you to get out of debt and to start saving money:
- Bankruptcy Provides The Quickest and Most Efficient Way To Get Debt Free And Get A Fresh Start – Sure a Chapter 7 lasts only 90 days, and then your case is over, but in order to qualify for a Chapter 7, you have to have no money left over to pay your credit cards, medical bill or personal loans. Someone in that category is more concerned about getting some peace of mind rather than the impact on their credit. Why? Since they don’t have money to pay for the credit cards, medical bills or personal loans, it is likely that their credit is in the tank and can only get better. In contrast, someone that has money to pay those types of debts is more likely to be concerned about the impact of bankruptcy on their credit. They are also more likely to be a candidate for a Chapter 13 because of disposable income that is available to pay those debts. A Chapter 13 bankruptcy lasts only 36-60 months, and then you’re done. Compare the length of the bankruptcy process to doing it on your own. Where are you going to be in 5 years? Are you going to be debt free, or are you still going to be choosing which creditors to pay first, if at all? If you’re not going to be debt free in 5 years or less, then this consideration alone may make bankruptcy a better alternative.
- Your Credit Report Will Show That You Filed Bankruptcy, But It Will Also Show That You Are Debt Free – You will be debt free, so the important part of re-establishing your credit depends on how you handle your finances after you get debt free.
- The More Cash You Have, The More Credit Worthy You Are - Remember, after you get debt free, the goal becomes saving as much money as you can so that you’re in a good position to make a vehicle purchase. The more money you have, the more credit worthy you become. Here’s a case in point: I had a family member that filed a Chapter 7 bankruptcy after a business downturn, and sometime after his bankruptcy was over business picked up and he was able to start saving money. Soon, he had a need to purchase a car. He went to a car dealership, selected the car he wanted, and asked the salesman if they would finance the purchase. The salesman asked how his credit looked, to which he responded that he had filed bankruptcy in the past. The salesman said they couldn’t finance him. Then he informed the salesman that he intended to pay half the purchase price in cash. The salesman then said he was approved and there was no need to do a credit check. Why? Because cash is king. Another example comes from the billboard ad of a 2 nd chance finance dealership: “Nothing cleans-up a credit report like a nice tax refund.” Remember, first get debt free, then start saving money after you increase your income.
- There’s Not A Big Difference Between BOTTOM And ROCK BOTTOM – If you’re struggling with debt, there is a good chance that it will take some work for you to get good credit again, regardless of which way you take to get debt free. Based on my experience, however, I believe that bankruptcy gets you there quicker. Why? Keep reading.
- Creditors Have To Report a Zero Balance Within 6 Months Of The Completion Of Your Bankruptcy Case – You can make sure that happens by monitoring your credit report after case is over, and if necessary, you can send a copy of your Discharge Order in bankruptcy to the credit reporting agency to clear up any mistakes that may be present.
- Here’s A Little-Known Secret: You Can Get A Higher Credit Score After Bankruptcy If You Manage Your Finances Well - Right now, your credit score is determined by comparing your credit history to other people in the general population. After you file bankruptcy, your credit score is determined by comparing your credit history only with other people who have filed bankruptcy. So, if you do a good job of managing your finances after bankruptcy, then you can get a higher credit score. I don’t share this with everyone that comes into my office to see me because this should not be reason to file bankruptcy.
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