Myth: I don’t want to file for bankruptcy because it will damage my credit and I have great credit now.
Fact: This myth is composed of about one teaspoon of fact and two cups of fiction. The teaspoon of fact is that yes, your credit will take a hit after you file for bankruptcy.
The first cup of fiction is believing that you have great credit right now. If a person’s finances have become so distraught that the person has made an appointment with me to discuss bankruptcy, their credit is usually worse than they think it is. Most people think that their credit rating is based solely on their payment history, and because they are current on all of their bills, they must have excellent credit.
In fact, credit scores are based on several items – only one of which is payment history. The algorithms for determining credit score are a tightly guarded trade secret held by the credit bureaus, so there are only a few people in the world who know with certainty what affects credit and by how much. What we know, however, is that your credit score is impacted by:
- payment history
- debt to income ratio
- types of debts
- number of open accounts open
- available / unused credit
- residential and employment stability
- and much more…
No matter what sort of bankruptcy you’re filing under, bankruptcy is generally a debt to income ratio problem. Even millionaires can file for bankruptcy. The issue isn’t how much money you make, but whether that income is sufficient to pay back your debt as it becomes contractually due.
The second cup of fiction is that your credit is ruined forever. While it is true that the bankruptcy remains on your credit for up to ten years, your credit score can be rehabilitated. Think of bankruptcy as resetting you to when you turned 18 and had no credit. You start over from scratch.
If you’re lucky, you will have debts that survive bankruptcy, like a mortgage, car loan, or student loans. These debts already exist, so you don’t have to reapply for them. You can continue making payments on these debts and use them to re-establish your credit worthiness. Filing Chapter 13 can also help rebuild credit a little faster than it would in Chapter 7, because you’re paying back some of your debt, plus the regular plan payments and payments from the trustee help. If you file under Chapter 7 and don’t have any surviving debts, small secured loans (furniture and appliance loans) are a great way to get back on your feet.
When done correctly, most people have substantially better credit scores about 12 months after filing bankruptcy than they did going in.
Also bear in mind that your bankruptcy will – in some respects – make you less of a credit risk. People filing for Chapter 7 Bankruptcy can’t get another Chapter 7 discharge for 8 years. New creditors know that one way or another, they’re going to get paid for the foreseeable future. Also, with all of your unsecured debt now eliminated, you now have a better debt to income ratio, and presumably, an increased ability to pay back new debt.
An experienced bankruptcy attorney can look over your financial circumstances and give you advice on the best ways to rebuild your credit after bankruptcy before you make any commitments. Want to find out what bankruptcy could mean for you? Call (920) 490-6160 now to schedule a free consultation.