Your Credit and Bankruptcy

The Myth of Bad Credit

As a Bankruptcy attorney I hear a lot of misinformation from clients.  The number one thing I hear that is just plain wrong is that your credit will be ruined forever.  WRONG!  Believe it or not it is pretty easy to get credit after your case discharges.  I know this may seem counter intuitive.  However, think about it from a lenders perspective.  If you have a Bankruptcy discharge then they know that you don’t owe anybody else any money.  Therefore, they aren’t competing with other lenders.  Plus, they know you can’t file Bankruptcy again and that the consumer (you) are going to be hyper sensitive about paying them.   The lender is going to make money off an annual fee to start (possibly) and get the interest.  It’s all about the money for them.  Are they going to start you off up with a $20,000 limit (NO).  Will they start you off $1,000 (YES AND MAYBE MORE).  After you establish a history with them they will start increasing your lines.

Your Credit Score

There is no magic formula for determining your score after the case is filed and discharged.  The credit reporting agencies have their own algorithms.  However, it is pretty normal to be at a 700 after 2 years.  The best thing to do to build your score is to use it and pay it off.  The scores are based a lot on on time payments.  So make sure to do that.  The formula is also based a lot on how much credit you are using vs. how much is available to you.  So make sure to keep those ratios as low as possible.

I Don’t Want Credit Anymore

I hear this a lot too.  It is certainly your right to not use credit and just go cash.  However, I would encourage you not to do that for the simple fact that a good score just helps everything in your life.  I tell people to just have $100 on a card every month for gas or some other expense and just pay it off.  They will report the on time payments and increase your lines in an attempt to lure you into making more purchases.

So, What is the Downside?

The Bankruptcy is out there forever.  No getting around that.  If you really know how to find it then you can.  It is also on your credit report.   A Chapter 7 is on there for 10 years (from filing date) and a Chapter 13 is on there for 7 years (from your filing date).  Please note that you have to finish your Chapter 13 for it to only be on there 7 years.  If you convert or let it dismiss then it will be on your report for 10 years.

As you can see from above — just because it is on your credit does not mean you can’t do anything.  People get credit cards and cars right after the case is over (if they want).  I have people all the time buy houses after a couple of years.

Bankruptcy is a business decision and the laws were enacted to help you.  I encourage you to treat it as such when determining how you want to handle you debt.

Below are some links for information about this topic:

Cost of Bankruptcy

Getting a Mortgage after Bankruptcy 

Credit Score After Bankruptcy