This is often one of the biggest questions looming in the minds of people who are having trouble paying their bills and are thinking about bankruptcy. It seems like everyone has an opinion–and some of them come from brain-dead idiots who have no business talking about things they don’t understand. See the links at the bottom if you want to see morons at work.
Here’s the first thing I tell people when I meet with them in my Oakland bankruptcy office: Don’t believe the horror stories you hear about the blood bath that results when credit scores collide with bankruptcy. It’s not as bad as the credit card companies would have you believe. That’s the second thing I tell them. Think about it. If everyone knew how quick and simple bankruptcy can be, more people would do it and millions (or billions) of dollars more in credit card debt would be wiped out! The credit card companies don’t want you to know that, so they continue to float boatloads of misinformation out there about bankruptcy. The longer they can keep you from bankruptcy, the more money they can continue to suck out of you even when you can’t afford it.
Here’s the simple truth about the affect of bankruptcy on your credit score:
- Chapter 7 stays on your credit report for 10 years although it impacts your score less as time goes on.
- Chapter 13 stays on your credit report for 7 years and its impact also lessens with time.
- If you currently have stellar credit and file a bankruptcy case, you can expect a large drop in your score.
- If you have had trouble paying bills and your credit score is already low, however, a bankruptcy will likely improve your score because it wipes out balances due. You go from owing lots of money to owing no money or very little money.
- You can buy a car on credit the day after your chapter 7 is over, and you can buy a car on credit in the middle of a chapter 13 case if you need one! How’s that for surprising?
- If you qualify in all other respects, lenders will loan you money to buy a house in as little as 2 years after filing a bankruptcy. Even more surprising?
- Bankruptcy law prohibits discrimination in employment due to bankruptcy.
- Although credit may be available to you after you file a bankruptcy case, it will most likely be at a higher rate of interest. That’s understandable, but it’s still less expensive than repaying all that credit card debt (that you couldn’t afford to repay anyway)!
- The best way to improve your credit score after a bankruptcy is to pay your bill on time for the rest of your life. You plan to do that anyway, right?
- As a practical matter, a chapter 7 bankruptcy can drop you score between 200 and 300 points.
- According to Bankrate.com, you can rebuild to an excellent credit score (above 750) “within a few years after your bankruptcy case has been discharged.” That doesn’t sound like a bloodbath, does it?
Now, here are some practical thoughts. If you were in my office and talking to me about the effect of bankruptcy on your credit score, I might have this conversation with you:
Client: I am so worried! Won’t bankruptcy kill my credit score?
Me: Well, sure, your score will go down but it will also recover again over time.
Client: But, but…how will I survive if I can’t get credit?
Me: What do you mean when you say, “How will I survive?” Do mean will you die if you don’t have credit?
Client: No, no, no…I mean how will I get by financially if I can’t get credit?
Me: That’s a good question. I’m glad your asking it. OK, so if you had no debts at all and you needed to buy something new, how would you buy it? Would you put it on a card or would you just pay cash for it.
Client: Well, I’d just pay cash for it.
Me: So if you had no bills and you were paying cash for everything, then you really wouldn’t need credit so much, would you?
Client: No, I guess not.
Me: And I’ve already told you that you can qualify for a car loan and a home loan not too after you file, right?
Me: OK, now think about this: Right now, you have $75,000 of credit card debt (pretty typical for the San Francisco Bay Area). Do you have the ability to pay that off?
Me: And you want a good credit score so that banks will loan you more money that you will also be unable to repay?
Client: Oh, I see what you mean.
Me: I guess this is the big question to consider: What good does it do to have a great credit score and access to lots of additional credit if you don’t have the ability to pay off the debt you now have?
Client: I never thought about it that way! I kept thinking I needed more credit so I could borrow more. I sound like a drug addict, don’t I?
Me: No, you don’t. But I find it’s always helpful to look at credit and bankruptcy in the right way.
I suppose the final thought I have about credit and bankruptcy is this: People file for bankruptcy because they no longer have the ability to repay their debts. In other words, they file when they have no other choice. What this means is that if you are still making decisions based upon how it will impact your credit score, you may not have reached that point where you have no other choice.
If, on the other hand, you run the numbers and find that you can’t pay rent and utilities and credit card bills–and still have money left to feed the family, your credit score really no longer matters. What matters is putting food on the table and a roof over your kids’ heads. If bankruptcy will help that happen, I can help. Call me at (510) 451-6200 to make an appointment. You can also email me at firstname.lastname@example.org.
And now, those links I promised. Click here, here, here, or here. Idiots! All of them!
If you want to meet with Oakland bankruptcy attorney James Pixton, you can make an appointment for his office at 1300 Clay Street, Suite 600, Oakland, CA 94612. His phone number is (510) 451-6200 x101. Be aware that the Oakland is by appointment only. There is no staff there and Attorney James Pixton meets clients there only as needed. All paperwork should be sent to his PO box in Alameda, California.