Virtually every person that comes to see us to talk about a potential bankruptcy filing asks us this question in one form or another. They may have been told by a friend that bankruptcy will ruin their credit. Another has heard that they won’t be able to get new credit for 7-10 years. In short, most folks want to know how a bankruptcy filing will affect their credit.
The truth is that, by the time an individual makes it into our office to discuss bankruptcy, their credit is usually already in bad shape. They may have gotten behind on mortgage or car payments. Perhaps a foreclosure or repossession has already occurred. Some people have managed to keep their credit score high, but they are simply borrowing from one creditor to make minimum payments to another. We call this robbing Peter to pay Paul. The credit score may be okay but the last thing they can do, or want to do, is borrow more money. The point is that bankruptcy doesn’t ruin your credit; it is what has taken place prior to filing bankruptcy that does so.
The great majority of our clients are honest people. The credit problems that they have had are often through no fault of their own. It may have been a job loss, an illness or even a divorce; but for whatever reason, they are unable to pay their bills as they become due. Often, bankruptcy can be the first step in helping to turn around their credit worthiness.
But how can this be? How can bankruptcy make a person’s credit better? Step back and think about that question from an objective perspective. Say a person who has never filed bankruptcy goes to a bank to borrow money. Although no bankruptcy, the person has thousands of dollars in credit card debt. She is behind on her car payment. The truth is that she can’t pay the bills that she has now let alone the payments on the new loan that she is asking the banker to give her. Plus, if the banker were to give her the loan, she could file bankruptcy on all of her creditors, including the banker, shortly thereafter.
Now say this same lady makes the tough decision to file a chapter 7 bankruptcy and she receives a discharge of all of her credit card debt. She surrenders her car with payments that were too high and discharges the balance owed. A year later, she goes to the same banker to borrow money to buy a less expensive car with lower payments. She is honest and tells the banker that she filed bankruptcy a year earlier. He considers this but also considers the fact that she now no longer has any credit card debt or a high car payment. Perhaps most importantly, she can’t file another chapter 7 bankruptcy until eight years after the prior case was filed. So if he makes the loan, it will be the only debt that she will have to pay and she cannot discharge the debt in bankruptcy. Objectively, she is a much better loan risk now than she was a year earlier. Of course, all of this assumes that she acts responsibly after her bankruptcy discharge.
The point here is that if your credit is already in bad shape or overextended and the stress of dealing with the situation is becoming overwhelming, it may be time to sit down with a bankruptcy attorney and at least learn your options. As we have said often, don’t be fooled by someone that you don’t know at the other end of an 800 number. Our firm offers a free consultation during which you will meet with an experienced bankruptcy attorney. We won’t just pass you off to a secretary or paralegal. One of our attorneys will meet with you face to face and help you explore your options. Don’t let what you have heard about how bankruptcy may affect your credit keep you from doing this. The real question is – what condition will your credit be in a year from now if you don’t do something?