How bankruptcy affects your credit is one of the most common concerns of people considering bankruptcy.
Let’s set the stage for looking at this issue: Any reported event that occurs pertaining to how you have paid your debts will show up on your credit report. An event remains on your credit report for 7 years, and a bankruptcy will show up on your credit report for up to 10 years. Another important point is that good credit results from paying what you owe, when it is due. Basically, on-time and in-full. Anything else reduces your credit score.
If you are in financial difficulty, for whatever reason, the chances are that your credit report is already bad or soon will be bad. Since your credit report is probably already substantially impaired, the filing of a bankruptcy case may be the best thing or the only thing that you can do to begin to reestablish your good credit.
Here are some other points you should consider:
- Consider your credit worthiness rather than your credit history. A lender determines your credit worthiness at the time that you apply for credit. Many people mistakenly believe that their credit report is the only determining factor in this process. Instead, a lender will look at (1) your income; (2) your monthly living expenses; (3) the ratio of your income to the proposed monthly payment in order to determine how much of your income it takes to pay the proposed monthly payment; (4) your total debt; and (5) your payment history on your debts. Your credit report typically provides information as to items 4 and 5 only.
Most people that have a hard time paying their bills would have difficulty showing that they have enough money coming in each month to pay on an additional debt, regardless of what their credit report says. If a lender determines that you do not have enough money to make the proposed monthly payment on the new debt, then you will not be able to get that new debt. Thus, the biggest problem for most people that have a hard time paying their bills is not what their credit report shows, but how much money they have left over each month after all their monthly expenses are paid. REMEMBER THIS: IN THE WORLD OF CREDIT, CASH IS KING!
- Will bankruptcy on your credit report will prevent you from getting any credit? Look in your newspaper and you will likely see ads stating that offer financing to those persons with credit problems. Although everyone’s situation is different, many of my clients get offers of credit after their bankruptcy case is over. We have received in our office several pre-approved credit card offers for clients that have received a discharge in bankruptcy.
Another example of how a bankruptcy can help someone’s financial situation is shown by a former member of my staff. Less than two years after she filed a Chapter 7 bankruptcy, she and her husband were able to purchase a vehicle and a house using credit. There was one downside – the interest rate on her vehicle was 14%, but she was able to get that loan refinanced to a market interest rate after 6 months of on-time payments.
A more recent example comes from one of my clients who obtained credit approval for the purchase of a house at 6.5% interest, due in part to his ability to show 24 months of on-time payments to creditors after the bankruptcy discharge that was issued 2 years earlier. There was one downside – my client had to shop around for lenders, and it was the third lender that approved him for the credit.
So, like I tell my clients, the filing of a bankruptcy will show up on your credit report, but the good thing is that it will show up on your credit report. It will discharge most, if not all, of your debt, and for many people it is a big step toward improving their credit worthiness.
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