Thursday, December 30, 2010

Effect of filing bankruptcy

Contrary to popular belief, filing for bankruptcy is not credit suicide. The fact that many people who file for bankruptcy already have less than perfect credit generally leads to an increase in their credit score after they file for bankruptcy. For years, creditors and collection agencies, who abhor bankruptcy, spread the idea that bankruptcy is the end all of your credit life. Working in the industry, I've seen people's lives improve drastically after bankruptcy.

For people with unmanageable amount of debt, there are several reasons why filing for bankruptcy is a good thing.

First, it provides a definite time line for relief. Credit card companies make money on the minimum payments and late charges that people can only afford to pay; we all know that by paying only the minimum payments, it could take 30+ years to pay off a small debt. You basically enslave yourself with debt for 30+ years. Bankruptcy can break this ball and chain and allow you to actually work toward a better future.

Second, you can only benefit from a Chapter 7 bankruptcy once every 8 years. This means that after you've filed, you are considered lower risk customer to creditors. In fact, people report receiving a crazy amount of credit card offers within months of filing for bankruptcy. Although getting back into debt is an easy way to build up credit, it's also a debt trap. In 2005, Congress reformed the Bankruptcy Code. One of the many changes include mandatory credit counseling and financial management classes before someone can file for bankruptcy. It was designed to curb the number habitually filers. It's too early to see if credit counseling is working since people who filed after 2005 aren't eligible to file again until after 2013 (since one can only file a Chapter 7 once every 8 years).

Third, credit reporting bureaus generally suppress reportings after a bankruptcy case is filed. This means that your credit score can only go up after a bankruptcy--so long as you act responsible with future credit. From experience, credit scores are usually around the mid-600s one year after filing. The ideal score would be around 700 and higher. 800 or higher is considered supreme, but even those with "perfect credit" don't have scores in the 800s. *Note: Nobody starts at 800, you have to earn it over a long period of time and credit.* Bankruptcy is only a one time hit on your credit report. Everything you do after that can substantially improve your credit.

Fourth, the Fair Credit Report Act requires credit bureaus to remove a "bankruptcy" mark after 10 years. This means that after 10 years, the only way anybody would know that you have filed for bankruptcy is if you tell them or they search bankruptcy court records. Even so, after 10 years, if someone can't obtain credit, it's probably not because of the bankruptcy.

People fear bankruptcy for the wrong reason. It is not a credit suicide. It is, at worst, a temporary obstacle to getting back into debt, and at best, fresh start at life with a clean slate and no stress.

Happy new year everyone!

9 comments:

  1. Hm I feel like I'm having deja vu - I could've sworn I read this post already, but it was only JUST posted! haha Bankruptcy may be 'temporary', but to the people experiencing it, it might as well be called suicide. I hope I never have to go through that!

    Hope you, Steph, and both your families have a safe and happy new year!

    xx The Little Dust Princess

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  2. Very interesting, I really thought that filing would be considered suicide. I heard it is hard to file for bankruptcy. Its nice to know that after 10 yrs, no one will know about the filing.

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  3. I wouldn't consider bankruptcy as credit suicide but it will be my last resort if there's no where else i could turn to for help. I just think that bankruptcy would totally affect my credit and it will take 10 years to disappear from my credit history. Which also means it will take an awful long time for me to obtain credit from banks, and credit card companies. Hopefully i'll never have to experience this.

    Happy New Year, Minh!

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  4. Happy New Year to Arrow Law Group! :) Best of luck you to you this year.

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  5. I would just rather not be in such serious debt not matter what T-T makes life much less stressful

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  6. Wonder if the credit counseling is working...guess we'll find out in 2 years. Happy New Year!

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  7. Thank you for clearing up the misconception! I seriously thought bankruptcy was the end of your life and credibility. Your blog is top notch informative!

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