What Will A Bankruptcy Do To My Credit Score?

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Over my many years of bankruptcy consultations I hear the same questions come up over and over again.  “Can I keep my car?  Can I keep my house?  Will this affect my spouse?  Do have to list all my debts?”  But the one question that probably comes up the most is, “how will a bankruptcy affect my credit?” I have to answer this with a question, “well, how is your credit now?”  In the vast majority of cases, people are coming to me because their credit situation is already pretty bleak.  There may be unpaid debts that have fallen into the hands of debt collectors.  Some of these creditors may have hired lawyers and filed lawsuits.  Those lawsuits might have ended up as wage garnishments, asset seizures, or foreclosures.   In situations like those I have just listed, a bankruptcy might have little to no effect on your credit score, but it might lead to a significantly improved score.  I am always amazed at how many myths are commonly believed by the public about credit and bankruptcy.  Here are three myths I come across often:

Myth #1 – Bankruptcy always hurts your credit
If you have awful credit to begin with and a lot of debt you can’t repay, I assure you that bankruptcy will not “hurt” your credit.  No one is lending to you right now, with or without filing for bankruptcy.  However, a bankruptcy might give you the fresh start you need to finally build up some credit.  Look at the examples of “Mr. A” and “April” below to illustrate my point.  “Mr. A” recently lost his job.  He has $40,000.00 in credit card debt and he has no conceivable means to pay it back.  Once he misses a few credit card payments, his credit score will go into the tank and the interest rates on his cards will skyrocket.  Banks always jack up your interest rates when you miss payments, as if they will somehow have an easier time collecting MORE money than the lower interest rate you are already unable to pay.  So now, Mr. A has no chance of catching up.  What would bankruptcy do to his credit?  Well, his credit is presently terrible and there is very little chance of it improving any time soon.  If he were to discharge his debts in a Chapter 7 Bankruptcy, he will get the opportunity to start over.  Once he lands another job he can slowly start to build his credit score by getting one credit card, using it a little every month, and paying it off every month.  In the case of Mr. A, bankruptcy was an opportunity to significantly improve his credit score.  Had he not filed for bankruptcy, those unpaid debts would have been a complete hindrance to receiving any kind of credit for a VERY long time.  People are amazed at how quickly your credit can bounce back after a bankruptcy.

The following is a true story (name changed to protect her identity).  April came to me because she lost her job in 2008.  She was living within her means, but once her income stopped, she was unable to manage her credit card debt along with her student loan debt.  We filed a Chapter 7 Bankruptcy for April and the case progressed perfectly.  Her credit card debts were gone and she was able to put her financial life back together.  She got a job and started growing her credit score through the use of a secured debit card at her bank.  April was so diligent in improving her credit score that 14 months after her bankruptcy case was over, her FICO score was just below 700.  Within 2 years of her bankruptcy case, April was able to get financed to open a bar in St. Petersburg, FL.  She financed a liquor license, a build-out of the premises, and all of the furniture.  You ever see those weight loss commercials where they have the “before and after” pictures, and at the bottom it says “results not typical”?   I should add that the example of “April”  is not a typical result, but it is possible, and I can attest that I saw it firsthand.

Myth #2 – “Bankruptcy wrecks your credit for 10 years!”
You ever hear this one?  This is a very common misconception.  While it is true that the fact that you filed for bankruptcy will remain as public record for 10 years, it will certainly not affect your credit  nearly that long.  As you can see from the example of “April” above, you can start rebuilding your credit immediately after you receive your Discharge and your case is concluded.  While you certainly do not have to wait 10 years to have good credit again, there are a few timelines to consider.  Angela Colley, a journalist in New Orleans, wrote a very informative blog post about how to buy a home after bankruptcy on Realtor.com – http://www.realtor.com/advice/finance/buy-home-bankruptcy/.  As you can see, you can reasonably start applying for a mortgage around 2 years after your debts are discharged in bankruptcy.  There is no mythological 10 year penalty box where you are unable to get credit.

Myth #3 – “I don’t want to file because I don’t want to hurt my spouse’s credit”
Married couples are not required to file joint bankruptcies.  If one spouse files, the other is not required to.  One spouse can maintain perfect credit while his/her spouse files for bankruptcy.   It is important that both spouses are informed about the bankruptcy laws and how marital property will be treated by the bankruptcy court, but from a credit standpoint, one spouse’s filing will not impact on the other spouse.  That being said, if both spouses have a joint debt and only one spouse discharges that debt in bankruptcy, the non-filing spouse will still owe that debt.  John Ulzheimer, the president of Consumer Education at Smartcredit.com, wrote the following blog article about what happens when one spouse files for bankruptcy and the other spouse does not – https://blog.mint.com/credit/what-happens-to-my-debt-if-my-spouse-files-for-bankruptcy-0413/  As you can see from the article, there are positives and negatives to only one spouse filing.  This is something that would have to be discussed in a no-cost consultation, either in person or over the phone.

How can I separate fact from fiction?
In order to learn the truth about the bankruptcy myths that seem to run rampant, you will need to consult with a qualified, experienced bankruptcy attorney.   Finding the right attorney is crucial, as your family’s money, assets, and future could be at stake.  I have been helping clients navigate the waters of bankruptcy since 2002 and our firm will always offer a no-cost consultation, either in person or over the phone.  If you are wondering how the bankruptcy laws might affect your particular situation, you should call me at 727-344-0123 or email me directly at jesse@berkmyer.com.

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