The “Brutal Truth” About What Filing Bankruptcy Does to a Consumer’s Credit

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One of the most frequent questions I have been asked in my 15 years (so far) of representing consumers as a bankruptcy attorney is some variation of the below:

• Will I never be able to get credit again?

• Will bankruptcy filing trash my credit permanently?

• Won’t I be better off signing up with a debt management service, rather than filing for bankruptcy protection?

• But my parents told me that only crooks file for bankruptcy…. 

The fact is that the majority of the people who come to see me have already suffered major negative credit events, such as late pays, credit line charge offs, even debt collection law suits. So the short answer most of the time is: filing for bankruptcy won’t make things anything worse than they already are. And it can legally stop wage garnishments, bank account attachments and collection activity like phone calls and dunning letters.

Consumers are frequently surprised to learn that, rather than “trashing” their credit, a bankruptcy discharge actually makes it possible to start over again and re-build their credit. They are also surprised when, after they file, car dealerships, furniture stores and credit card companies stuff their mailboxes with solicitations to please come in buy something, on credit, specifically because they have just filed for bankruptcy.

But rather than take my word for it, let’s see what a real consumer credit expert has to say about the subject.

Liz Pulliam Weston has devoted her entire career to analyzing consumer finance issues: as a published author, syndicated newspaper columnist and frequent guest commentator on network television and National Public Radio (NPR). Here is one of her newspaper columns, reprinted with permission, which sums this whole issue up quite nicely:

“Question: Several years ago I was hospitalized three times within an 18-month time span. During that time I was out of work, got divorced, lost my house and collapsed financially. I was well over $75,000 in debt in credit cards alone.

Fortunately, my health was restored and for the last four years I’ve had a great job. I am enrolled in a debt-management program with a consumer credit counselor and have never missed my $1,800 monthly payment. Within the next 17 months I will be debt free.

Recently, I checked my credit score and found that it is still awful. I had hoped someday to rent a nicer home or purchase a car on my own with a reasonable interest rate, but I’m wondering if that will ever be the case. (A parent co-signed my current auto loan, which I’ve always paid on time.) Will my credit score ever improve or am I not living in the real world?

Answer (by Liz Pulliam Weston): Here’s the brutal truth: Many people who file for bankruptcy are able to boost their credit scores to near-prime levels within three to four years of their cases being discharged. Instead of using their money to pay old bills, they use it to make down payments on homes or cars and get loans that help rehabilitate their credit.

People who try to pay off their debts instead of filing for bankruptcy often find it takes much longer to restore their credit. Lenders are wary of them because of the huge amounts they still owe (and because they still have the option of filing bankruptcy, whereas those who have already filed are generally prohibited from filing another case for several years). Participating in a credit counseling debt-repayment plan can make lenders leery as well.

That’s not to say you made the wrong decision — far from it. The lessons you learned about credit and living within your means will serve you the rest of your life. You had the means, the ability and the tenacity to pay what you owed, and should be congratulated. Now you’ll need to apply the same resources to improving your credit.

If you can get your debt-management program paid off early, do so. Although the leading credit scoring model, the FICO, treats credit counseling as a neutral factor, you could still run into lenders who are unwilling to let you borrow while you’re participating in the program.

If you still have a credit card available to you, charging small amounts each month and paying those off promptly can help build your score. If you no longer have any cards, look for a secured card that gives you a credit line equal to a deposit you make with the issuing bank. Just make sure the fees are reasonable and that the issuer reports to all three credit bureaus.

Your car loan is already helping you rebuild your score, whether you can tell or not. If you continue making those and all your other payments on time, you should begin to see a gradual improvement in your scores.”
Liz Pulliam Weston is the author of the books “Your Credit Score” and “Deal With Your Debt,” both published by Prentice Hall. Send questions to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or visit http://www.lizweston.com . Distributed by No More Red Inc. Used by permission.

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