As an Asheville bankruptcy attorney, I spend a large portion of initial consultations discussing the negative consequences of filing a case. One fear which is often overblown, in my view, is the effect of a filing on your credit score. Many folks incorrectly think they will not ever have access to credit again or will not have access to credit for 10 years.
Failing to Make Payments Ruins Your Credit Score
If you are having trouble paying your bills on time, your credit score is almost certainly damaged. Think about it from a creditor’s perspective. If you are not making timely payments on your current bills, why would a lender extend more credit on a new loan to be added to the other unpaid bills? 30 and 60 day late payments are reported to the credit bureaus, and frequently drop credit scores low enough to where a potential client cannot access credit on reasonable terms. In effect, when folks fall behind on their bills, lenders shut down access to more credit.
Bankruptcy Can Change This Cycle
Although a Chapter 7 bankruptcy case is a negative on your credit report, it also stops the negative reporting of 30 and 60 day late payments. By ending the cycle of negative reporting, you have the opportunity to rebuild your credit score by making timely payments moving forward. I frequently hear from clients who have higher credit scores within one year of filing a case. Oddly enough, bankruptcy is often a positive first step toward restoring good credit.
Credit Card, Car Loans, and Mortgages
Practically speaking, credit will be available at high interest rates as soon as your case is discharged. Many former clients report that credit card offers fill their mailbox after their Chapter 7 case is finished in 3 months. Car loans, if you are employed, are often available immediately from buy here/pay here dealers. The key to using this type of credit after a bankruptcy filing is not to sign up for deals which you cannot afford. Fannie Mae and Freddie Mac guidelines currently prohibit applying for a standard mortgage from a bank for at least 2 years after filing a bankruptcy case. However, after the mortgage crisis, folks needing my services generally are unable to qualify for a mortgage before filing their case anyway.
Paying Bills Moving Forward
The key to a successful bankruptcy case, in my view, is planning for how bills are going to be paid moving forward. Achieving a discharge is very likely if you qualify and are honest, but it makes no sense to file a case and then fall right back into the same debt trap. Imagine your credit cards, medical debts, personal loans, and any secured loans for property you intend to surrender going away. Could you pay your other monthly bills moving forward? If so, you may be good a candidate to file a case, and I would be pleased to speak with you during a free, initial bankruptcy consultation either in my Asheville office or over the telephone.
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