Interviewer: Are there other misconceptions about bankruptcy?
Chris: One of the big misconceptions- which I think is a fear factor by credit card companies and other creditors to get people to pay bills they can’t afford- is the effect on your credit report. Most times, people come in and say, “I don’t want my credit to get bad.”
Well, a lot of times your credit is already bad. This is because you have been missing payments. You have not been able to keep your budget straight because of all the extra bills you acquired over the years. So, bankruptcy is not necessarily going to make your credit report much worse than it already is.
No way am I saying that bankruptcy has an immediate good impact on your credit report, but it can help eliminate debt. One of the criteria I always find when I go to buy a car or even get a house is they look at your credit report and compare your income to your debt.
If you have not filed for bankruptcy but you have $50,000 worth of credit card debt and make $50,000, you might have problems getting loans. Whereas, if you have a bankruptcy on your record but you have no debt and you have that same job for $50,000, that might help you with your debt to income ratio.
So a common misconception is that bankruptcy is the black eye of your credit report. I disagree with that. I do not give loans to people for a living, so everybody has their own opinion on it. However, just looking at the numbers, a person’s debt to income ratio after filing bankruptcy can improve greatly.
Interviewer: There is a misconception out there that once you file bankruptcy it scars you forever. For credit purposes, how long does it last: seven years, 10 years, 13 years?
Chris: The general rules are that Chapter 13 will be on there about 8 years; whereas a Chapter 7 will stay on there up to 10 years. Here’s the real lowdown: The further you get away from the bankruptcy, the less of an impact it has on your credit report.
I very often get calls from clients who are in bankruptcy or have just gotten their discharge. They are getting mail asking them to buy a car or giving them a credit card. So you will get offers for those items, and time heals. Also, as you get further away from your bankruptcy discharge, your credit will continue to get better.
Let’s just go back to the $50,000 worth of credit card debt. Suppose you do not do anything about it. If you have $50,000 of credit card debt on your credit report now, three years from now you still have $50,000. So you are really not making much progress.
Interviewer: We are not lenders. However, suppose we have two people. One filed bankruptcy a year and a half ago and has no debt, and the other one has $50,000 in debt. The one that filed actually looks better to me.
Chris: You are right. Here is another thing. Creditors are not our friends. They are business people. In bankruptcy, you are limited on how often you can effectively file bankruptcy and get that discharge.
So you are a lender, and I come to you a year after I filed bankruptcy. Scenario A, I come to you. I have $50,000 worth of credit card debt and I make $50,000. Scenario B, I come to you and I just got out of Chapter 7 discharge. So I make $50,000 and have zero credit card debt, but I have the bankruptcy on my credit report.
In Scenario A, you are looking at me saying, “I am just going to be another lender adding to your $50,000 worth of debt. At some point in time, are you going to stop paying me? How are you going to choose me? Are you going to choose me over other guys?”
In scenario B, I have no other creditors or very few creditors; maybe a house note. You feel a lot more comfortable as a lender saying, “This guy doesn’t have anyone else he owes money to, so it won’t be as hard a choice who he pays.” The other reason the lender might like you in scenario B better is because you are barred from filing an effective bankruptcy, for a certain period of time.
In scenario A, the lender may think this guy is only a year, or a few months away, from having to file bankruptcy; whereas in scenario B they know. Lenders know the law. This guy is not going to be able to get a discharge for maybe eight years or so. So from a selfish standpoint, lenders will like you in scenario B just because it is in their better interest for getting paid.