08 Jul Credit Reporting And Bankruptcy
Odds are if you are thinking about filing for bankruptcy protection your credit score is already pretty bad. In most cases once you miss two or more payments it can drop your credit score over 100 points. If you have a spotty payment history, high debt to income ratio and judgements showing up on your record, odds are your credit score is going to be pretty bad for some time.
It takes seven years for negative information to come off of your credit report, and judgements can show up on your credit for 20 years in Minnesota. All of these things mean you will not qualify for the best interest rates when you want to purchase a house or car.
The majority of the clients I see have a credit score on the Fico range of 500 to 600. This is because of the above issues. Once all this negative history has accumulated on a credit report, it is very hard to recover.
You of course can go in and dispute any inaccurate information in the credit report and that may marginally improve your credit score, but more than likely you will not see a big increase. When you have a below average credit score you will probably pay three to four times as much for credit as a perfect credit score, that adds up to thousands of dollars in additional interest payments.
My clients who have filed for bankruptcy protection often see their credit scores increase substantially a couple of years after filing for bankruptcy. This surprises most of the clients I talk to because they have heard that bankruptcy stays on your credit report for 10 years.
And they think it will ruin your credit for 10 years, in fact nothing could be further from the truth for most bankruptcy clients. It is true that it shows up on your credit report for 10 years, but the recovery happens within the first 3 years after the bankruptcy filing.
If you can imagine walking into a bank pre bankruptcy and asking for a loan, the banker will probably turn you down if you have missed payments and have a high debt to income ratio.
The banker will not want to stand in line with your other creditors waiting to get paid. In the same scenario after filing for bankruptcy protection and getting your discharge, your negative payment history goes away, and the debt to income ratio is good because the debt is gone. The banker would be more likely to give you the loan because you are now debt free and the banker will not have to wait in line with other creditors to get paid.
The credit score gives the bank an idea of how likely you are to pay back a debt, and with no other creditors you are much more likely to pay back debt, because you will be able to afford the payment.
I have clients calling all the time 2-3 years after their bankruptcy discharge requesting bankruptcy documents. They are requesting the documents because they are looking to buy or refinance a home. I ask them what kind of credit score do they have, and in most cases they have a score in the 700’s and are getting a good rate on a new loan.
This is much better than they would have done with all the debt and payment history before the bankruptcy. These clients have benefited from the fresh start that bankruptcy can offer to people and their credit score. If you have further questions about bankruptcy or credit scoring give our office a call.