San Diego Bankruptcy Lawyer | Will Bankruptcy Ruin My Credit Rating
Will bankruptcy forever ruin my credit rating?
First of all, if you are considering bankruptcy, your credit is probably not all that good to begin with. Secondly, most clients report their credit rating scores actually IMPROVE upon filing their case! In fact, if someone is overwhelmed with debt, bankruptcy will usually improve a person’s Fair Isaac Corporation (FICO) score within 18 months to two years. It is true that the bankruptcy filing can legally remain on a credit report for up to ten years under the Fair Credit Reporting Act. However, it tends to have a positive rather than negative effect over the long term.
Here is why. If you have ever applied for a mortgage, you might remember the loan officer discussing “debt ratios,” which relate to the percentage of available income that an individual has to service the debt that is being applied for. In the case of a mortgage, for instance, many lenders want total debt obligations (including mortgage, credit cards, other debt, and car payments) to be less than 40 percent of the borrower’s gross income. Although not discussed as openly in other credit transactions, a person’s total debt is always considered and factored into the decision to grant credit. The more debt you have, the less likely you are to be able to manage even more, which is directly reflected in your FICO score. Second, if you file for Chapter 7, for instance, and receive a discharge, you are precluded from filing another Chapter 7 and receiving a discharge for eight years. For that reason, a person is often a better credit risk the day after he files bankruptcy than the day before. Why? It is because if a person is overwhelmed with debt, she is a bankruptcy waiting to happen. However, after she files bankruptcy, there is no longer a significant risk, at least for another eight years. Creditors know this. In fact, many people have little difficulty obtaining a car loan (a five to six year note typically) immediately after they file for bankruptcy. Finally, creditors and the FICO credit score system look at the overall picture of a person rather than just one event. With good income and very responsible use of credit, a FICO score of over 700, while not typical, is possible within two years of a bankruptcy discharge.
Clients typically start receiving multiple offers of credit about 90 days after filing Chapter 7. Credit card companies begin to see them as inviting targets for credit card solicitations because they recognize the filing individual’s debt-to-income ratio has gone to zero after filing and that the filing individual is prevented from filing another Chapter 7 for eight years.
So, bankruptcy can actually become a tool to rebuild a credit rating.
