Some people worry that filing for bankruptcy will have a negative impact on their future credit. While that may be true, having a lot of delinquent debt can affect your future finances even more, says bankruptcy attorney James M. Wirth of Debt Line Law Office, based in Tulsa, Oklahoma. Here, he discusses why bankruptcy can often be the best option to help get you back on your feet, and on the path to rebuilding credit and a better future.
Many people are worried when they file for bankruptcy that this action will affect their future finances. Will it? The simple answer to that question is “yes.” However, contrary to popular belief, many people who are in need of Chapter 7 bankruptcy protection can benefit their credit through a bankruptcy, even though that may seem difficult to believe.
For example, most people filing for Chapter 7 bankruptcies are delinquent on many debts, and also have a lot of debt. As each month goes on, they are unable to pay these debts, so the delinquency gets longer. Filing a bankruptcy and discharging that debt can improve your credit in some cases because you will not have as much debt when creditors look at a debt/income ratio.
Improve Credit Quicker After Bankruptcy
Under the new Bankruptcy Code, you can only file a Chapter 7 bankruptcy once in eight years. So post-bankruptcy, your creditors will know that you will not be eligible for bankruptcy again in the next eight years. But that is not to say that a bankruptcy will magically fix your credit. A bankruptcy will remain on your credit report for ten years, but those who are in true need of debt relief can improve their credit more quickly after bankruptcy than if they had not done the bankruptcy in the first place.
If you’re going through a bankruptcy and are concerned about improving your credit, then it’s a good idea to reaffirm some debt. That debt could be the mortgage on your house or a car loan. That way, after the bankruptcy, you can immediately start making regular payments to start a good history after your clean-slate bankruptcy.
Here is an example – and if you look at things from the point of view of the creditor, you can see how this is the case: Someone who is in a position to file bankruptcy applies for a loan. The bank pulls his credit report and sees that he already has a substantial amount of unsecured debt. They can see that he is delinquent on a lot of his accounts, and they can see that his income is below the median level, which means that he can qualify for bankruptcy. They can also see that he has not filed for bankruptcy in the last eight years, so he is therefore eligible to file.
Things Look Better Post-Bankruptcy
In this type of scenario, it is very unlikely that the bank would give out a loan. However, looking at the same person post-bankruptcy, things might seem bit better. The bank will see that the person filed for bankruptcy; however, it will also see that there is not a lot of unsecured debt already. Therefore, the person’s debt/income ratio will look better. The bank will also see that there are not a lot of accounts that are delinquent right now, and the bank will see that the person requesting the loan is ineligible for filing for bankruptcy for the next eight years.
Each bank or creditor has its own criteria for determining whether to grant loans, but it is easy to see how in this scenario, the person might have a better shot at a post-bankruptcy loan than when he is struggling with a lot of delinquencies and debt. If in doubt, contact a qualified bankruptcy attorney for advice, as he can help you determine whether bankruptcy is really the best option for you.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.