Bankruptcy Discussion

A credit score is a numerical expression based upon a statistical analysis of a person’s credit files, to represent the credit worthiness of that person, or so says wikipedia. FICO is a publicly traded corporation (under the ticker symbol FICO) that created the best known and most widely used credit score model in the United States.

When you file a bankruptcy petition, you are asking the bankruptcy court to apply the bankruptcy laws to your situation, basically in one of three ways: (1) to discharge all your unsecured debt immediately (chapter 7), (2) to force your creditors to accept 100% payment over a period of time (chapter 13 100% plan), or (3) to force your creditors to accept payment over a period of time with your unsecured creditors receiving less than 100% of what is due to them (chapter 13 partial plan).

A chapter 7 bankruptcy stays on your credit report for about 10 years after filing. A chapter 13 bankruptcy stays on your credit report for about 7 years after filing. The idea is that you put more effort into a chapter 13 bankruptcy to pay back creditors, so you are rewarded by having the bankruptcy removed from your credit report in less time.

Can you and how do you rebuild your credit rating after a bankruptcy filing. Yes you can rebuild. That is the whole point of bankruptcy. In fact, many of my clients, in our initial consultation, will convey worry that a bankruptcy will hurt their credit rating. However, after they make their worry known, they quickly realize that their concern is, as Mr. Spock might say, “quite illogical”. Most often, if you’re looking at the prospect of filing bankruptcy, your credit rating has already taken a beating. I can’t say for certain how a particular credit rating agency will react to a particular bankruptcy, but I can say that wiping the slate clean of unsecured creditors is a step in the right direction.

My advice as to how to start rebuilding your credit rating after a bankruptcy is to fill out the next credit card application that comes in the mail (and they will come). The credit card companies and banks need you more than you need them. They might approve you for a $500.00 limit. Before I start getting attacked for advising to take another nip of the dog that bit you, there are two warnings I have. First, if you have an uncontrollable compulsion to use credit cards (like a gambler in a casino), then do not apply for another credit card and stick with a debit card. Secondly, if you do get approved for another credit card, do not carry a balance and pay finance charges. Pay off the balance at the end of each month. If you can’t stick to that plan, don’t get back into this dangerous game.

Some, especially people in the lending industry, may tell you to carry a balance and keep your payments current. This is technically the better way to build your credit rating more quickly, however, I do not condone playing this game and paying finance charges. My way will build your credit rating also. Slow and steady will win the race every time.

Finally, your credit score will affect the rate you get on your next auto loan or whether or not a life insurance company will issue you a policy, but do not judge yourself by your credit score. Enjoy your time off the credit grid. Maybe you’ll get used to it. Too many Americans are in too much debt, and the stress of carrying a load of debt is no good for your life on any level. Let bankruptcy be a fresh start and a respite for reflection upon life’s priorities.