Frequently Asked Questions (FAQs)
Dispelling some myths about credit scores and bankruptcy.
As a long-time practitioner of bankruptcy law, I’ve had one particular question come up thousands of times: “How will filing for bankruptcy affect my credit score?” The question, posed by clients contemplating the pros and cons of filing for bankruptcy, reflects several different competing concerns.
The fact that the question about credit ratings is the number one question I get asked time and again is a testament to the idea that Americans are obsessed with credit. There’s no denying that Americans have become highly dependent on credit and paying cash for anything is simply a relic of the past. While the ‘hows’ and ‘whys’ of how credit became so critical in the U.S. economy is fodder for another day’s topic, for now, the basic assumption that we can probably all just agree on is that Americans are generally just ‘credit-crazy’
If it’s on it my credit report than it must control everything right?
The very first shocker to my clients is the notion that the courts and the credit bureaus are not related! Whenever this is stated to the client, they invariably give me a confused look, “Huh? Are you sure?” Yes, I am.
What gets filed and recorded in state and federal courts actually have important legal implications for the client. Credit reports, on the hand, are simply shorthand ways for potential lenders to assess the risk of lending money to any particular consumer. That’s truly the sole purpose of credit reports. And contrary to popular belief, credit reports are NOT perfect – they rarely are. Credit reports can be rife with errors or be woefully incomplete. Not all creditors report to the credit bureaus and of the those who do report, inaccuracies can be a common problem.
It not just a little ironic that many of my clients have seemed to be more stressed out over their credit score than the potential implications of getting sued. One has tremendous legal effect while the other does not – and yet, often clients will agonize over the credit score rather than the lawsuit. I’ve had many clients even refer to the lawsuit as a “letter” from the creditor. No, it is NOT just a “letter” – it is a SUMMONS and COMPLAINT. And if it is not handled correctly, there will be very costly and dire consequences to the client. These consequences can include wage garnishment, bank account levies and lien recordation against real property the client may own. These are the very real, very expensive consequences of lawsuits. …”But what about my credit score?”
Will a bankruptcy filing ruin my credit forever?
A client should be worried if they’ve been served with a summons and complaint. Failure to answer complaints or handle them appropriately can lead to default judgments. And judgments, whether by default or verdict, have severe legal consequences.
While it is true that a bankruptcy filing can be noted on your credit report, this does necessarily mean that you are unable to obtain credit (loans) when you’re not in an active bankruptcy. Again, a credit score is simply a short-hand way for a particular creditor to determine whether they want to lend to you – and they are completely free to do outside a bankruptcy. For that reason, other factors such as your income, length/stability of employment and debt-to-income ratios are all significant factors that affect this consideration.
It is also my personal opinion that creditors who see that you’ve filed bankruptcy and obtained a discharge may be also take that into consideration – you no longer legally owe on the other unsecured debts that were discharged in your bankruptcy – thus your chances of paying back on their loan should be better.
It’s also my guess that creditors may also believe and hedge that you’re looking to rebuild your credit after a bankruptcy – another factor supporting the idea that you’re more likely to pay them after a bankruptcy filing rather than before filing.
Further, clients sometimes forget that their credit has already been adversely impacted by derogatory notations such as missed or late payments, having too much lines of credit open or having a high debt-to-income ratio. The credit score for these clients has already been negatively impacted — without a filing bankruptcy.
And yes, you can rebuild your credit. Many of my clients seem to have been able to do so without too much trouble.