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YOUR CREDIT SCORE BEFORE AND AFTER BANKRUPTCY

Many people have the idea that after filing bankruptcy, their credit is ruined and they will never have a decent credit score again. This is not guaranteed to be true. Whether it happens may depend on you.

Even if you vow to never use credit again after filing bankruptcy, you need a good credit score. Many insurance companies consider your credit score when deciding how much to charge you! You can save yourself a bundle by guarding your credit score.

To intelligently plan your credit future after bankruptcy, you need to understand a little about how credit scores usually work. There are three main credit bureaus: Equifax, Experian, and Transunion. Each of these gives you a credit score, which are usually different though not far apart. You (or prospective creditors) can also obtain a single score which takes all three bureaus into account.

WHAT DETERMINES YOUR CREDIT SCORE There are many factors which go into determining your credit score. First, there are some general factors. Do you own or rent? How long have you lived at the same address? (Someone who has had five addresses in three years is generally assumed to be less reliable than someone who has had the same address for fifteen years.) How high a percentage of your income is taken up by your mortgage? A mortgage payment that is 60% of your income will count against you; one that is 25% of your income will not. Likewise, how long have you had the same job? And, very important: How close are you to your borrowing limit on each account? Generally speaking, it is best to borrow no more than 15% to 25% of your borrowing limit on each account. Maxed-out accounts count significantly against you. There are many other factors, but this gives you an idea.

THE BAD NEWS Next, each month that you are reported as paying late (or not paying at all) on an individual account brings your score down some. For example, if you are late in paying on two revolving charge accounts, and pay on four others on time, it will bring your score down some. If you do not pay on three accounts at all, but pay on three others on time, it will bring your score down more. If you do not pay on six accounts at all, it will bring your score down a lot more. Most credit cards, etc. report every month to all three collection agencies as to whether you are up to date or not. Each and every month you are late or do not pay stays on your permanent credit record for seven years after it is first reported (a separate black mark for each month, for each account). After seven years, it comes off the record. So, if you get behind on an account and stop paying for three consecutive months, seven years later one negative report will come off your report for each of three months in a row. (Most medical bills are not reported to the credit bureaus until they reach the next stage, below.)

Any collection efforts are even worse on your score. If a creditor sends a bill off to a collection agency, that hurts your score a lot. So does each successful collection effort – being sued and getting a court judgment against you hurts your score more, and so does a garnishment or lien to attempt to collect on a judgment. All three credit bureaus check all courts at least once every three months, and record each of these “public record" events. Again, each of these stays on your permanent credit record for seven years after it is first reported. After seven years, it must come off the record.

Finally, major negative events hurt your credit most of all. Foreclosure on your home or other real property, repossession of a vehicle, or bankruptcy each cause a major decrease in your score. (A “deed in lieu of foreclosure" or “short sale" also counts as a major negative event.) Also, bankruptcy can stay on your record for ten years! But it should be noted that Chapter 13 bankruptcy does not hurt your credit as badly as Chapter 7 bankruptcy. So much for all the bad news.

THE GOOD NEWS (SUCH AS IT IS) But it’s not as depressing as it sounds. A negative mark – whether relatively minor, such as a missed credit card payment, or major, such as a foreclosure – may stay on your record for seven years (Chapter 7 bankruptcy stays for ten years), buthow much it counts against your credit score decreases every year.So, a three-year-old negative report does not count nearly as much against you as a similar one-year-old negative report; a six-year-old negative report does not count nearly as much against you as a similar four-year-old negative report; and so forth. Also,accounts paid promptly build your score up every month.Just as every month an account that is late counts against you, so every month it is paid on time counts in your favor, though one negative mark can wipe out many good marks.

WHAT GOOD THIS KNOWLEDGE CAN DO YOU Many just throw up their hands and say, “What’s the use – my credit is already ruined for years." But this is exactly the wrong way to look at things. There are at least two lessons you can take away from this discussion:

1. STOP THE HEMORRHAGING AND RESCUE YOUR CREDIT SCORE AS MUCH AS POSSIBLE. When someone has had a major accident, before you can treat the wound or give antibiotics or a vitamin shot, you muststop major bleeding first.Likewise, when you are in financial trouble, you need to stop the major inevitable decreases in your credit score.

Let us assume that a family with decent credit which had its income cut to the point that they can no longer pay all their bills takes a long, hard look into the future. They see that with the income cut,starting this monththere is no way they can pay all their bills on time, so they promptly go see a good bankruptcy attorney. They file bankruptcy.Immediately, all lawsuits, garnishments, foreclosure, and repossessions are stopped.The negative credit reporting ceases.If they file Chapter 7 and have kept up with their mortgage payments and do not have over $43,000 equity (Georgia limits) in their house, there is no foreclosure. If they have not kept up their mortgage, and/or they have more than $43,000 equity in their house, perhaps they can file Chapter 13 and keep their house, if they have at least one income. Either way, when the bankruptcy is over, they start over with a clean slate.They do not have many months of slow or no payment on their credit report; no court judgments, no garnishments, no repossessions, no foreclosure;and they avoided many rattling months of stressful calls and letters from collection agencies, which would have made them hesitate to answer their phone or even look at their mail. True, they have a major hit against their credit – the bankruptcy. Butbecause they filed bankruptcy promptly, before their credit score began a major inevitable, irreversible decline, their overall credit score is not depressed nearly as much, and as a result their recovery is much quicker.

2. THERE IS LIGHT AT THE END OF THE TUNNEL. After your bankruptcy (wherever your credit score ends up) make absolutely sure you never abuse credit again. Pay every bill promptly, and if you do not have cash, do not buy it. If you were careless before the bankruptcy, learn from your mistakes.

Believe it or not, most people coming out of bankruptcy receive offers of new credit cards. Why? Very simple: 1) They carry high to very high interest rates; and 2) they know you can’t file bankruptcy and get a discharge again for years.

If you are certain you have the self-discipline to control your use of credit absolutely,go ahead and take a couple of the best of these credit card offers– not so you can go on spending yourself into trouble, but rather so you can begin rebuilding your credit. Here’s how: With one of these new cards, buy all your gasoline regularly, andnothing else.Then pay the balance in full promptly most months, a few days before it is due, using the money you would have used for gas anyway. Do not pay the balance in full every month; every few months just pay the minimum balance for a month or two, then pay it all off the following month. Even at a high interest rate, this will not amount to much extra. This is to make sure they do not cancel the credit card due to never making any money off you.By doing this, you will create a good regular payment record,and your credit reports will say “pays as agreed" or the like.

With another of the new cards, only buy the groceries you would ordinarily buy, and promptly pay it, too, every month, paying only the minimum once in a while, then paying it off regularly. Two cards reporting as “paid as agreed" every month, without any more negative reports since the bankruptcy, will gradually bring your credit score up, and the amount the bankruptcy damages your credit will get less and less every month. Regular mortgage payments will also have a powerful effect on your score.

We know of cases where people had good credit but had a major income decline, and then filed bankruptcy promptly before their credit score could decline, and had a credit score in the mid 700’s and were able to buy a house only two years later! Yes, there is light at the end of the tunnel; when you get a fresh start from your bankruptcy, use it wisely. Keep plugging away; pay promptly, use credit wisely to build up your score, and sooner or later, you will be back where you belong. Walt Disney, Donald Trump, and Henry Ford all went bankrupt at one time or another, and they rebuilt their credit. You can too.

© Jeff & Patty Williams 2012

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