IS THERE LIFE AFTER BANKRUPTCY?

How does Bankruptcy Effect on credit rating

One of the most common worries of individuals contemplating on filing bankruptcy is, "What will it do to my credit?"

Filing bankruptcy is obviously negative on one's credit history, and will almost certainly find its way onto consumer credit reports prepared and disseminated by the major credit reporting bureaus. Under the Federal Fair Credit Reporting Act this event may remain on the person’s credit report for a period of 10 years from date of filing the case.

One slight but positive result of the bankruptcy is that delinquent accounts showing up on the credit report must show the amount owed as "0."

In the real world the large majority of individuals who are driven to the point of filing bankruptcy already have a terrible credit report due to tardy payments, non-payments, judgments and liens. Thus, as a practical matter adding a bankruptcy to an already sorry looking credit report will not damage the person's credit any more than the damage already done.

In the opinion of many credit professionals, filing bankruptcy, in the right circumstances, help prevent even worse things from appearing on the credit report. For example, having a judgment or tax lien appear on the credit report is worse than a bankruptcy, because credit grantors know that the individual's wage or salary remains subject to levy to satisfy a judgment or tax lien, this making such person a bad risk in terms of new credit.

Filing bankruptcy may in many instances actually improve one's credit worthiness in the eyes of many credit grantors. This is because many credit grantors realize that erasing a substantial amount of consumer debt frees a considerable amount of the person’s disposable income and makes it much easier for the person to make the payments on subsequently incurred credit obligations. They know that the credit applicant cannot file another Chapter 7 bankruptcy for six years.

Can a person who has just filed Chapter 7 get credit during the next ten years?

In answering this question the most important thing to keep in mind is that the ability to obtain credit is not a black-or-white proposition. It is not all-or-nothing. Thus, one does not either has credit, or not have credit. In the real world, the ability to get credit is fainter, and there is a huge gray area between yes and no.

The fact of the bankruptcy on the credit report will be a major impediment to obtaining new credit in any situation in which the credit grantor relies exclusively or substantially on the credit report. Thus, applying for a new unsecured credit card, a retail store's proprietary credit card, applying to rent an apartment, applying for a lease for an office, or applying for a commercial loan from a bank will be problematical due to the bad credit report.

However, if one thinks about it, what most people need is what could be called "working credit." Most people really only desire or need credit in three categories; 1) a mortgage loan to buy a home; 2) financing for a car; and 3) several major credit cards for such things as groceries, gas, car repairs, travel, birthdays and Christmas, and emergencies.

It is possible to obtain all three of these things notwithstanding a bankruptcy on the credit report.

In the mortgage industry there is a general rule of thumb that a bankruptcy over two years old should not be considered in reviewing a mortgage loan application.

In regard to vehicles, all one has to do is look at the Sunday morning classifieds to find an abundance of car dealers and finance companies making a specific pitch to people with bad credit or bankruptcies; while such offers usually include higher than average down-payments and interest rates, the point is that car financing is available.

Major credit cards are available if one is willing to post some money as security. In fact, a huge industry has grown up around these cards, called secured credit cards. These are Visa or MasterCard, and are as valid as any regular, unsecured credit card. With one of these cards, one has no need of applying for a retail store credit account, since all retailers take major credit cards, including secured cards.

The one most common area of frustration for people with imperfect credit is renting an apartment. Apartment complexes are typically run by professional management people who weigh credit reports heavily in the balance. A bankruptcy on the credit report will be a roadblock here, and it may take many applications to various apartment complexes before one is finally able to sign a lease.

To summarize, filing bankruptcy will be a negative on any credit report but will in most cases be no more damaging than the damage already done by a poor payment history. Obtaining credit after bankruptcy for major items such as mortgagees, cars and major credit cards is possible. In the real world, the ability to obtain credit is largely a function of the individual's energy, hustle, and alertness to credit opportunities.

Discrimination against bankrupt individuals

While discrimination against a person in bankruptcy is allowed in the consumer credit industry, the Bankruptcy Code specifies that a governmental entity is prohibited from discrimination against the person, or solely on account of filing a bankruptcy, in the area of government licensees, permits, charters or other similar matters; private employers may not refuse to hire, fire, or discriminate against an employee solely on account that  they have filed bankruptcy ; and no student loan program may deny an application solely on account of the applicant's (or person associated with the applicant) having filed a bankruptcy.