We are continuing our article series describing challenging customer situations in debt collections. Perhaps, the main reason why we shifted our focus from collectors to consumers is that consumers may be misunderstanding some aspects of the collection process, which, in turn, may complicate collections for collectors.
So now, we are going to dispel another set of myths persistent in debt collections; the disastrous, irrevocable consequences of bankrupt accounts.
Things are Better than You Think! Answering your Stereotypes about Bankruptcy
Bankruptcy is not that Bad for Your Credit Score
The thing most people don’t know is that filing for bankruptcy can give them a fresh start since it clears most of their debts, if not all of them. Fearing consequences, particularly of the damage that bankruptcy can cause for their credit, they often hesitate to do it.
Yes, your credit score may fall significantly once you declare yourself bankrupt. However, it depends on where your score is prior to filing for bankruptcy. As proven by many experts, recovering a credit score is faster for those who file, compared to those who don’t. Simply put, if you don’t file for bankruptcy right away, you may be in debt longer and face more credit report penalties.
Your Bankruptcy Filing Record is Not Eternal
When you file for bankruptcy, the filing gets reflected in your credit report within two days. Also, mind that its presence in your credit report is limited in time and varies by section. However, in most chapters, it lasts up to 10 years with the only exception for Chapter 13, where it remains for up to 7 years.
Delinquent Accounts are Not the “Verdict” for your Credit Report
At the time of filing, the account statuses will be “included in bankruptcy.” However, after the discharge, the status will be “discharged for bankruptcy,” with a balance of $0. That status and related accounts remain on your credit report for seven years from delinquency. Even if your bankruptcy record lasts for ten years, the associated accounts will remain in the report for seven years.
Although your credit report will have the “included in bankruptcy” status at the time of filing, your payment history won’t be updated during that period, and no data will be reported to credit bureaus. This happens because lenders avoid court discharge violations during your filling period, so they don’t report your payment history.
Bankruptcy is Way Less Painful for Accounts with an Average Credit Score (or Worse)
As we said earlier, the actual damage your bankruptcy may have on a credit score depends on your credit score before the bankruptcy. This has also been statistically proven; according to the FICO report, the accounts that have a high credit score are affected the most. The ones with an excellent credit score (780) have a decline of around 240 points, while the ones with a fair credit score (680) have only 150 points in decline.
Yes, in both these cases, you will have a bad credit score. But the ones with a stellar or good credit score have more to lose. And even if your credit score is bad already (meaning that it is less than 500 points), the damage may not be that bad. Remember, FICO scores typically go down to 300 points, yet, most scores rarely go down below 500.
Getting a Mortgage is Challenging with a Low Credit Score
Credit scores of 550 or lower are considered too low to qualify for the mortgage. Yet, with a score of 550, you are close to the qualification. Under FHA financing requirements, scores between 560 and 600 are suitable candidates for a mortgage.
Mind that bad credit scores come with their own limitations, such as lower credit card limits, higher interest rates on financing, less ability to qualify for car loans, mortgages, and other attractive types of loans. To summarize, bankruptcy is bad for your credit, but, again, it is not that bad. After all, there are financing options targeting consumers who have survived bankruptcy.
Fresh Start in 6 Steps: Your Action Guide to Overcome Bankruptcy
Well, you’ve been discharged. What now, go down into depression? We have better advice for you; rather, you can start rebuilding your credit right away! Although the bankruptcy will affect your credit report for the next 7-10 years, your positive actions can improve the current credit score and, therefore, your public record.
Enough with words — here’s what you should do right now.
- Plan and allocate the budget that will cover all your expenses, to avoid credit card debt.
- Make paying off debt and planning emergency savings fund your top priority — this way, you will protect yourself against unplanned expenses and emergencies.
- Consider debts that are left after the discharge and pay them off in time (or asap if they are past due).
- Order a secured credit card that you will open with a small cash deposit.
- Each month, make only the charges you can pay off in full.
- If you are OK with that, add more accounts if you need them but only if you can afford to pay off all the balances each month.