There is a misconception that trying to pay your bills and avoiding bankruptcy is the best way to go. For many people, there is a personal or societal stigma attached to filing for bankruptcy. However, avoiding bankruptcy and struggling to pay your bills is not the best way to go when it comes to accessing new credit.
This Fox Business article about How Avoiding Bankruptcy Can Backfire explains the results of the Federal Reserve Bank of New York report on the effects of the 2005 bankruptcy reform. In the Federal Reserve report, it reviewed the changes made to the bankruptcy laws and its effects on the various credit states of a selection of Debtors.
As the article highlights, people whose bankruptcy case was finished had access to more new lines of credit than those who did nothing. As the report concluded, the access to credit was much higher for people who filed bankruptcy. If rehabilitating your credit is important to you, then bankruptcy is better than doing nothing.
There is a perception the filing for bankruptcy will cut off or restrict your access to credit. This is not true. In fact, the opposite is generally true. As a result of filing for bankruptcy, you will no longer owe any other unsecured creditors. From a creditor’s standpoint, you are actually a better credit opportunity than someone who still owes a multitude of other debts.
We know this to be true in our office. In fact, the access to credit can come too quick and be too much for someone who just filed bankruptcy. We warn our clients that after they receive their discharge, that they will receive offers for new credit cards, new car loans and even furniture loans. Bankruptcy is a matter of public record, therefore a creditor wishing to solicit someone can easily obtain that person’s information from those records. The creditor uses that to solicit you for new offers. But be careful, just because you CAN access new credit does not mean you SHOULD take every credit offer that comes along. Not all offers are good….
Please read our blog post Be Careful of Your First Credit Card After Bankruptcy for a more in-depth discussion of this.
Although it varies from each person to each person, in our experience, people who file bankruptcy will start getting decent interest rate offers on car loans within 2 to 4 years of filing. In some cases, you may be offered good interest rates even within a year of filing.
According to the Federal Reserve Bank, individuals who file bankruptcy receive a sharp boost in their credit score after the bankruptcy case is finished versus those that do not file. We suspect the reason for this is how those debts are reported on your credit report after bankruptcy. After you file for bankruptcy, your credit report will still list those debts for up to seven years, however those debts will now be reported with zero balances. The trade line of each of those debts will show “included in bankruptcy” versus having a negative trade line like greater than 120 days late or a charge off. While the bankruptcy itself will cast a heavy weight on your credit score, it will neutralize all of the other debts by showing the balance owed as zero. By cleaning up all of those negative accounts, the bankruptcy can actually help boost your credit score within a year of filing.
The Federal Reserve noted that those who do not file bankruptcy exhibit more financial stress than those who do file. The reserve concluded that if the debtors could afford it, they would more likely prefer to file bankruptcy than suffer through the stress of not paying their bills. This comment really goes without saying. Owing a lot of creditors, dealing with harassing phone calls and fearing a mailbox full of collection letters (or worse: lawsuits) can create a great deal of stress for anyone. That stress can translate to problems with your spouse and family and problems with your health.
We tell our clients that there are two strong advantages in filing for bankruptcy protection. The first advantage is that the bankruptcy brings you peace of mind. You will not worry about phone calls, your mailbox or your budget because you know you no longer have to pay those bills. The other advantage is that it gives you certainty. You know that you will never have to pay those bills ever again. You know that if a creditor wrongfully tries collect a debt that was discharged, you have the ability to bring that creditor into the courtroom to explain its collection actions to your judge. A person struggling to pay their bills will not have the same peace of mind or certainty. In fact, that person will likely have the complete opposite.
Although it seems hard to believe, the Federal Reserve report makes it clear that for many people, Bankruptcy IS better than doing nothing. That is why we offer a no obligation consultation to our prospective clients. We will be happy to review your financial situation and explain the advantages of filing for bankruptcy protection. Bankruptcy is not for everyone and we will let you know if we don’t think it’s right for you and your situation. Hopefully the Federal Reserve report gives you an idea of HOW bankruptcy can help you or a family member. The next step is up to you.
The law firm of Busby & Associates has helped bring peace of mind to thousands of clients and seen just as many reestablish their credit after bankruptcy. If you need help with your debts, please give us a call.