If you are struggling financially, bankruptcy may be the best solution for you. However, you may be concerned on how filing a bankruptcy case will impact your ability to make purchases on credit in the future. With a better understanding of the process, you will quickly realize that filing bankruptcy will not prevent you from being able to obtain credit after or even during the Chapter 7 bankruptcy case.
Although there are four types of bankruptcies that can be filed, most debtors in Texas file a Chapter 7 bankruptcy case. One reason for this is the great exemptions under Texas and federal law available to debtors which allow the debtor to protect a significant amount of assets in a Chapter 7 bankruptcy. Although there are exceptions, most debtors who are considering bankruptcy have a less than exemplary credit rating as a result of the financial difficulties that have led them to consider filing bankruptcy.
The ability to make purchases on credit is typically tied directly to your credit rating. Qualifying for a mortgage or car loan, for example, will depend heavily on your credit score. Most people who are considering bankruptcy will not qualify for credit before filing bankruptcy. Or if they do qualify for a loan or credit, it will be at a significantly high interest rate. What many people do not realize is that it may actually be easier to qualify for credit and/or qualify for a lower interest rate during or shortly after a chapter 7 bankruptcy is filed.
Although each debtor’s situation is unique there are a number of common factors that may make it easier for you to obtain credit after your bankruptcy case is filed, rather than prior to filing. Some of those factors include:
- Obtain new debt and pay it early or on time – Many of our clients come to us with a car that is barely running or a car that they owe much more on than the car is worth. We have a local relationship with a local car dealership that actually helps our clients buy new or used cars during their Chapter 7 bankruptcy case. The old car is returned to the lender and that debt is discharged. The clients then obtain a new or used car without trading that “negative equity” into the new vehicle. The interest rates begin at a high rate, but if timely monthly payments are made, they are able to refinance these car purchases after the one year anniversary of the loan. These new loans help rehabilitate our Chapter 7 clients’ credit even during their Chapter 7 cases.
- Derogatory remarks removed from credit bureau – Before we file a bankruptcy case, we run a credit report on all of our clients with the three major credit reporting bureaus – Experian, TransUnion and Equifax. We place all of the creditors reporting derogatory comments on our clients’ bankruptcy schedules that are filing in their bankruptcy case. When the clients receive their Chapter 7 discharge, we send a copy of their discharge order, along with a list attached to the order showing all of the debts that were discharged, to these three bureaus and ask that they change the clients’ credit bureau reports to reflect that all of these debts have been discharged. Most of our clients report a significant increase in their credit scores after their reports have been changed to reflect that these derogatory remarks have been discharged.
- Cannot file again for eight years – The 2005 Bankruptcy Code amendments restrict Chapter 7 filings to once every eight years. You can file other chapters more frequently, however lenders realize the restrictions on repeat filings and that actually makes you a better credit risk.
- Debt-to-income ratio – By eliminating debts, your debt-to-income ratio becomes much more favorable, thereby increasing you credit score.
If you believe that filing bankruptcy will make you unable to ever buy anything again on credit, that is simply not true. A Chapter 7 bankruptcy can actually get rid of your debt and make you a much more credit-worthy customer.