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Bankruptcy: The Gateway To Credit Recovery

Bankruptcy Recovery, Rebuilding, Life After Bankruptcy


by John G. Merna

The biggest misconception about bankruptcy is that it is “bad” and destroys your credit.  These is not true.  Myths about bankruptcy are generally spread by people who have not filed bankruptcy but have an expert degree in “I know someone who did or heard that”.  You know these myth perpetuators.  They are friends, family members, work colleagues.  Their badge of expertise is actually a curtain over their ignorance.  Don’t let your well-intended friend lock you into a world of myths and stress.  Do your own investigation of the facts about bankruptcy.  Here are a few facts about how bankruptcy effects your credit to help you in your investigation.

MYTH #1 (Most Common):

Bankruptcy destroys your credit.  Wrong!

Most people’s credit is destroyed before they file bankruptcy due to late payments, foreclosures, judgments, etc.  In my 18 years of practicing bankruptcy, I can count the number of people on my fingers who were still current on their debt when they came to consult with me.   Chances are if you are reading this article you are also already behind on your debt.  So the reality I am about to talk about is that bankruptcy does not destroy your credit, the damage is generally already done by the time your consult an attorney.

FACT #1:

Bankruptcy is the gateway to rebuilding your credit.

In reality, bankruptcy is like a knife that cuts the cord that is holding down or dragging down your credit score. Once the cord is cut your credit score is free to start floating to the surface. Your score will rise automatically as much as 100 points in the year following the filing of your bankruptcy. It will rise higher and fast if you enroll in and work an organized, efficient, and tailored program of recovery. For more information on such a program visit www.acceleratedcreditrecovery.com.

So to recap – Bankruptcy is not what has destroys credit.  The defaulted debt that drives people into a bankruptcy is what has destroyed their credit. Bankruptcy cuts loose that bad credit reporting and lets your score start to improve. So why is there a persistent urban legend that bankruptcy destroys your credit for 10 years?

MYTH #2:

Bankruptcy Destroys Your Credit For 10 Years. Wrong again!

The law allows credit reporting agencies to list a Chapter 7 bankruptcy filing on your report for up to ten years and Chapter 13 for up to seven.  So why isn’t that a problem? Because ….

FACT #2:

The reporting on your credit report is not your “credit”.  Your credit score is technically your “credit”.  Your credit score is your Beacon or FICO score, which gives a numeric summary of the reporting by giving numeric weigh to things like late payments, types of accounts, length of credit, amount of credit, etc.  After a history of late or non-payment and the filing of a bankruptcy your score will actually begin to rise.  Credit and the question of whether to extend credit has become such a complicated formula that credit lending institutes almost without exception now rely almost entirely on scoring.  This most certainly applies to lending for home purchasing.  So to recap – while the bankruptcy may be on your credit report for up to 10 years, your credit score immediately begins to improve.

MYTH #3:

Filing bankruptcy drives your credit score to zero.  Wrong Once Again!

Bankruptcy has two effects on your credit.  The first is it is reported in the public records section on your credit reports.  The second is it halts all reporting of accounts listed in your bankruptcy. (Emphasis on “accounts listed in your bankruptcy”.  If you are working with an attorney who does not pull your credit reports or you do not provide your credit report  to the attorney you are making a big mistake.  Continued negative reporting by companies not listed in your bankruptcy can crush your credit recovery.  Don’t make that mistake.  Your goal is not to file bankruptcy.  Your goal is to recover.)

FACT #3:

The true numeric effect of a bankruptcy on a credit score is that the score bounces.  When you file bankruptcy the reporting of the filing can have a point effect from 0 to 100 depending on your score.  The higher the score, the higher the point effect.  If your score is extremely low then it will have little to no effect initially.  Immediately after the filing the “bounce” is that the FICO or Beacon formula is not longer registering late payments.  As a result, you score immediately bounces upward.  Generally by the discharge or completion of your bankruptcy your score will be higher than the day before you filed the bankruptcy.

Crazy isn’t it.  Bankruptcy actually helps your credit score and your ability to recover.  Ssssshhhh.  It is our secret.  Don’t tell your friend or relatives who are struggling with the stress of not being able pay their bills, wasting years wallowing in bad credit when they could to rebuilding towards buying a house, or are just so misinformed that they are hung up by the unintelligent belief that bankruptcy “bad”.  Having bad credit and owing people you can’t pay and who continue to hound you is “bad”.

Bankruptcy is good or more accurately I should say “does good” or “has a good effect”.  You can ask the million plus people each year who file.  Be smart. Don’t rely on myths to make your financial decisions.  If you have any questions give us a call.  We are happy to answer them all.

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