Will I be able to get credit, after filing bankruptcy?
According to the Federal Judicial Caseload Statistics, there are literally millions of people filing bankruptcy each year. The statistics reveal that Chapter 7 is by far the most frequently filed Chapter, with 958,634 non-business consumer filings for the period ending December 31, 2011. The reason for this is that a Chapter 7 bankruptcy releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. 11 U.S.C 727
One of the single most important questions that people pose to their attorney when considering filing bankruptcy under Chapter 7 is, “Will I be able to get credit after filing bankruptcy?”
While the answer to this question varies from individual to individual, this article seeks to provide some insight to the factors that go into answering this question.
The common misconception among those considering filing for bankruptcy is they will no longer be able to buy a home or a car, or even get credit. While it is true that a bankruptcy can appear on your credit report for years, a bankrupt’s ability to get credit post-bankruptcy is dependent on two factors. The first is a debtor’s income post-bankruptcy. The second is the debtor’s ability to show that they can manage their post-bankruptcy debt.
The single most important factor in securing credit post-bankruptcy is a demonstrated ability to pay.
Extreme examples that demonstrate the importance of ability to pay are the unemployed debtor versus the lottery winner. Needless to say, if you are unemployed after you filed for bankruptcy, it does not matter that you filed bankruptcy and discharged your debt; you still will not be able to get a credit card, a new car or home mortgage financing. Now the flip side to this extreme is the fortuitous lottery winner.
It goes without saying that a bankruptcy who wins the lottery after the entry of his or her discharge will be able to buy virtually anything and the obtaining of credit will be little or no problem.
Between these two extremes is the typical consumer who makes a living wage and has shed all of his or her debt through bankruptcy. For the typical consumer, it is their financial condition post-bankruptcy, and their ability to manage their post-bankruptcy debt, that determines the extent of credit that will be extended after filing for bankruptcy.
To understand how this works, let’s use the example of a typical consumer with $50,000 in credit card debt pre-bankruptcy, consisting of ten (10) unsecured creditors. Let’s also assume that the consumer has a steady job and is making $4,000 a month. Now imagine that you are a banker and this consumer walks into your office with $50,000 in debt, ten creditors and a yearly income of $48,000. If you were a banker, would you give this consumer a loan, knowing that the consumer already has ten outstanding creditors and debt equal to over a year’s worth of income?
Contrast this with the same debtor post-bankruptcy with a different financial scenario. As mentioned above, once a debtor receives a discharge in Chapter 7 all existing unsecured debt, with few exceptions like taxes and child support, are wiped out. Again put yourself in the shoes of a banker. If that same consumer walked into your office making $4,000 with absolutely no debt and no other creditors, wouldn’t you be more inclined to grant that consumer a loan? Especially knowing that this consumer had already filed Chapter 7 and couldn’t file again for at least another eight years. 11 U.S.C. 727 (a)(8)
Let me put it another way. If I walked in to see you, the banker, and I had $50,000 worth of debt, was making $4,000 month and had ten credit cards that I couldn’t pay, would you be willing to be the eleventh creditor?
In contrast, if I walked in to see you, the banker, and had absolutely no debt and not a single credit card or other outstanding bill, still making $4,000 per month, would you find me a better risk knowing that you would be first in line to be paid, not eleventh?
Post-bankruptcy, a credit card company or your mortgage banker knows two pivotal things. First, that the consumer has no debt, having already discharged. Second, that the consumer can’t file Chapter 7 again for eight more years.
In sum, filing Chapter 7 is designed to give the debtor a “fresh start.” Part of the “fresh start” means a fresh look by bankers of all kinds. As such the debtor in a post-bankruptcy world is a much better credit risk than the same debtor pre-bankruptcy. Thus, the important thing to remember is that your ability to secure credit post-bankruptcy depends not so much on your prior credit history, but on how you manage your financial affairs going forward.
This is an article by attorney Mitchell Reed Sussman. Mitchell is a California real estate attorney specializing in real estate, foreclosure and bankruptcy. His website is http://www.losangelesrealestateattorney.com/.