Will A Bankruptcy Affect My Credit Score?
A client recently asked me, “Will a bankruptcy affect my credit score, and what can I do about it?” Yes. A bankruptcy does affect your credit score, somewhat. Here’s why.
How your credit score works
Your credit score is based on how much money you owe. Are you current on your payments, did you make all your payments on time, or are any of them late? And that is a portion of the formula that the credit reporting agencies use to determine your so-called credit score.
If you don’t file a bankruptcy, and you’re behind on your payments, the credit report will show you’re behind. It’ll show how many days you are behind, how late you are, and whether you owe money by what’s called a debt or possibly a judgment if you haven’t paid it, and someone sued you and took you to court.
How a bankruptcy helps you
Now, what can a bankruptcy do to help you? Well, after the bankruptcy, the creditors have to go back to the credit reporting agency after the debt has been wiped out or discharged. And they must write down that the amount owed is zero.
So your credit report is going to show that instead of owing money, you will owe zero on every single creditor who’s been wiped out or discharged in a bankruptcy. And how would you get credit again? Very simple. The credit card companies are only too eager to give you more credit cards after a bankruptcy.
A client story
I’ll tell you a little story. I have a client, and he’s a really good client because every eight years, he comes back like clockwork. He and his wife come back to file another bankruptcy. I’m working on it. I just finished number three for him, and I also finished number three for his wife.
After the bankruptcy number one, he bought another car. A very nice car. It was a BMW, and he financed it. And unfortunately, he couldn’t make all the payments. So bankruptcy number two took care of that. It wiped out what he owed on that car, even though he turned it in.
And then after bankruptcy number two, I told him good luck. Hopefully you won’t have any more problems. But he decided once again to get another car. And again, he didn’t make all the payments, and he ran up a lot of bills. And eight years later, we filed bankruptcy number three, and all the debts were eliminated.
So right after bankruptcy one, he got a car. Right after bankruptcy two, he got a car. I did bankruptcy three. And I would bet you anything. He got another car because he likes cars. His wife did the same thing.
Why are companies so willing to lend money after a bankruptcy?
After the bankruptcy, these companies are very willing to lend money. The reason is simple. You can’t file again for a number of years. So if you’re working, making money and you file a bankruptcy, and the debt is eliminated, you won’t owe any money.
And now, your whole income is available for a new creditor, a new credit card, a new car loan. And these credit card companies and car loan companies are only too happy to lend you more money because they’re in the business of lending money.
The car distributor wants to sell cars. They finance the cars through a finance company. The car distributor makes money when they sell the car. They also make money when you borrow money and finance the car. They’re only too eager to have another sale because they make money.
Same with credit cards. Credit card companies make money when they lend. When you buy something with a credit card, they charge the store a fee. And if you don’t make payments on time, they start to charge you a fee for credit cards.
What you should do
So after a bankruptcy, it’s fairly easy to get credit. I recommend you do it carefully, and you don’t abuse it. But if things don’t work out, we’re always around to help you with number two or number three if you need it. Glad to help. If you have any questions, talk to me. Give me a call. I’ll be happy to chat with you.