Impact on Credit

Interviewer: That’s a myth that someone could just get stalled right there, because I think I hear that a lot, too: “Bankruptcy ruined my credit forever.” Can I still get a credit card after bankruptcy? What is the truth with that? Will someone be able to get approved for a credit card right after bankruptcy? How soon?

Court Koehler: Yeah. For the most part, I think that that’s the message kind of propagated by the credit card industry, because they don’t want you to file bankruptcy. There’s some truth in that. It is true that the bankruptcy will be reported on your credit report and it will negatively affect your score. It will stay there for a period of 10 years. That’s true.

In practicality, usually bankruptcy helps your credit score. That’s because by the time people come and see me, they’ve had financial trouble for a while. They’re behind on lots of things on their credit and their credit score is not good. If you don’t foreclosure on your credit, it’s going to hurt you a whole lot, obviously, more than a bankruptcy. If you’ve got lots of delinquent payments or charge offs on your credit card and things like that, those things are going to really hurt your credit score to the point where when you file bankruptcy it’s not really going to affect it too much. What it does do is it gets all that negative stuff taken care of on your credit report and it starts you out to be able to rebuild your credit over a period of time.

Let’s say you’re behind on 10 credit cards and your car loans and your mortgage. Right now, today, if you file bankruptcy, you can start to repair that credit, whereas if you struggle over a period of 10 years without any help from repaying your debts, in 10 years, your credit score is still going to be terrible. It’s going to be even worse. As now, it might be as bad as it can possibly be, whereas if you file bankruptcy today you start repaying your credit over time. In maybe even as soon as a year, your score is going to be much, much better.

It might not be a great score. It’s not going to be at 800; the bankruptcy will take some points off, but you’re going to be in a much better position doing it that way than you would kind of struggle and pay back back-payments that you’re not going to be able to handle and aren’t going to be paid off anyway.

Repaying Credit Card Debt

Interviewer: As far as someone who has like outstanding debt, are they going to have to repay all of that with bankruptcy? You mentioned something about a certain amount of forgiveness.

Court Koehler: Debts in general or something specific?

Interviewer: Well, debts in general and then credit card debt.

Court Koehler: Credit card debt? Okay. The way it works is it’s a bit complicated, and that’s why you have a bankruptcy lawyer. You’re required to pay back certain things in a Chapter 13 plan. The biggest thing is you’re required to pay back arrearages on secured debts. You’re going to have to pay back any back payments on your mortgage over the period of the plan.

Now, when it comes to unsecured debt, you’re not necessarily required to pay anything back, but the situations where you would have to pay something back is usually what we do as we enter a liquidation analysis. What that means is, under the bankruptcy code, if you file a Chapter 13, your creditors are entitled to receive as much from you as they would have if you filed a Chapter 7. Basically you can’t put them in a worse position than they would have been if you file a Chapter 7 by filing your Chapter 13.

What that means for unsecured creditors, like your credit cards and things like that, is that we imagine, okay, what would they get if you file Chapter 13? If you have a lot of equity in your house and you have assets and things like that, that if you were going to file Chapter 7 it will be taken and sold and distributed to your creditors, then you have to pay back the amount to your creditors over the period of the Chapter 13 plan.

Usually it’s pretty rare for somebody to have to pay back too much to their creditors, but usually there’s a little bit of extra equity that’s hanging around. It can vary a lot, but you may have to pay maybe two percent or three percent through your unsecured debt, usually not much more than five percent over the period of the plan. If you have $50,000 worth of credit card debt, then you might have to pay back two or three percent of that, maybe like a few hundred bucks or something, over the period of the plan. Like I said, that varies a lot depending on your financial situation, what assets you have and things like that, but that’s the way it works. That’s how you determine whether or not you have to pay your unsecured debtor or creditors or anything.

By Court Koehler

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