debt

Bankruptcy not the worst thing for credit

Justin HarelikQuestionDear Bankruptcy Adviser,
I have some questions regarding credit reports and credit scores. Specifically, I am wondering how different types of information on a credit report are interpreted. For example, is a bankruptcy worse for my credit score than late or missed payments on a house? Would slow or missed payments on a car or credit card be viewed the same way as missed house payments?
-- Sue

AnswerDear Sue,
I can't pretend I am a credit score expert. But in my years as an attorney handling bankruptcy law, I have read quite a bit of about credit reports and the impact of different negative events on your credit score, so I feel I can answer your questions. Knowing which paths have the least negative consequences could help you in your effort to obtain credit in the future.

Bankruptcy will have a big impact on your credit. Through research and client statements, the credit hit is approximately 150 to 200 points. Usually, it is one big drop and the damage is done. You can start to rebuild your credit score after concluding your case.

However, you also need to make sure all the accounts on your credit report reflect the fact that the debts are "discharged in bankruptcy." You don't want to take the hit to your credit score and then compound that with missed payments showing up on your report after your filing. All accounts that are included in the bankruptcy must show that no more late payments are being applied.

As a client said to me after filing bankruptcy, "The good news is that my score can only go up from here." While I am not trying to say that bankruptcy is the better option, it is a fact that after filing you will be able to start rebuilding.

Now let's examine your questions regarding late or missed payments. Any late and missed payments -- absent a bankruptcy filing -- hurt your credit three ways. First, you will continue to show late payments every month. Also, some of those creditors will charge off the account, which means write off the balance as uncollectible. Any charged-off accounts would likely be sold to collection agencies. Those collection agencies will post another negative line on your credit report. They will report late payments as well.

Second, you are likely to be sued by one or more of your creditors. That means you will have the monthly negative mark on your credit report. Plus, a lawsuit and judgment will show up in the "public records" of your credit report. These will have additional negative impact on your credit score.

Third, a delay and/or missed payments strategy will make it more difficult to rebuild your credit. With a bankruptcy, you can start rebuilding, although admittedly some of the initial credit offers may not have very attractive terms. But if you work at it, eventually you will be able to demand better rates and better terms.

Without the bankruptcy, late and missed payments will mark you a credit risk. Very few lenders will extend you credit. And those that do will offer even worse terms than if you filed bankruptcy.

I am not advocating one approach over the other. Both result in negative consequences. However, you want to consider life after negative credit and determine which approach will allow you to rebuild your credit faster.

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