debt

Worst-case scenarios when filing bankruptcy

Justin HarelikDear Bankruptcy Adviser,
What is the worst-case scenario legally when filing for bankruptcy or credit counseling?
-- Maureen

Dear Maureen,
I have written a few columns listing the advantages and disadvantages of bankruptcy and credit counseling. Personally, I am not a fan of credit counseling. Obviously, a bankruptcy attorney would not be a fan of competition, but I am not a fan of bankruptcy either.

I think the entire debt business is broken and neither bankruptcy nor credit counseling should exist. The original creditors should have more obligations to rehabilitate delinquent borrowers rather than be incentivized to charge off accounts and send the account into the collection market.

Getting off my soapbox, I will answer your specific question: What is the worst-case scenario you can legally face when filing bankruptcy or entering into a credit counseling program?

Future employment: Private employers are allowed to "discriminate" against you. A future employer may look less favorably at your application versus someone with a good credit report. This is reasonable because an employer doesn't want to hire an employee dealing with distracting financial issues. The employer may believe your financial turmoil will be a distraction.

Future employers may look at credit counseling and bankruptcy differently. While bankruptcy means you have no more debt but bad credit, credit counseling means you now may be managing your finances.

So, regarding work -- your worst-case scenario would be the challenges of securing employment.

Future landlords: Landlords can discriminate against prospective tenants because they don't want to rent to anyone who can't pay his or her bills. While I have not completed any sort of study, I would guess that a landlord would be more inclined to rent to someone who just completed bankruptcy rather than someone enrolled in credit counseling.

The landlord knows that while the bankruptcy filer couldn't manage his or her accounts, at least he or she is free of all debt. That increases the likelihood that rent would be paid on time.

I am not sure how the landlord would look at a prospective tenant enrolled in credit counseling. Since your credit score does not drop with your enrollment, the landlord might not notice that each account is under credit counseling management.

Regarding housing: Your worst-case scenario would be the inability to rent a new apartment or home because of your credit.

Future lenders: Future lenders can charge you a higher interest rate or deny your application altogether. You will need to re-establish credit post-bankruptcy. If you begin working on your credit right away, you could have a decent credit score within 24 to 36 months after the bankruptcy is closed. Lenders will still be able to charge you higher rates since you did file, but the sooner you rebuild your credit the sooner you can demand good rates.

It will be difficult or impossible to finance anything while inside an active credit counseling program. Lenders will see that you had trouble managing your accounts and are still dealing with outstanding balances. You will likely be denied for any financing until you complete the program and rebuild credit.

Regarding future lenders: Your worst-case scenario would be either not being approved for a loan, or if you were, not receiving the lowest interest rate possible.

Good luck.

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