Every bankruptcy lawyer in Pittsburgh has heard the question a hundred times. Of course, every situation is different so there cannot be a response that is completely correct in each instance. However, here are some rules of thumb about the impact of a filing a bankruptcy case upon a person’s credit.
Often Debtors Have Low Credit Scores Prior to Filing Bankruptcy
People tend to file bankruptcy as a last resort when their financial conditions worsen past beyond any reasonable hope of paying their debts. As a person’s financial condition erodes, they tend allow their credit balances to meet or exceed their borrowing limits. Cash strapped people also tend to pay their bills late from time to time. It is not uncommon for people under severe financial strain to give up their efforts to pay entirely. That often means that creditors will seek judgments, send the matter to collections or sell the doubtful account receivable to another company. All of those actions give rise to adverse credit events that press credit scores very low. Under those circumstances, the additional hit of a bankruptcy filing might lower the credit score further but, by that time, the difference is not meaningful.
Impact of a Discharge on Credit
A bankruptcy discharge can eliminate very large portions of indebtedness. While some debts are not subject to discharge, most general unsecured debts are dischargeable. Thus, credit cards, medical debts and unsecured loans are usually discharged. That discharged indebtedness affects a debtor’s debt to income ratio which is a major factor in calculation of credit scores. The benefit of the bankruptcy case is further increased by responsible financial behavior after the bankruptcy case closes. People who pay their debts as they become due after the bankruptcy case closes are often pleasantly surprised by how rapidly their credit scores rebound.
Financial Life After Bankruptcy
Filing a bankruptcy case does not mean that a person will never reach their financial goals. Many intelligent and financially savvy people will use their bankruptcy fresh start wisely. Lending guidelines have shifted in recent years to allow mortgage lenders to extend loans to individuals three years after their bankruptcy cases. That three-year period is all the more astonishing when one considers that, for most people scraping by on minimum monthly payments, three years without a bankruptcy would likely have resulted in deepened insolvency and an even lower credit score.
Contact a Pittsburgh bankruptcy lawyer today to see if bankruptcy and a fresh start might be your best path forward. The initial consultation is absolutely free.