Bankruptcy

Credit After Bankruptcy

By Richard K. Gustafson

Recently, an associate professor of law at the University of Iowa, Katherine Porter wrote that “credit solicitations of recent bankruptcy debtors is rampant.”  She studied data collected by the Consumer Bankruptcy Project and found that nearly every debtor receives credit offers shortly after bankruptcy.  Most offers are for credit cards, however, some are for mortgages and car loans. 

It is interesting because this phenomenon contrasts with the picture painted by the credit industry and things most of us read and hear about from credit counseling agencies and debt settlement negotiators.  We’ve all heard proclamations throughout society that “bankruptcy ruins your credit” or “you will never be able to finance a house” or other similar doomsday forecasts (I’ve discussed before about how bankruptcy is a first step in the rebuilding of credit since most who need bankruptcy already have bad credit or are about to without bankruptcy).

The data collected by the Consumer Bankruptcy Project support what I and many others have been saying for years.  It is not only possible to obtain credit after bankruptcy, it might actually be easier to obtain credit after bankruptcy than after other non-bankruptcy options are attempted (usually unsuccessfully). 

 As Professor Porter says in her article, “Bankruptcy Profits:  The Credit Industry’s Business Model for Postbankruptcy Lending,” “despite debtors’ trepidations and creditors’ warnings before bankruptcy, borrowing after bankruptcy is not only possible after bankruptcy, such activity is actively encouraged by the credit industry.  These data suggest that creditors’ threats to refuse credit after bankruptcy are hollow.  The credit industry may tell consumers that they will not lend after bankruptcy and that paying the debt is the only option to maintain their credit access, but such statements are largely untrue.  Rather than resulting from a marketing mistake, the widespread availability of postbankruptcy credit more likely reflects a careful calculus about the profits of lending to consumers vulnerable to financial distress.  The bankruptcy system shapes creditors’ ability to profit from former bankrupts, and law can play a critical role in defining the appropriate boundaries of credit solicitation.”

Full post as published by Consumer Bankruptcy Blog from Legal Helpers on September 23, 2007 (boomark / email).