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Bankruptcy Revenge

By Douglas Jacobs, California Bankruptcy Attorney

The most important impact of filing Bankruptcy is the automatic stay. That provides a guard against any collection activity including garnishments, foreclosures, and harassing collection companies.

The second dramatic thing that happens is, most often, a dip in one?s credit score.  Even if your score was pretty low to begin with, once the credit reporting companies find out about the Bankruptcy, they will lower your FICO score.

Why is that?  If it were true that a credit score is designed to determine the credit worthiness of a person or the likelihood that a future loan would be repaid, then this is completely backwards.  The truth is that the credit reporting industry doesn?t report the likelihood that your next loan will be repaid at all: it reports the probability that you are likely to repay the previous loans.  Thus, what is actually being determined is what you did in the past.

Is this a true indication of your future credit-worthiness?  Absolutely not, as noted by my friend, Gene Melchionne in his excellent post on Money Health Central.  In fact, immediately after you file bankruptcy, you are likely to be a better credit risk than before you file.  Why?  Because most people may run into an economic crisis in their life and have to file, but they certainly will try to avoid that in the future (few people actually file multiple bankruptcies); and secondly, you can?t file again for a while.  In fact, if you filed a chapter 7, you can?t file another one for at least 8 years.  That makes you a pretty good risk for a while!

So why does everyone, from car companies to credit cards, charge you more interest because you have a bankruptcy on your credit history?   I think it is revenge.  The credit industry is mad at you and this is their way of getting even.

Frankly, a car-buyer, for example, with a recent Bankruptcy on his record, is a great candidate for a loan.  He is virtually certain not to file Bankruptcy again during the term of the loan and he has more available funds since he just got rid of most, if not all, of his credit card and other unsecured debts.

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Full post as published by Bankruptcy Law Network on December 11, 2010 (boomark / email).