People have a lot of misconceptions about bankruptcy, such as that it will ruin their life or they will never get credit again, or their employer will find out or that they will have to pay all the money back, or they will lose their car or their home, or the IRS will levy their bank accounts. It is a very long list and all of it is just not true. A client of mine who thought they would never get credit again went through bankruptcy two or three years ago and they just bought a house. I have clients who got through bankruptcy a year or two ago and they are already getting credit cards; admittedly, they have pretty high interest rates and include annual fees and the like, but they still get credit. Those are probably the main fears and misconceptions that people have.
Are There Ever Any Valid Reasons to Delay Filing for Bankruptcy?
I see situations where I ask people to delay filing bankruptcy because they recently incurred debt; perhaps they just bought a car, or they just cash-advanced a credit card and they just paid a veterinary bill for their dog. It is not smart to file bankruptcy if you have just been running up credit card debt in the last six months to a year. What you want to do in those situations is you want to show a repayment history or at least an attempted repayment history and then file bankruptcy.
If you really hit your credit cards hard or you incur a lot of debts and you want to file bankruptcy, you always run the risk of the Trustee coming back to you and claiming that you utilized extensions of credit without the intent to repay, and you never want to be in that situation. You always want to wait several months after you incurred significant debt before you file bankruptcy.
Sometimes, it is best for people to wait to file, especially in a Chapter 13 situation until they can put some money in savings because sometimes Chapter 13 can be very difficult to maintain on a monthly basis, so you want to make sure you have a little bit of money in the bank. If someone just bought a car, I generally want to wait four months from the time they bought the car to allow the car loan to age a little bit before we file.
Another big reason to wait comes when you have tax debt; by waiting a certain amount of time, you might be able to get rid of taxes in a particular tax year because the statute of limitation runs out for the IRS to collect on that debt. I have seen situations in which an attorney filed the bankruptcy 4 or 5 months too soon, and if they had simply waited, the client could have discharged a big tax bill for a particular tax year.
Can Someone’s Credit Actually Improve After Filing for a Chapter 7 Bankruptcy?
If you walk into my office and you have high credit card debt, you are late on your credit card payments and your other debts or you have medical bills in collections, your credit score is probably absolutely horrendous. The day you file bankruptcy, all that debt goes away at once and after you get your discharge four to five months later, chances are your credit score will actually go up, and you can start doing things to improve your credit.
I have clients who are two years out from their bankruptcy filing and they have a credit score of 680 or 690, but when they first came to me, their credit score was like 495 or 525. The reality is, more often than not, if you do what you have to do to improve the quality of your life, you will be in a much better position two years after bankruptcy than you were the day before you filed. The number one thing that I try to stress to people when they are filing bankruptcy is that you are in the driver’s seat now; how your credit score changes and how much it goes up is directly related to how active you are in terms of doing what you have to do to improve your credit score.
If you want to just sit back and be a victim and complain that your credit score is terrible, then you get what you deserve. However, if you are proactive and get a credit card and do what your credit consultant tells you to do and you do what you need to do to improve your credit score, then you will do just fine. The game has changed drastically in the credit world post-bankruptcy in the last ten to twenty years; it is actually much more manageable for the average consumer. I always tell my clients that if they want to succeed in their credit lives after filing bankruptcy, then act like a successful person and do what you need to do to succeed. I am here for them and can help them make it happen.
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