At Kain & Scott, we get the question all the time, "What happens to my credit score if i file bankruptcy?" It is a question that concerns every Minnesota debtor facing bankruptcy and wondering what the bankruptcy aftermath looks like. I am high anxiety so I would be asking the same question too. Fortunately, what makes up your credit score and how bankruptcy affects it is a lot better than you would think.
The Big Myth
I feel compelled to dispel a myth that has been around since the beginning of time: that is, do banks really care if your other creditors get paid? I would argue they do not and here is why. We have met with thousands of Minnesotans who say something like this: hey Wes, my husband and I make 100k a year, we have 50k in credit card debt, and we are current on all our payments and our house payment too. So you ask, why are these people in my office talking to me right? Chances are they have credit scores of 750+ and they are current on all of their debts, so what is the problem?
The problem is the freight train is about two inches from the front of their noses. This couple tells me they went to see a banker who declined them a loan even though their credit score was 750+ and they are current on all of their debts. Why can’t this couple get a loan? Are they not the perfect example of a couple banks want to lend to? High credit scores and on time payments? The truth is the bank is worried that the bank loan will be the straw that breaks the camel’s back, so to speak, and the bank will lose. In other words, the bank doesn’t care if they are current on all of their other debts, they are concerned the bank will lose money if they lend money to this couple. That is positive proof banks don’t care if you pay your other debts, they care if you pay THEM!
The hidden truth
Second, while bankruptcy is a negative credit event to be sure, many debtor’s actual credit score increases after a bankruptcy! Why? Because they have no debt! I would wager that the couple above could get a loan from the same bank after discharge in a bankruptcy case but not beforehand. Weird huh? That’s because the couple, post discharge, have no debt. Now lets be clear, the bank is likely going to tickle their interest rate to get the loan, but the point is they can get the loan whereas before they could not!
And that is the irony of filing a bankruptcy for most people. If your credit is already banged up and you have overwhelming debt, filing a bankruptcy is an improvement to your credit situation. After all, you are debt free and your credit score will likely increase after filing a bankruptcy and getting a discharge. Even for those of you who are on time with all of your bills and have a high credit score, if the freight train is staring you down, you may not be able to get out of the way of bankruptcy.
Many times, people feel sheepish about this. Wes, they say, I am current on all my debts and my credit score is high, do I still qualify for a bankruptcy? Yes, most people still do. Much of the time, I hear another little tidbit that makes the filing of a bankruptcy all the more necessary. I hear something like, Lisa is going to part time next week or Jim is having surgery and will be out of work for 6 months without pay, or I am still working at my job but they cut my overtime to zero. Some trigger like this usually prompts people to take a look at whether they should consider bankruptcy, push the reset button, and start fresh.
I feel for these people because they have been, often times, grinding away for years paying these bills, and doing balance transfers, and doing the juggling act just to keep this up not knowing what does bankruptcy do for you. It is taxing physically, emotionally, and mentally. You have no idea how many people we have seen over the years suffer physically, emotionally, and mentally due to overwhelming debt.
Lets get started!
Life is humbling. Everyone deserves a safety net now and then. If you have been suffering with overwhelming debt, there are solutions available to solve the problem once and for all. All it takes is some courage. At the Kain & Scott Bankruptcy Law Firm, we honor the courage and anxiety our clients feel. What we have found, is that clients feel enormously relieved after going through a bankruptcy. What they find out, is that they should have filed a bankruptcy years ago.