Many people make the error of putting off an inevitable bankruptcy because they fear losing access to credit. While credit provides a valuable resource when you are financially fit, it does precious little to help those on the verge of bankruptcy.

An old adage holds that credit is easily available to those who have no need for it. Individuals in dire straits may need credit as a lifeline but find their loan applications denied because they present too large a risk to the lender.

In short, when it comes to credit access, being insolvent traps you between a rock and a hard place.

The only way to restore good credit is by substantially reducing or eliminating debt. If you find yourself insolvent, you may be able resolve debts without filing for bankruptcy. On the other hand, if no sustainable debt reduction plan exists, then you need to consider bankruptcy right away.

Several options exist to manage debt without bankruptcy, and one of these solutions may work for you.

For example, you may lose your job and have to survive on unemployment insurance, your savings, and your credit cards. However, unemployment is a temporary condition. Provided you can find a new source of income sufficient to pay your bills, you can recover without going through bankruptcy.

You may also be able to work out a modified repayment plan with creditors. By reducing your monthly obligations, you may regain solvency. For example, if credit card debt is strangling your finances, credit counseling sometimes solves the problem by reducing your monthly payments to an affordable level. Then, you can slowly repay the debts in full.

But credit counseling has some serious drawbacks compared to bankruptcy.

Firstly, you must be willing to cease making credit card payments for several months while the credit counseling agency negotiates with your creditors. The process does lasting damage to your credit score while still leaving you saddled with debt.

Secondly, you still owe the credit card companies ruinous interest rates. This costs you thousands of hard-earned dollars over time.

Thirdly, because paying off the debts takes years, your credit score rebounds slowly. In some cases, it never recovers.

Finally, the IRS may any forgiven debt as income, leaving you indebted to Uncle Sam.

Households with high medical debt may find they can work payment arrangements without damaging their credit. However, many end up filing for bankruptcy because the costs of some treatments are astronomical.

But in the end, the important thing is that you climb out of debt and restore your credit rating, whether through bankruptcy or other means. Contrary to popular belief, bankruptcy can be a faster way to a higher credit score for those with severe debt problems.

What Happens to Your Credit Score When You File Bankruptcy in Athens?

Upon filing for bankruptcy, your credit score drops. This is for a logical reason. People with open bankruptcy cases are poor credit risks. However, this drop is temporary, and your score begins to climb rapidly after discharge because you no longer have unmanageable debts.

Your Credit Score After Filing a Chapter 7 Bankruptcy in Athens

Chapter 7 bankruptcies are liquidation bankruptcies. In a liquidation, the bankruptcy trustee sells the petitioner’s assets and uses the proceeds to reimburse creditors. Beyond what the trustee recovers, the filer has no liability for dischargeable debts, even if creditors receive pennies on the dollar or nothing.

When you have few assets and overwhelming debt, Chapter 7 makes sense.

In terms of your credit score, you can expect it to plummet upon filing. For instance, if your score is over 600, you can expect your FICO to drop to 500 or below. Individuals with very high FICOs can expect their scores to drop by hundreds of points.

However, most people filing Chapter 7 already have credit scores in the fair to poor range, with some under 500. As a result, filing bankruptcy, while temporarily reducing the FICO score, is of little practical consequence to them. The filers already have poor credit and are subject to credit denials by all except very high-risk, high-interest-rate lenders.

In fact, filing a Chapter 7 often represents the fastest path to an improved FICO score.

For people with high debts, collections, foreclosures, and other credit challenges, FICO scores tend to be in the 500s or below. Their credit score sinks lower for the time the bankruptcy case is active, usually- three to five months.

Once the court discharges the case, the filer’s FICO score immediately climbs. Now that the case is over and the dischargeable debts wiped out, the individual represents a better credit risk than before the bankruptcy, allowing his FICO to rise above its pre-bankruptcy level.

Many wonder why the FICO score drops upon filing a Chapter 7 but rises after the bankruptcy discharge.

The score falls precipitously upon filing a Chapter 7 because any new debt acquired by the petitioner is subject to being placed in bankruptcy. For example, if a landlord signs a lease with someone in Chapter 7, that person could put the lease into bankruptcy, causing the landlord to lose many rent payments. As a result, people in Chapter 7 who need to move often must go to places with month-to-month- or week-to-week tenancies.

Because the case is open, the petitioner presents a high credit risk, so the FICO score naturally reflects this.

However, upon discharge, creditors no longer need to worry about the filer placing a new account into Chapter 7 and wiping away the debt. As a result, the score rises dramatically.

Post-discharge, filers usually receive credit offers designed for people fresh from bankruptcy. These lenders target recent bankrupts because they now have low debt and are barred from filing Chapter 7 again for seven years. If they have sufficient income, this makes them a better credit risk than they were pre-bankruptcy.

Increasing Your Credit Score After a Chapter 7 in Athens

Once your Chapter 7 case is discharged, you can obtain fresh tradelines on your credit report. Tradelines are accounts reported to credit bureaus, such as revolving accounts, car loans, and mortgages. When emerging from bankruptcy, you may have few or no active tradelines. Establishing new ones, therefore, helps you build your FICO score.

Many recent Chapter 7 filers reestablish credit through a secured credit card. These cards require you to place a security deposit with the issuer, which you can borrow against. They report this credit activity to the major credit bureaus, so you build a positive payment record. With a secured line established, you will start to receive offers for credit cards with small, unsecured credit lines.

As you establish a record of repaying these accounts, you receive offers for cards with higher limits and better terms.

Other types of credit, such as vehicle loans and personal loans, also help build credit history. Additionally, signing up for services that report non-traditional tradelines to the credit bureaus, such as rent and utilities, further helps you rebuild your credit rating after Chapter 7 bankruptcy.

 

Obtaining a Mortgage After Bankruptcy in Athens

Mainstream mortgage lenders require seasoning before extending credit to people after a Chapter 7. Seasoning refers to a period that must pass after the Chapter 7 discharge. Different lenders and mortgage programs have various seasoning requirements, including the following:

Conventional Loans

4 years for Chapter 7 and 2 years from the dismissal of Chapter 13.

FHA Loans

2 years from a Chapter 7 discharge and 1 year from a Chapter 13 filing.

VA Loans

2 years from Chapter 7 and 1 year into Chapter 13 with court permission.

USDA Loans

3 years from a Chapter 7 discharge and 1 year from a Chapter 13 filing.

Credit Scores and Chapter 13 Bankruptcy in Athens

As you can see from the chart above, obtaining credit during and after Chapter 13 differs from Chapter 7. When a Chapter 7 case is open, few lenders will loan to the petitioner. However, since Chapter 13 is not a liquidation bankruptcy, it provides the filer with no absolution of debt. As a result, some lenders are willing to extend credit to those with open Chapter 13 cases.

Most Chapter 13 filers can obtain a mortgage one year or more after filing a Chapter 13.

Chapter 13 bankruptcies restructure debt rather than eliminate it. The petitioner proposes a repayment plan to the court. If the judge approves the plan, the petitioner pays his debts through the court. The payment plans last three to five years.

After discharge, any debt remaining from unsecured loans, such as credit cards, is eliminated. However, the borrower must continue paying for secured loans, such as mortgages.

As with Chapter 7, Chapter 13 filers see a drop in their credit scores upon filing. Once the court approves the plan and the debtor begins payments, his score improves. Over the life of the plan, the score continues to improve as the borrower reduces debt and strengthens his financial position.

If the plan is succeeding, the Chapter 13 petitioner may establish new tradelines during the bankruptcy, resulting in a positive FICO score impact.

Filing for bankruptcy requires careful consideration. You want to be certain that it will allow you to regain control of your financial situation and make it possible for you to create a brighter future for your family. When overwhelming debts plague you, bankruptcy is often the quickest and cleanest way to remedy the problem.

Some debtors procrastinate in filing for bankruptcy. This only extends the time until they restore financial security. Credit scores usually improve soon after bankruptcy, rising above pre-bankruptcy levels in months or a few short years. Because of this, bankruptcy filers often find it easier to establish new credit after a bankruptcy than before.

Morgan & Morgan’s bankruptcy specialists are here to help. If you need a solution to financial problems, consult Morgan & Morgan for a consultation.

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