What Happens To My Credit Score After Bankruptcy?

It’s Not As Bad As You Think

Video transcript:

David Shuster:

The bankruptcy itself may not necessarily cause your score to get any worse, just better.

Rob Rosenthal:

Did you know that bankruptcy might actually help you rebuild your credit score faster than you think it will? Well, that's what we're going to find out today because that's what we're going to ask the lawyer.

Hi again, everybody. I'm Rob Rosenthal with askthelawyers.com, and my guest is Texas attorney David Shuster. David, good to see you again as always. Thank you for helping us out.

David Shuster:

Always excited to be here, Rob. Thanks.

Rob Rosenthal:

So let's say someone's got maxed out credit cards and more than they can handle. Maybe they're trying to make some payments. Maybe it's too little late payments, but they're thinking that's better for their credit score than a bankruptcy. You're here to tell me that may not necessarily be true, right?

David Shuster:

That's exactly right, Rob. It's a big problem; people think of bankruptcy, they think of bad credit, bad things. The image needs a bit of a makeover because it's just not true. The late payments and the maxing out of the cards obviously hurts the score and it gets worse and worse each month. The sooner that you go ahead and pursue a bankruptcy is the sooner that stops and you're on the road to recovery right away.

Rob Rosenthal:

So does the bankruptcy affect how my creditors can report to their credit agencies?

David Shuster:

That's exactly right. When the bankruptcy is filed, Rob, the creditors can no longer report late payments. They have to stop reporting all together and the accounts say “included in bankruptcy”. And so a lot of people get all concerned about that and worry about that, but it's a good thing, because nothing is reporting late. There is no further reporting unless you reaffirm a debt. From that point on, you're in bankruptcy. 90 days later in a Chapter Seven, the balances are in fact zeroed out and all of those old creditors are still prohibited from any kind of negative reporting three months later after the bankruptcy. So you've done something right away by filing the bankruptcy, then in three months you have zero dollar balances on everything.

Rob Rosenthal:

What does that do to my score then?

David Shuster:

Well, right away every situation is different; it depends. It depends if you go into bankruptcy when you just missed one or two payments and you file bankruptcy, you're going to see a pretty big drop, and then once you get that discharge 90 days later, you follow our system and advice that we give all of our clients, then you'll be recovering almost immediately after that discharge. But if you're already in default with multiple late payments, then the bankruptcy itself may not necessarily cause your score to get any worse, just better.

Rob Rosenthal:

But with the bankruptcy that rules out any future credit cards or car loans or anything for a long time, right?

David Shuster:

That's what everybody thinks. And surprisingly, people get credit card offers and new credit cards before the bankruptcy is even done, often just two months after filing a bankruptcy. Okay, and again, this is only a three-month process, but often just within 60 days they're already getting offers and taking those offers out for new credit cards. And most people say, “Oh jeez. I don't want to take out another credit card because that's how I got into this mess.” But again, if you follow our system and advice for how to get on the path to financial stability, you will be recovering very quickly by taking out these cards and using it and paying them. No, it’s not a long wait. You can get a car loan and a credit card immediately after the bankruptcy, credit cards before even, so it's a very, very fast track.

Rob Rosenthal:

Why would that be, David? Why would the credit card companies start seeing your applications right after?

David Shuster:

Simply because you don't have any other debt. You've discharged all of your debt; it's all zeroed out, so you're a good candidate for that bank to get a new loan potentially, definitely to get a credit card. You're a good candidate because you have no other debt, it’s been zeroed out, so they're looking for you. You're going to get offers. You can go on and do that immediately, and it's because you don't owe anybody anything.

Rob Rosenthal:

What about home loans? It seems like I've heard it’s seven years or something like that before a home loan.

David Shuster:

For a conventional loan you can get that one year after the bankruptcy, okay, in a chapter seven. And with the FHA loan, then you're looking at two years. So I just tell folks, two years to be safe, but yeah, after a couple of years you can get a home loan. And although you can get a car loan just the day after bankruptcy, what I tell clients is if you can hang on to that car if you have the ability to do so for six months or even as long as a year, you're going to be hopefully in the single digit interest rate if not just right is not just right where you were before when you were current with all the creditors.

Rob Rosenthal:

So I know every situation is different, but are you saying the average bankruptcy from the beginning, David, is about 90 days?

David Shuster:

Correct, Rob. Average recovery is one to two years max.

Rob Rosenthal:

So it sounds like there's, David, a lot of myths out there surrounding bankruptcy that people don't realize are false

David Shuster:

There certainly are. That's exactly right. A lot of my time when I talk to new clients—and again, just call and we will talk through it immediately—but a lot of comments are just that, “Hey, this is just going to kill me. I don't want to get stuck in bankruptcy. It's horrible.” Meanwhile, they have tens of thousands of dollars of debt with no end in sight of paying it off. So it's a very good tool to use. And yeah, bankruptcy does need a bit of a makeover, but we love helping clients. I've got over 100 positive Google reviews and it's because as we guide people through this process, they're in so much better of a situation at the end, and so it just makes it fun to do it.

Rob Rosenthal:

So when it comes to navigating those waters at least, and especially at the very beginning when they're not even sure about what to do, they can call and talk to you? And what about that initial consultation? Is there a fee for that?

David Shuster:

It's a free consultation if it's regarding bankruptcy, Rob, so yeah, there's really no reason not to make the call.

Rob Rosenthal:

You've cleared up a lot of things. As usual, Dave, thank you for making some time and answering our questions.

David Shuster:

Yeah, thanks Rob.

Rob Rosenthal:

That's going to do it for this episode of Ask the Lawyer. My guest has been Texas attorney, David Shuster. Remember, if you want the very best information or you just like the idea of being able to choose a lawyer that lawyers choose, make sure to go to askthelawyers.com. Thanks for watching, I'm Rob Rosenthal with AskTheLawyers™.

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