Bankruptcy Myths Debunked

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Registered: 07-05-2005
Bankruptcy Myths Debunked
1
Fri, 10-04-2013 - 8:47am

Bankruptcy is undeniably one of the worst things -- if not the worst thing -- you can do to your credit, typically causing a credit score loss of more than 200 points.

However, you can minimize the impact and hasten the recovery of your credit through better awareness of how credit scores treat bankruptcy. To do this we’ll need to set the record straight on some of the most commonly held misconceptions about how bankruptcy impacts credit scores.

http://money.msn.com/debt-management/5-bankruptcy-myths-debunked

I thought this was a pretty good article.  Would you agree with their points?  Anything you'd add/expand upon?  

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Registered: 03-17-2003
Wed, 10-09-2013 - 1:11pm

I thought this was an excellent article that debunks common myths of bankruptcy.

Wanted to throw in my feedback on a couple items.

Fact No. 1: While intuitively this logic might make sense -- better credit management prior to the bankruptcy means lower future credit risk? -- the reality is that a positive payment history on an account prior to it being included in bankruptcy does very little toward minimizing the damage to your score. Simply the presence of bankruptcy information on the credit report and, most importantly, the length of time since the information first appeared, are the strongest determining factors.

This fact is true in terms of the short term hit on your credit score, but let's fast forward.  First let's understand the No. 1 top reason for people filing bankruptcy is and has been medical related expenses (hospitalization, doctors bills, medicine, postop care, and of course there may be lost wages secondary to the medical related expenses).  Thus the filer may have been maintaining good, perhaps pristine, credit history until one event turned their world upside down and resulted in filing bankruptcy. This is not uncommon.  These filers struggle to keep up with the bills but maintain their house payment while other creditors go unpaid and eventually they file bankruptcy.  So they file bankruptcy and keep on making their house payment "business as usual" during the bankruptcy.  After they are discharged they continue to make their house payment and keep on making their house payment "business as usual".  Eventually the bankruptcy falls off their credit reports.  After 7 years the accounts included in bankruptcy also fall off their credit reports, but that mortgage remains.  Know what?  That one credit item provides (1) long term history and (2) boosts the credit score because they kept up with the payments before, during, and after bankruptcy.   The article states, "...the reality is that a positive payment history on an account prior to it being included in bankruptcy does very little toward minimizing the damage to your score" is true but only for the short term.  That positive payment history can, and will, help your credit history in the long run.  The same holds true with car payments or any other secured debt.   I did this and have seen others do the same thing knowing full well in the fullness of time the struggle to keep up can pay off, even while your credit score tanks because of the bankruptcy.

The important thing to remember about your credit score is that it is fluid.  Credit scores change all the time.  One missed payment will hit your credit score hard, but the older it gets the less it hurts.  Same with bankruptcy and your credit score: filing will tank your credit score but in the fullness of time bankruptcy will disappear and no longer hurt your score.

Good article.