Why is it that bankruptcy has less, or equal, an impact as "paid" collections?

[Anonymous]

I guess this is just a question about the algorithms that the CRA's use.

I've seen posts by people on this forum that have gone through Ch7 and Ch13 relating their credit scores and experience.   It appears that while these people never paid their debts, their scores weren't any more adversely affected, in some cases they appear less, by their actions then someone who paid their debts.

What is the logic here?   Why are "paid in full" collections just as negative as "negotiated settlements" or collections that aren't "paid" at all?   It seems logical that a person that "paid" all their debt, even if they did not "pay as agreed" would be reported in a better light then those that didn't pay at all.  Am I nuts for thinking that this is logical?

I went through a business failure and a divorce several years ago.   I had some significant lates.  Two accounts went 90 days and one account went 120 days before I got them caught up and eventually paid off.   I also had one credit card during this time go to collections, which I also eventually paid off in full.   I paid all interest and penalties.   Yes, I did not pay as agreed, but I did pay.  My scores are in the 660-690 range today, but at the time they dropped from 750-790 range to the 500's.   It took a lot of time for me to get them even to their "fairish" range today.  Hell, I was underwater....but I eventually paid ever cent I owed.  It wasn't easy.

I've read many posts which people who have not paid in full....ever.   They either negotiate settlements, or have actually declared Ch 7 or Ch 13.....and their experience with their credit scores seem no worse for the wear.  

Is that logical?

[JoeBJay20]

I wouldn't argue that their scores weren't less negatively affected, there's no question that filing for BK absolutely tanks your scores.  However, over time, history can be rebuilt.  Still, the mere presence of a BK in your credit file is devastating, especially under a manual review.  You have to keep in mind that FICO is is a risk estimate designed in part to measure your history of paying debts on time.  It's not an issue of whether a collection or charge-off is eventually paid or not (although paid collections/chargeoffs do look better under a manual review), the fact that you were severely late on the payment is the issue.  As has been stated on this board many times, while being an important factor for credit, FICO is just a single factor, and many other factors are and should be examined in the decision to grant credit.  

Message Edited by JoeBJay20 on 06-06-2009 06:07 PM

[MattH]

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@JoeBJay20 wrote:

I wouldn't argue that their scores weren't less negatively affected, there's no question that filing for BK absolutely tanks your scores.  However, over time, history can be rebuilt.  Still, the mere presence of a BK in your credit file is devastating, especially under a manual review.  You have to keep in mind that FICO is is a risk estimate designed in part to measure your history of paying debts on time.  It's not an issue of whether a collection or charge-off is eventually paid or not (although paid collections/chargeoffs do look better under a manual review), the fact that you were severely late on the payment is the issue.  As has been stated on this board many times, while being an important factor for credit, FICO is just a single factor, and many other factors are and should be examined in the decision to grant credit.  

Message Edited by JoeBJay20 on 06-06-2009 06:07 PM

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JoeBJay is basically right.  But the main thing to remember is that FICO's scoring models are not based on what people intuitively think will have predictive value but on what actually does have predictive value when they perform statistical analyses.  I've never worked in the financial world, but in my own work (pharmaceutical research and development) I make extensive use of very similar statistical data mining algorithms.  It is the universal experience among people doing pharmaceutical research to have our intuitive expectations turn out not to be correct when we have actual data on how people respond to a new drug.  The same is likely true about trying to predict who will get into difficulty over credit.

Also, from the perspective of a lender a debt that is paid very late can be almost as costly as a debt that is never paid at all, after one factors in the cash flow impact and collection costs.

[Anonymous]

"Still, the mere presence of a BK in your credit file is devastating, especially under a manual review."

I'm rather new to investigating credit issues, and I was wondering what this poster meant by "manual review."  We filed Ch. 7 about 18 mos ago, and my scores have been improving quite a bit.  But now I'm wondering if this "manual review" somehow overrides the FICO score in creditors' decsions.

Thanks

[JoeBJay20]

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@Anonymous wrote:

"Still, the mere presence of a BK in your credit file is devastating, especially under a manual review."

I'm rather new to investigating credit issues, and I was wondering what this poster meant by "manual review."  We filed Ch. 7 about 18 mos ago, and my scores have been improving quite a bit.  But now I'm wondering if this "manual review" somehow overrides the FICO score in creditors' decsions.

Thanks

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Welcome to the forums!

While many credit decisions are automated, some will actually be decided by an actual human looking through your credit file, this is what is referred to as a manual review.  This is usually the case for larger lines of credit such as mortgages.  As I stated in my first post, your FICO score is an important part, but only a single factor in decisions to grant credit.  There's no question that the presence of a BK on your report will virtually blacklist you with some lenders and even some employers, but that doesn't mean there won't be credit available to you.  If you haven't gone over to the bankruptcy section, I would highly recommend it, as there is a great deal of information in those threads. 

[Anonymous]

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@Anonymous wrote:

I guess this is just a question about the algorithms that the CRA's use.

I've seen posts by people on this forum that have gone through Ch7 and Ch13 relating their credit scores and experience.   It appears that while these people never paid their debts, their scores weren't any more adversely affected, in some cases they appear less, by their actions then someone who paid their debts.

What is the logic here?   Why are "paid in full" collections just as negative as "negotiated settlements" or collections that aren't "paid" at all?   It seems logical that a person that "paid" all their debt, even if they did not "pay as agreed" would be reported in a better light then those that didn't pay at all.  Am I nuts for thinking that this is logical?

I went through a business failure and a divorce several years ago.   I had some significant lates.  Two accounts went 90 days and one account went 120 days before I got them caught up and eventually paid off.   I also had one credit card during this time go to collections, which I also eventually paid off in full.   I paid all interest and penalties.   Yes, I did not pay as agreed, but I did pay.  My scores are in the 660-690 range today, but at the time they dropped from 750-790 range to the 500's.   It took a lot of time for me to get them even to their "fairish" range today.  Hell, I was underwater....but I eventually paid ever cent I owed.  It wasn't easy.

I've read many posts which people who have not paid in full....ever.   They either negotiate settlements, or have actually declared Ch 7 or Ch 13.....and their experience with their credit scores seem no worse for the wear.  

Is that logical?

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As a matter or practicality, a BK is actually less credit risky than collections.

1.  BK resolves current and past debts.  A collection is an unresolved derogatory debt.

2.  You can only go BK once every 7 to 10 years.  You can have an unlimited number of collections at any time, for any amounts without limit to frequency.

3.  BK is an act of last resort in order to get out from under debt.  Collections are part of accumulation of debt, which may force BK.

[scrambler]

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@Anonymous wrote:

I guess this is just a question about the algorithms that the CRA's use.

I've seen posts by people on this forum that have gone through Ch7 and Ch13 relating their credit scores and experience.   It appears that while these people never paid their debts, their scores weren't any more adversely affected, in some cases they appear less, by their actions then someone who paid their debts.

What is the logic here?   Why are "paid in full" collections just as negative as "negotiated settlements" or collections that aren't "paid" at all?   It seems logical that a person that "paid" all their debt, even if they did not "pay as agreed" would be reported in a better light then those that didn't pay at all.  Am I nuts for thinking that this is logical?

I went through a business failure and a divorce several years ago.   I had some significant lates.  Two accounts went 90 days and one account went 120 days before I got them caught up and eventually paid off.   I also had one credit card during this time go to collections, which I also eventually paid off in full.   I paid all interest and penalties.   Yes, I did not pay as agreed, but I did pay.  My scores are in the 660-690 range today, but at the time they dropped from 750-790 range to the 500's.   It took a lot of time for me to get them even to their "fairish" range today.  Hell, I was underwater....but I eventually paid ever cent I owed.  It wasn't easy.

I've read many posts which people who have not paid in full....ever.   They either negotiate settlements, or have actually declared Ch 7 or Ch 13.....and their experience with their credit scores seem no worse for the wear.  

Is that logical?

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  For me the FICO scoring system  is absolutely illogical as it stands right now.  A BK is a serious derog that should attract stricter penalty because the process lead to substantial losses on the part of the government and the  financial industry. 

  Sometimes these losses can amount to $30,000 - $ 50,000 thousand dollars due to bankruptcy protection from Ch 7 or Ch 13.

On the other hand someone with a $120 library fines taken to collection because no proper communication were established after the debtor graduate from the University/College also results a similar score drop.

    If  a collection agent for the  $120 refused to delete the derogatory account even after payment, then you are in the same trouble as someone who game the system with a $50,000 BK7  protection. 

I know txjohn and other people argued that FICO is a risk predictor. It does a lousy job when grading a $50,000 BK7 versus a $120 library fine. 

FICO should reprogram their algorithm to penalize defaulters in proportion to the amount owed. A charge off should not just be a charged off. A $10,000 Charged off is not the same as a $150 charged off.

I am a programmer and If given the choice to modify the FICO algorithm, I will classify defaulters as follow:

CO = CA < Tax Lien < Public record/judgment < BK13 <  BK7 and assign different base weight to each default type.

I will let the assigned time on credit report stay as follow.

Paid CA and CO             =  Stay for maximum     of     2 years after payment date

Paid Tax Lien                 =  Stay for maximum     of     2 years after payment date

Unpaid CO and CO         =  Stay for Maximum     of     5 years from DOFD

Paid judgment                =  Stays for Maximum   of     5 years

Paid BK13                     =  Stayed for Maximum  of     5 years from DOFD

Public record                  =  Stay for a maximum  of     7 years

Unpaid BK13                  = Stayed for maximum  of     7 years from DOFD

BK7                               = Stayed for maximum  of    10 years

 I will then assign different base weights to different type of defaults. Defaulting is a risk and should therefore be penalized. For example,  I will assign the following BASE weights. The higher the weight the bigger the score drop.

CA                       = 10  ( Debt can still be paid if given the chance)

CO                       = 20  ( Debt has been relegated as a loss)

Public Record        = 30  ( Public pain)

Tax Lien                = 30  ( Owing public money)

BK 13                   = 30  ( Serious loss of public fund)

BK  7                    = 60  (Severe pain to the public)

Furthermore, a $100 CA will  lower your score further proportionally by the amount owed. Therefore a $5000 collection will   lower your score much more than a $100 collection. Because the eventual loss of such revenue will be a pain to business and possibly the public.

A $10,000 BK7 will have the debt divided evenly as $1000 public fund loss + interest. Then, FICO score will drop in proportion to that amount. The FICO score will recover over 10 years in proportion to the pain caused to the public till it reach the original score before the BK7. 

  For example if someone has a FICO score of 720 at the time of declaring BK7, score will dropped to say 520 after factoring the base weight and the amount owed. The defaulter will now recover at the rate of (720 - 520)/10 = 20 points per year until he returned back to 720 after 10 years.

  A person with a $50,000 BK7 will have score dropped to  420 and will recover at the rate of 30 points per year.  The program now penalize you according to how much you have defaulted the public/financial industry.

  I need to go somewhere now and I will continue my argument later.

Message Edited by scrambler on 06-11-2009 10:19 AM

[Anonymous]

Seems to me you want FICO scores to be a type of punishment rather than being a predictor.  Strange as it is, someone who is fresh out of bankruptcy is less at risk of defaulting than someone with a major amount of debt.  Obviously, people who filed bankruptcy cannot file again for 7 -10 years. 

From my reading of your post, you seem to have a lot of anger towards people who filed bankruptcy, not giving consideration to the the why or how it happens.  Lucky for us, you aren't the one writing the FICO algorithims.  

FICO scores shouldn't be a form of punishment.  

[medicgrrl]

Please don't continue your arguement later.  All you are going to do is offend a lot of people on this forum.  You don't know anything about the lives of those who have had past credit issues so to say people should be "punished" is really not fair. 

[smallfry]

scrambler if you want to be fair about it FICO should allow all paid off mortgages and car loans to remain on reports forever. Why should I be penalized for paying off a 30 year mortgage in 10? Or car loans before the term of the loan? It could go on forever. As someone who has gone BK7 I can tell you that FICO and the CRA's have punished me plenty. I got my first CC in 1975. Closed by credit grantor. My oldest account is less than half of my actual credit history to say nothing of my AAofA. Sure there are inequities in the scoring system but you cannot tailor a report for every individual.