Bankruptcy for bad credit?

[chalupaman]

From my experience, if your credit was already bad and in the dumps, bankruptcy wouldn't impact you too much at the beginning, especially if you were in the 500s as it is. That's where I started and in the months leading up to the discharge, my scores were already slowly going back up. When I got my cards and established good payment history again, that's where I really saw the most gains to the 600s. After a while your scores will stabilize and improvement will be much more gradual. But yes, go with secured cards like from CapOne at the beginning and work your way up. 

[Remedios]

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[mich800]

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@Anonymous wrote:

Would it be worth it to file then? To improve my credit. Yes I know it'll drop it in the beginning but I can improve after that. 

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Generally speaking, people file because the ability to repay the existing debt is unlikely and the BK process lets you reset your finances and not continue sending cash to something that will never go away.  Credit ratings are typically already in the toilet by this point.  How bad your credit was prior to filing will to some extent dictate how quickly your scores will improve in the following months/years.  Your credit sins will not just disappear from your credit file but you will not have the stress of a creditor sueing and living hand to mouth with your bills.  

So file to make it easier to sleep at night and get a fresh start.  Your improving credit rating is just gravy at that point.  This is an oversimplification and can be much more complicated depending on your assets, business ownerships, etc.  but in general that is the way I view bankruptcy.

[jmw1]

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@Anonymous wrote:

Would it be worth it to file then? To improve my credit. Yes I know it'll drop it in the beginning but I can improve after that. 

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I'm a big fan of bankruptcy. More people should file. Many wait too long.

That being said, it's not supposed to be a tool for credit building which is the vibe I'm getting. But regaining improved credit faster is one of the side benefits. Chapter 7 is filed when there is no prayer of ever repaying your debts in full rather than get rid of your lates.  When you can't pay, the lender sues you. Once they get a judgment, the lender garnishes 25% of your wages involuntarily. The garnishment of wages and bank accounts and multiple lawsuits is the point when most people file BK.  

You can file chapter 7 only once every eight years. You want to do it when your personal finances are improving and you'll establish good credit/personal finance habits going forward such as AZEO and learning how to live within your means and save for an emergency fund of at least $1k or $2k.  For example, if you're unemployed, you shouldn't file until you get another job that pays enough to live on without credit and build a savings account. So if you file today and end up with 80% utilization and a 30-day late a few months from now, you should have delayed filing because you really, really need to make good use of your once every 8 year reset and build a savings account. The savings account is so you don't have to rely on credit when there is an emergency like car repairs.

Lots of chapter 7 folks mess up just a few years after filing and get the world's tiniest violin string quartet when they complain about waiting 8 long years while chapter 13 folks have to enter a partial repayment plan over 3-5 years. 

[Horseshoez]

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@jmw1 wrote:

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Lots of chapter 7 folks mess up just a few years after filing and get the world's tiniest violin string quartet when they complain about waiting 8 long years while chapter 13 folks have to enter a partial repayment plan over 3-5 years. 

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I had to go the Chapter 13 route, and while it is no picnic, there are some benefits compared to filing a Chapter 7.  Said benefits include, but are not limited to, the following:

• The Public Notice of your bankruptcy falls off your credit report after only 7 years (from filing date) versus 10 years.
• You can protect property from being sold to pay creditors (the degree here depends upon jurisdiction).
• Some say creditors look more favorably on someone with a Chapter 13 discharge compared to a Chapter 7, and are more likely to extend credit.
• The enforced austerity plan a Chapter 13 enforces on most folks can pay benefits post discharge; in my case I'm 14 months post-discharge and I'm still pretending I'm in my bankruptcy, however, instead of paying the Trustee all that money every month, I'm paying my savings account.  So far I've already saved up about half the money I need to put 20% down payment on a new home for my wife and myself next year when we'll be eligible for a regular mortgage.

[Anonymous]

You dont need 20% down on a mortgage even still in a chapter 13 and you only have to wait until 12 months past filing to get approved with FHA.

[Brian_Earl_Spilner]

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@Horseshoez wrote:

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@Anonymous wrote:

Not at all.  I have one they gave me, $2000 limit and no fees.  How is that predatory?

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A fee free card is pretty rare for CreditOne, you are one of the very few with such a card, then there is they fact they typically charge interest from the moment a charge is made.  I call that predatory.

Cards from the likes of CapitalOne are far more traditional in that if you pay the balance in full by the due date, there is zero interest charged.

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They have a card with no fees, a grace period, better rates than the biggest lenders, and rewards. They also have multiple configurations of this for people with decent credit.

[Horseshoez]

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@Anonymous wrote:

You dont need 20% down on a mortgage even still in a chapter 13 and you only have to wait until 12 months past filing to get approved with FHA.

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While I don't need 20% down, that is my plan so as to avoid PMI and such; as for getting an FHA mortgage, your comments are only partially correct.  With court/Trustee approval you can get an FHA mortgage while inside of a Chapter 13 after a year of on time payments to the Trustee, but that is a special case and requires manual underwriting.  If you read the FHA guidelines, it is very specific, to get a normal automatically underwritten FHA mortgage prior to the 2-year post discharge date, regardless of the type of bankruptcy, you must either have "extenuating circumstances" or apply for a manually underwritten mortgage, which will also typically mean higher interest rates.

[FLLGuy]

@Horseshoez  You're correct.  

Actively awaiting discharge from 13 - got the green light from both Atty/Trustee to sell my house and buy a new house.  So it is possible however, a few things to consider.  Advice from my atty in South Florida. 

1. If you sell during active 13 then the Trustee gets hand in the cookie jar and mandates the proceeds are 100% utilized for new home sale within 1yr if I recall correctly.  If you don't then your plan gets adjusted and that money is now uesed to pay allocate your creditors. 
2. Of course all the paper work that follows (incur debt, permission fromTrustee to new lender......blah, blah)
3. FHA is possible, in fact it's the only option during active bankruptcy and 2-4yrs out post discharge via manual underwritting.
4. FHA will come with overwhelming woes of conditions/paper work/proof of your existenece and lineage along with DNA.

In the end, if you can wait then sit tight until you qualify for a convential loan is what my atty advised and a close mortgage broker friend.  However, for me - I can't wait this pandemic accelerated real estate prices to skyrocket with all these cash hoarders coming out the wood-work.  I'll wait patiently for discharge papers and present it to my loan officer and go through the agonizing hurdles to get a new FHA mortgage with the manual underwritting process.  I will refinance later once my scores inprove and i'm out 4yrs post BK 13. 

[Anonymous]

Update: I filed chapter 7 and have my meeting tomorrow will be discharged 30 days later. My score is already up 40 points! I've been added as an authorized user on an account that was open in 2014 with a 2500 limit and perfect payment history so I'll see what that does to my score. Thanks guys 🤙🏽

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