From a Credit Rebuilding Standpoint , Is Bankruptcy Really Better and Quicker Route Than Settling ?

[icloud987]

Hi,
I have been considering between debt settlement and bankruptcy.
I consulted one attorney today. He said bankruptcy would rebuild credit quicker because all the late payments and charges will be deleted after completing a bankruptcy. (I have about seven charges off the account and almost a year of late payment ) At the same time, with debt settlement, those negative marks continue to wear my score down.
My goal is to buy a house in 2 years or so, so rebuilding credit will be an essential factor for me to make a decision.
The cost analyst part is about the same for both, I may have to do chapter 13 and pay 50% debt, and debt settlement is about 50%.
Can anyone offer your insight or your personal experience, please?

Thanks.

[CH-7-Mission-Accomplished]

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@icloud987 wrote:

Hi,
I have been considering between debt settlement and bankruptcy.
I consulted one attorney today. He said bankruptcy would rebuild credit quicker because all the late payments and charges will be deleted after completing a bankruptcy. (I have about seven charges off the account and almost a year of late payment ) At the same time, with debt settlement, those negative marks continue to wear my score down.
My goal is to buy a house in 2 years or so, so rebuilding credit will be an essential factor for me to make a decision.
The cost analyst part is about the same for both, I may have to do chapter 13 and pay 50% debt, and debt settlement is about 50%.
Can anyone offer your insight or your personal experience, please?

Thanks.

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If you can do a chapter 7, that would be preferable.   You can get your FICO scores up to 700 in some cases and certainly get them to 680 in 2 years.  

If you have to do a 13, and it's the same price as settling, don't do it.   Chapter 13's are 3 to 5 years in length so the soonest you could get discharged is 3 years and most 13's are 5 years so you wouldn't be able to buy before then.   FHA/VA is two years post filing chapter 7 to get a mortgage and conventional loans are 4 years post filing, assuming your mortgage scores are high enough.    Just remember if you file a Ch 7, that's it for 8 years,  you have played your one Ace card.

[icloud987]

Thank you for your quick reply.
I heard in chapter 13 , people can buy houses after one year entered into chapter 13 , if they make all payments on time . So that is quicker than chapter 7.
But bankruptcy just sounds scary to me than debt settlement. So I have a hard time determining it.
But you do agree then? Does bankruptcy lead to a quicker credit rebuilding than debt settlement?
What if I can be added as AU on others credit card? Would that help a lot in post-debt settlement or bankruptcy rebuilding?

[Horseshoez]

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@icloud987 wrote:

Thank you for your quick reply.
I heard in chapter 13 , people can buy houses after one year entered into chapter 13 , if they make all payments on time . So that is quicker than chapter 7.
But bankruptcy just sounds scary to me than debt settlement. So I have a hard time determining it.
But you do agree then? Does bankruptcy lead to a quicker credit rebuilding than debt settlement?
What if I can be added as AU on others credit card? Would that help a lot in post-debt settlement or bankruptcy rebuilding?

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Yes, you can buy a house after only one year of on-time payments to the Trustee in a Chapter 13, with the Trustee's approval, and then only with "manual underwriting".  There are folks here who've done it and shared their experiences.  I finished my Chapter 13 in March 2020 and opted to wait the full 7-years from filing before I start applying for mortgages.  Why?  I'm too busy to muck around with manual underwriting, I have stupid cheap rent where I'm living, and I REALLY don't want to pay higher interest and/or PMI, so I'm waiting until I have at least a 20% downstroke for the new home.

[dragontears]

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@icloud987 wrote:

Hi,
I have been considering between debt settlement and bankruptcy.
I consulted one attorney today. He said bankruptcy would rebuild credit quicker because all the late payments and charges will be deleted after completing a bankruptcy. (I have about seven charges off the account and almost a year of late payment ) At the same time, with debt settlement, those negative marks continue to wear my score down.
My goal is to buy a house in 2 years or so, so rebuilding credit will be an essential factor for me to make a decision.
The cost analyst part is about the same for both, I may have to do chapter 13 and pay 50% debt, and debt settlement is about 50%.
Can anyone offer your insight or your personal experience, please?

Thanks.

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I wanted to correct some misinformation from the lawyer. 

BK does NOT remove the negative information from prior to filing. All lates/CO will still be there. BK discharges the debt not erases the past poor payment history. 

Some times collection accounts will be removed  

[icloud987]

@dragontears Thank you for sharing that . 

So if the negative info wont be deleted upon completing of bankruptcy , that means bankruptcy doesnt  always  lead to quicker rebuild of credit compare to debt settlement ,right?

[jmw1]

You should always be thinking finances before FICO in all of your dealings. But the FICO effect is better with BK7/13  vs. debt settlement.

In a 100% repayment chapter 13, no interest or late fees are charged. Your fees consist of the trustee cut and your attorney fees. The attorney fees are usually $3k-$5k and the trustee cut could be as high as 10%. Lack of credit card interest makes it much faster to pay 100%.

In a 0-99% repayment chapter 13, no interest or late fees are charged. The trustee cut and attorney fees are subsidized by your unsecured creditors rather than you. You only pay what you can afford to pay, which is called your disposable income.  From your disposable income, your trustee and attorney take their cuts first. Then secured/priority creditors paid through the plan. Whatever is left over is given to unsecured creditors. It can be as little as a penny on the dollar. Your unsecured creditors have no say in how little their cut will be.

In a chapter 7, you pay the attorney fees and all of the debt is gone instantly. 

When you file for either 7 or 13 BK, your unsecured debts go to zero on your CR so you will have an amazing unsecured DTI of 0%. Past history does stay, but your debt is gone on day one even in a 13. If you fail your 13, the debt comes back.  Because you owe nobody anything on unsecured debt, you will get credit cards super fast in a 7 and even 13s can get credit cards if permitted by the trustee. In many districts, you don't need the chapter 13 trustee's permission to incur a small debt of $1k or less. 

If you do debt settlement, you will get a 1099 for the forgiven amount which means you have to pay taxes on top of the amount you repaid. You will have to pay credit card interest rates if this isn't a lump sum payoff. With any chapter of bankruptcy, there are no tax consequences for the discharged debt.

For mortgage qualifying after bankruptcy, one year into a 13 repayment plan or two years after a 7 is good enough to qualify for FHA with manual underwriting. Manual underwriting is 97% the same as automated underwriting from the borrower's point of view. The only difference I noticed was to have a one month reserve in a 401k or IRA account. 

Bankruptcy is way better for both your finances and FICO.

[Horseshoez]

So, I'm a little confused regarding the comments of previous derogatory remarks being removed following the discharge of a Chapter 13.  Why am I confused?  Because literally all of my unsecured accounts included in my bankruptcy were removed from all three of my reports within six months of my discharge; the only one which remained was a car loan, which oddly enough, never had a late and was paid in full, but yet shows IIB.

[dragontears]

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@Horseshoez wrote:

So, I'm a little confused regarding the comments of previous derogatory remarks being removed following the discharge of a Chapter 13.  Why am I confused?  Because literally all of my unsecured accounts included in my bankruptcy were removed from all three of my reports within six months of my discharge; the only one which remained was a car loan, which oddly enough, never had a late and was paid in full, but yet shows IIB.

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My guess is that your accounts were delinquent prior to you filing and they reached the reporting exclusion time frame so were removed and it had nothing to do with your BK 

[Horseshoez]

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@dragontears wrote:

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@Horseshoez wrote:

So, I'm a little confused regarding the comments of previous derogatory remarks being removed following the discharge of a Chapter 13.  Why am I confused?  Because literally all of my unsecured accounts included in my bankruptcy were removed from all three of my reports within six months of my discharge; the only one which remained was a car loan, which oddly enough, never had a late and was paid in full, but yet shows IIB.

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My guess is that your accounts were delinquent prior to you filing and they reached the reporting exclusion time frame so were removed and it had nothing to do with your BK 

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Delinquent?  Yes, but no where near that delinquent.