Why is BK “rewarded”?

[CH-7-Mission-Accomplished]

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@designated_knitter wrote:

First, I don't want to make this seem like I'm disparaging anyone who has declared bankruptcy.  We all have to do what we have to do.

It feels like in reading the forums that if you declare BK, you are rewarded for walking away from the debt.  People start getting approved with larger CL with prime issuers and scores rebound faster with scores over 700 within a couple of years after BK.

Wheras, if you had a rough time a few years back but stuck with it to pay your obligations, you *MAY* start to rebound SLOWLY after a couple of years as you grind it out continuing to make payments.  If you DO get in with a prime issuer, you get a low SL and can't get CLIs to save your life.

Ive read that havin a 90 or 120 day delinquency is considered ALMOST as bad as declaring BK.  But, it seems like it is actually worse because even when you do rehabilitate that account and repay the obligation in full, you're still treated like a pariah and nearly impossible to get above 650s across the board (never mind 700s) even 4-5 years out.

it just seems like the current system is set up to reward people who walk away from their debts instead of working through them and paying them off.

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I think you are right, actually.   A lot of people struggle along for years trying to pay off debt while their lenders have jacked the interest rates to default rates (like 30%) and the pressure is insane.  

I think people file for bankruptcy when the pain of not filing is greater than the pain of filing.   If you have to file and you have ethical issues about "burning" a lender, there is nothing on earth stopping you from paying each and every one of them back 100%.   You just don't legally have to.   And I have never seen someone in a Chapter 7 do this.   Chapter 13 is another thing altogether.   To me it sounds like pure hell.   It's three to five years of having a stern parent monitoring your every financial move.   Yes, it lets you keep your house and other assets, and pay off your creditors at a reduced rate, but the experience would be dreadful.

I have over 200K in revolving credit limits and I have closed over 100K of credit cards I no longer needed or wanted.   I bought a nice house in Seattle at 3% interest.   I have over a year's living expenses in savings, not including my retirement accounts.

Bankruptcy is a right in this country, just as the second amendment, first amendment, etc.    And companies will always file bankruptcy when it is in their best interests to do so.   You can bet the FICO corporation would file if it were in their best interests.   In fact their board would have a fiduciary duty to their stockholders to do so.   If they didn't file the board members and CEO could be sued for derelection of duty.    Individuals should make that same calculation of what is best for THEM.

[CH-7-Mission-Accomplished]

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@Horseshoez wrote:

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@designated_knitter wrote:

@Horseshoez Thanks for sharing your stories.  Your story certainly seems more akin to what I would expect in terms of rebuilding.... and a comparable timeline that I am experiencing climbing out of my hole.

Im sorry you both had to go through that!  However, I applaud you both for getting through it and getting back together so you could preserve your most valuable asset:  your marriage!

Would that everyone's relationships could survive!  

I hope that doesn't sound trite or like I'm minimizing the financial hardships you both had to endure... just having gone through my own divorce, I am always  impressed with couples who can stay together and wish my own had survived... 

Thank you again for sharing your story.  If you don't mind me asking, is there a reason you didn't go Ch7 vs Ch13?  Also, which one do you think was the least painful and easier to deal with and recover from?

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I had to file Chapter 13 because my income was significantly higher than the median here in New Hampshire, it was also high enough to pay back rather more than my then current assets over a 5-year period.  As an aside, every state, and in some cases even within some states, there are different rules about the qualifications for the two chapters, and the rules which need to be followed.  In my case, there was literally no option to file for a Chapter 7.

As for which is easier to recover from, there are benefits and drawbacks to both:

• Chapter 7:
  • Benefits include, a very short duration between filing and discharge, which allows you to shed assets, and then start over rebuilding in a relatively short span.
  • Drawbacks include a 10-year window where the Public Record of the bankruptcy shows up on your credit history, which can make finding a mortgage at a low rate challenging for the entire duration.
• Chapter 13:
  • Benefits include having the Public Record drop off your history after 7-years (i.e. 2-years after a 60-month discharge) and being able to protect the equity in a house.  Another benefit which I've heard of, but not ever confirmed, is lenders prefer seeing a Chapter 13 on a credit report over either a Chapter 7 or a bunch of defaults, lates, and collections, and as such, are alledgedly more willing to lend.
  • Drawbacks include being effectively limited to little or no credit (depending upon where you file) for the term of the Chapter 13 (typically either 3 or 5 years) and a significantly longer time to start rebuilding credit.  Depending upon where you live when you file, you can be compelled to hand over some, or even all, of your annual tax returns (here in New Hampshire you need to turn over anything over $1,250).

In my case, I went nearly 7 years without a credit card, and that was very much a challenge from time to time.  In one instance I was on a road trip to visit my mother who'd recently had a severe stroke when the alternator of my car died and the only place which had one in stock was a Honda dealer, $700 later I was back on the road.  The money I spent was earmarked for my rent which in turn required me to dip into my meager savings to pay the rent.  On another occasion I was on a business trip to the west coast, and while there I needed to rent a car to visit a cousin up in Napa for a couple of days.  I found out the hard way you cannot rent a car at most (or even all?) major airports with a debit card; I ended up spending nearly half a day on a series of busses to travel only 100 miles.

Long story short, Chapter 7s open your life up to the Trustee to figure out what you own which can be turned over to help pay your creditors.  Chapter 13s put you in credit prison, typically for 5 years, where all but a small portion of your DMI is turned over to the Trustee to repay your creditors.  Neither is a picnic, that said, the years I spent in my bankruptcy were far better than the alternative of years of collection agencies, judgements, and wage garnishments.

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You make 'excellent' and thoughtful responses.   It's a great analysis and helpful for forum members.

[pizza1]

I will add that a BK is no walk in the park. BK happens to people for many different reasons...medical bills, divorce, job loss, etc.. Making the decision the file a BK is gut wrenching. I cried all the way to the attorneys office, during the consultation, and afterwards.

Also, the time from actually filing BK, to actual DC is one of the most stressful times in a persons life. I lost sleep, had hair loss, stomach ulcers, etc.. Theres so much entailed in a BK filing, and all the scrutiny from the BK trustee and judge, you have no idea!

With that aside...BK folks dont get prime CCC for many years, especially if they burned them! We remain in their internal system for years upon years, many times, long after the 10 year wait, we are still being penalized, and denied credit for "past relationship".

The fact that credit is somewhat easily obtainable after BK is that their debt load went from 100% to practically 0% , and also we can't file another BK for 8 years from the last one, so companies will gladly lend credit knowing if you default, they will get their money since you can't file again. ( you can file anytime, and that scares them).

The big limits also is just knowing how to work the system, play the game, and also your rebuild after your DC. Proving yourself after a BK is very hard, and getting those high limits didnt come overnight, more like several years.

Also, just like working the credit game, we work the FICO game. Its a known fact that FICO has several, if not hundreds of different "buckets", and algorithms . A person with a BK is in a "dirty" bucket, and there are several dirty buckets, and we are all being compared against each other in the same or similar dirty bucket. Some BK'ers have better scores due to their "bucket " they are better compared with/too.

All sorts of things go into making a score, and the most important one is debt, and history. I could go on and on about lots of this, but you get the idea. Also, someone with a BK, will never get past scores of 750-760 until their BK falls off their reports. With a BK on file, we are also forced to slow down, and look at your finances and overall credit, and we have to watch every little detail constantly for ultimate FICO scoring purposes too. Its exhausting to say the least. We also have to jump thru major hoops a lot of the times more so than someone without a BK, just to get a measly $500 subprime card. Its not as easy as one thinks.

[tussking]

I wouldn't say "rewarded" my credit was destroyed because (Mod cut - not here, please @tussking - if a reminder is needed, reference the TOS or the Five Things We Don't Talk About). I could keep my health insurance a plan I had for 10+ years because of a pre-existing condition. I wound up having huge medical bills and no way out. I paid $700 a month for my plan god forbid I ever needed it. I had to file BK7 or I would never recover. Companies do it all the time. I didn't have much credit card debt like 20k. It is now 5.5 years post discharge and I just hit 695. I have all the credit I need and BK is there for a reason. The reality is with all the credit I have now if I had to file BK7 again I would be screwed forever.

[Anonymous]

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@KatSoDak wrote:

Interesting subject. Since FICO scores are built on odds, (the odds of you being trustworthy in repaying your debt) maybe the odds are greater that a person who has declared BK will not default.

Edit:  maybe a better word would be statistics instead of odds.

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This is certainly part of why BK profiles can rebound so quick although I don't know if that's embedded in scoring. You can't file BK again for 7 years so lenders can sue you for unpaid loans in that time and there's no protective umbrella to save you from them. 

[Anonymous]

My chapter 7 was quite different from most people's so I don't know how much I can contribute here. I filed before I got behind while I still had pristine credit because I saw the writing on the wall, got my discharge, and then didn't attempt to get any new credit until 4 years later and it wasn't until 8 years later that I found my way to myFICO and kicked my rebuild into overdrive. I was content to go without credit for the rest of my life until my living situation presented a need for a credit card for my roommate to go grocery shopping with and Capital One just had the right timing with their $300 Platinum offer. 

In my case, I don't think my BK did much for me except avoid me getting sued, which I was very thankful for. I didn't do it to have a reset to let me get more credit. 

[jmw1]

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@CH-7-Mission-Accomplished wrote:

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Chapter 13 is another thing altogether.   To me it sounds like pure hell.   It's three to five years of having a stern parent monitoring your every financial move.   Yes, it lets you keep your house and other assets, and pay off your creditors at a reduced rate, but the experience would be dreadful.

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Chapter 13 is actually great when you are trying to keep your house from foreclosure while competely screwing over your unsecured creditors. Chapter 7 doesn't save your house. Here are the reasons why ch13 is great.

1) You force mortgages and taxing authorities to accept a zero interest arrearage repayment plan for five years. If they don't like it, too bad. They can't foreclose on you as long as you pay the trustee and post-petition mortgage payments. Other secured property get paid 100% too like cars. I would never suggest you skip mortgage and tax payments on purpose, but you can see the advantage of doing so.

2) The arrearages and secured debt I mention above are effectively subsidized by the unsecured creditors. Disposable income pays secureds, preferred debt, trustee fee, and legal fees first before Amex gets a penny. Visa and American Express are actually helping to save your home from foreclosure by getting paid pennies on the dollar instead of a whole dollar and 20% interest.

3) You have some control on determining your disposable income PRE-PETITION ONLY. Once you decide to ch13, use the money that you used to pay minimums for allowed expenses instead such as healthcare, 401k, charity, etc. If you redeploy the minimum money properly, you can end up with a plan that pays unsecured creditors pennies on the dollar. 

4) If there is an involuntary lien (eg. judgment) that is reducing your homestead exemption, you can have it partially or completely removed early in the case with the help of your lawyer with a motion to avoid lien.

5) After just one year into your ch13 plan, you can get a FHA mortgage with manual underwriting.

6) After confirmation, the plan is auto-pilot for the most part other than surrender of tax refunds.

[SouthJamaica]

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@designated_knitter wrote:

First, I don't want to make this seem like I'm disparaging anyone who has declared bankruptcy.  We all have to do what we have to do.

It feels like in reading the forums that if you declare BK, you are rewarded for walking away from the debt.  People start getting approved with larger CL with prime issuers and scores rebound faster with scores over 700 within a couple of years after BK.

Wheras, if you had a rough time a few years back but stuck with it to pay your obligations, you *MAY* start to rebound SLOWLY after a couple of years as you grind it out continuing to make payments.  If you DO get in with a prime issuer, you get a low SL and can't get CLIs to save your life.

Ive read that havin a 90 or 120 day delinquency is considered ALMOST as bad as declaring BK.  But, it seems like it is actually worse because even when you do rehabilitate that account and repay the obligation in full, you're still treated like a pariah and nearly impossible to get above 650s across the board (never mind 700s) even 4-5 years out.

it just seems like the current system is set up to reward people who walk away from their debts instead of working through them and paying them off.

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You are dead wrong. Bankruptcy is the worst thing you can have in your credit reports. There is no reward for declaring bankruptcy.

[Horseshoez]

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@SouthJamaica wrote:

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You are dead wrong. Bankruptcy is the worst thing you can have in your credit reports. There is no reward for declaring bankruptcy.

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Is having a Chapter 7 or Chapter 13 on your credit reports worse than having a bunch of judgements and collections?  I ask because I've seen it argued both ways.

[FinStar]

Just a quick PSA...

Before things go sideways on this active discussion, let's keep in mind the FSR Forum Etiquette policy and the tone of responses.  Folks may agree or disagree on a variety of responses, but the bottom line is to keep things FSR - no exceptions.  If anyone needs a reminder I'll be glad to point it out, if need be.

Thanks all.

-FS