Losing your home to foreclosure, maxed out credit cards, and living on repeated cash advances are all credit-damaging actions. In comparison to these, Bankruptcy is not that bad! In fact, Bankruptcy far from being the “end” of your credit profile is really the beginning of a new clean credit report
Bankruptcy does remain on an individual’s credit for 10 years; however, consumers often believe it is the worst possible thing that they could ever do, NOT TRUE! What many people fail to realize is that financial trouble (i.e. late payments, missed payments, over-limit credit cards) affects credit scores significantly more than the single entry of bankruptcy. Lenders view these actions as those of an unstable borrower and often do not want to lend the consumer money.
There are very few ways for an individual to repair their credit while they are in a financial mess. The most powerful Bankruptcy, clears the slate and allows consumers to start over. Where else can you find that? After a bankruptcy, a debtor can begin to rebuild their credit.
Bankruptcy is the calm after the storm for many debtors. Individuals, who find themselves considering bankruptcy often have few options left. To companies that grant credit Bankruptcy marks the point that the debtor is serious about getting their finances under control and will soon be in a position to be handle new credit.
The Debt-to-Income Ratio is very important measure for institutions granting credit. The Debt-to-Income Ratio simply explains how much debt an individual has versus their income. For example: An individual with an income of $50,000 and debt of $50,000 has a ratio of 1. This individual does not look like a good credit risk since they have reached their max capacity. Another consumer with $50,000 of income and $10,000 in debt has a 20% ratio, which is much better and lenders would prefer to lend to this individual versus an individual whose debt equals or exceeds their income
Once that individual has filed bankruptcy and their $50,000 debt has been discharged suddenly the individual is very credit worthy. At this point a lender would be much more eager to lend them money and the individual is on their way to a much better credit score.
So with all of this in mind, why do all finance experts say “Bankruptcy is the worst thing that you could do?” Well, because they are not drowning in credit card debt, they do not have a home that has negative equity, and they are not making the minimum payments on their credit cards. For people, who have never made a financial misstep, bankruptcy would have a negative impact to a pristine credit score. However, for those already in a financial maelstrom, bankruptcy can be the beginning of financial stability and peace of mind. Contact Thinking Outside the Box, Inc. for more information.