The truth about bankruptcy is people can start to rebuild their credit and gradually get back into good standing.
A number of reasons suggest that, despite the negative mark on a person’s credit score, bankruptcy is a better strategy in the long run. A single hit versus a constant erosion of credit through repeated late and missed payments will typically be less harmful.
The Vicious Cycle of Bad Debt
Postponing bankruptcy will result in the continuing deterioration of credit scores as existing debts get further and further behind, interest grows and late fees continue to accrue. Not only do unpaid debts damage your credit score on their own by showing up on your credit report as late or missed payments each month, but the measures that your creditors take to collect on the debt can count against you as well.
After a debt has been overdue for a certain period of time, many creditors give up on trying to collect the debt themselves and instead will cut their losses by selling the debt at a discount to a collection agency. This gives the collection agency the right to receive payment from you for the original debt.
When your debts go into collection, it reflects negatively on your credit report along with the record of your previous late or missed payments on the debt. Late or missed payments to the collection agency will also appear on your credit report and lower your score.
Another consequence of continuing to carry past-due debts is that you are at risk of being sued by your creditors. When this happens, the court may enter a judgment against you for payment of the debt, which can lead to garnishment of your wages. Although judgments and garnishment proceedings are not directly reflected in your credit score, they are a matter of public record and can still be seen by potential lenders down the road.
Breaking the Cycle Through Bankruptcy
In the same way that habitual late payments damage your credit standing, the key to repairing your credit is to establish a record of consistent on-time payments. When your existing debts are overwhelming, this can be extremely difficult to do. It can also be very difficult to obtain new credit, such as a car loan or mortgage, if your credit report shows that your existing debts are not being paid.
Bankruptcy can stop the cycle of late payments by giving you a clean slate. Once your case has been filed, creditors will be prevented from collecting on your debts through an automatic stay. The automatic stay acts as a shield, prohibiting creditors from calling or contacting you, even while your debts are pending discharge. The discharge of your debts acts as a permanent bar on creditors from collecting on the debts listed in your bankruptcy petition.
Once you are no longer accruing late fees and missing payments you will be well on your way to rebuilding your credit after your bankruptcy. The key is to pay your bills in full and on time.
Despite the potential long-term benefits, there is no getting around the fact that a bankruptcy on your record will be a red flag for lenders, and a bankruptcy filing will stay on your record for ten years. However, unlike a pattern of missed payments, a bankruptcy filing can send a message to lenders that you are taking steps to improve your situation. This may make you more attractive to potential lenders than simply failing to pay your debts.
You may be surprised to find out that you will receive offers for credit cards you’re your bankruptcy is complete. Although they will be offered to you at higher rates of interest and you will want to verify that your payments will be reported to the credit agencies, credit cards, whether secured or unsecured, are a great way to help you rehabilitate your credit score. Once you have established a track record of current payments, you should be able to negotiate more favorable interest rates and terms.
An Attorney Can Help
Ironically, bankruptcy may be the fastest way out of a bad situation. Bankruptcy can help you regain control of your financial future. A thorough evaluation of your asset and liabilities coupled with an understanding of what a bankruptcy can do for you will give you the education necessary to evaluate whether bankruptcy is the right step for you.
An experienced Los Angeles bankruptcy attorney can examine your situation discuss your options with you.