What stops people from filing for bankruptcy? Ask a bankruptcy lawyer and you’ll get different answers. Is it fear, pride or a belief that declaring bankruptcy is in some way unethical? If you stopped and asked 10 people on the street for the number one reason not to file bankruptcy, most would mention damage to their credit.
Bankruptcy in Utah
There is a common public perception that playing the “bankruptcy card” creates a ripple effect that reaches every aspect of your life in a negative way. After all, bankruptcy does show up on your credit report for 10 years and no one wants to start a job interview by discussing a past chapter 7 case. Filing for bankruptcy certainly won’t make it easier to rent an apartment or lock in a good rate on a mortgage. However, it won’t disqualify you from future credit either.
The Toothpaste is Already Out of the Tube
To be sure, filing bankruptcy is not something that is to be entered into lightly, however, there is more than a hint of irony in the reasons people commonly give for not filing bankruptcy. Perhaps the most commonly cited: that bankruptcy will ruin your credit (and by extension your life). Unfortunately, bad credit is a scenario that has already unfolded for a good number of people who find themselves in financial distress. For many people, the biggest reason not to file bankruptcy (damage to credit) has already happened by the time the thought of bankruptcy pops in their head. Maybe a series of financial missteps or the loss of a job have caused charge-offs, liens, foreclosures, missed payments and a whole host of other negative credit events to appear on your credit score, is a bankruptcy really going to make much of a difference? Sure, bankruptcy will add another negative mark on your credit report, and you’d like to avoid it if possible, but in the long run it may actually give you greater access to credit. Taking your unsecured debts to zero and using the momentum to start over will help you build a stronger credit score. Waiting around with the phone off the hook won’t.
Bankruptcy vs. Other Negative Credit Events
Chapter 7 bankruptcy stays on your credit report for 10 years, whereas a foreclosure will usually stay on your credit report for 7 years. However, don’t assume that foreclosure is preferable to bankruptcy simply because it stays on your credit for a shorter period of time. Many credit counselors report foreclosure as having twice the negative impact on your credit score as a bankruptcy. According to Ray Hooper, Education and Housing Director for the Consumer Credit Counseling Service of Greater Dallas:
“A foreclosure is very serious to mortgage lenders. They’re going look at a foreclosure more seriously than they will a bankruptcy that doesn’t include the house.”
According to FICO estimates, bankruptcy will cause a reduction in the filer’s FICO score of between 130-240 points, whereas a foreclosure, deed in lieu or short sale will cause a reduction in the 85-160 range.
Public Records and Bankruptcy
Tax liens, judgments and bankruptcies are all listed under the “Public Records” section of your credit report. Any reported Public Record will damage you credit, however it’s important to understand that bankruptcy filings don’t have their own section on a credit report. They are lumped in with other government initiated events. If you’ve already had a tax lien or judgment reported on your credit, the negative impact of a bankruptcy will be decreased and the benefits of filing may outweigh the additional credit damage.
Even missing payments on credit card accounts can drop a credit score by 75 points or more. The point is not to make light of the seriousness of a bankruptcy filing, but merely to point out that, viewed in light of a series of negative credit events, bankruptcy becomes more and more attractive when a consumer’s debts have spiraled out of control.
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If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free initial consultation.
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Talk:Bankruptcy risk score
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If anyone is interested, the credit bureau Equifax calculates a score called Bankruptcy Navigator Index (BNI), that is used by Canadian Banks.
Bankrate on Bankruptcy Risk Score
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You probably already know about your credit score. That’s the number that helped increase your credit card limit or perhaps prevented you from purchasing your dream car. Well there’s another influential scoring tool you should know about: It’s called the bankruptcy risk score.
According to financial experts, this score is used secondarily to the credit score when financial institutions scrutinize a consumer’s credit history.
Kept tucked away from consumers for nearly 20 years, this number differs from the credit risk score, because it’s a little more specific. It measures how likely a person is to file for bankruptcy.
It is used by credit reporting agencies and geared specifically to lenders.
Researchers say the score typically surfaces when a consumer gives the bank permission to pull his credit report during the application process for a new loan, bank card or credit card, and during the periodic review of clients’ accounts to determine whether to increase a consumer’s credit limit.
Karen Gross, director of the New York Law School Economic Literacy Coalition, believes some lending institutions are using the score for their own compliance risk.
“Banks are required, by law, to keep a reserve based on potential bad debt losses,” she says.
“In other words, to ensure the solvency of our lending institutions, we require that they maintain a certain capital-to-risk ratio. Bankruptcy scores give banks a more finely tuned instrument by which to assess true risk within their portfolio. As such, the bankruptcy scores could enable lenders potentially to lower their bad debt reserves because they can more accurately assess and hence narrow potential risk.”
Credit reporting agencies weren’t the only ones dabbling in this innovative approach.
advertisement Researchers say a few credit card companies in the late ’90s developed a means to make the score a more powerful tool based on a combination of factors, including information that was right in front of them: consumers’ spending habits and types of charges.
“They could see that level of granular detail. So what they tried to do is combine credit bureau information and transactions to get a better idea,” says Mike Staten, director of the Credit Research Center at Georgetown University in Washington D.C. “They would use that and make the score available and even go as far as sending to issuers, that subscribe to their service, specific alerts when a person exhibits warning signs of higher bankruptcy risk.”
Analysts at credit reporting agencies say advanced mathematics and data analytics are used to determine the complex score.
However, they say, some variables come directly from your credit report, such as how the credit is used, how often a bill payment is late and the number of inquiries made.
“For a conventional credit score, you want a high number,” Gross says. “For a bankruptcy score you want a low number. And to increase the complexity, the range of the numbers is not the same. The credit score has a range of 350-850. The bankruptcy score range starts in the negative numbers and increases to possibly 2,000.”
So, why is it kept from the public?
“The argument is that people spent time and money researching the scoring model, and no one wants to disclose the model because they are giving away the value of the research that they’ve conducted,” says Gross.
However, Experian is considering making its score available to consumers.
“We feel that it may help consumers if they are getting in trouble with their debt,” says Samah Haggag, manager of analytics at Experian.
A July study by Experian is giving consumers some insight. The study ranked the states with the highest propensity to have consumers file for bankruptcy within the next year. The top five are:
Texas Nevada New Mexico Louisiana Arizona Economist Mark Lauritano of Global Insight in Massachusetts says from a broad economic view you can see the reasons why Texas would be at the top of the list.
“Based on studies we’ve done: It’s a relatively young state, people are moving to Texas, there’s a lot of immigration from south of the border, it has a below average income and it has a relatively low homeownership rate,” says Lauritano.
And, although the bankruptcy risk score may be kept under wraps, at least for now, researchers describe some actions that can help improve your score: Pay all of your bills on time, keep debt balances low and open accounts only when necessary.
-By Brigitte Yuille • Bankrate.com
Read more: Do you know your bankruptcy risk score? http://www.bankrate.com/finance/debt/do-you-know-your-bankruptcy-risk-score–1.aspx#ixzz1W9D6GvLe
Read more: Do you know your bankruptcy risk score? http://www.bankrate.com/finance/debt/do-you-know-your-bankruptcy-risk-score–1.aspx#ixzz1W9CxrSLF
Posted by CwF 2011 — Preceding unsigned comment added by Christeauxpher (talk • contribs) 18:19, 26 August 2011 (UTC)
How Bad Is Bankruptcy For Your Credit?
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