Credit after bankruptcy: Brave new world in 2010

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What will bankruptcy do to my credit rating ? is the most frequent question prospective bankruptcy filers ask. I try to stifle my knee jerk reaction to ask if anyone who knew the truth about their financial situation would lend to them now, and now I say truthfully, I don’t know.


Before the Great Recession, I could tell clients several things with confidence:

Your bankruptcy filing becomes less and less significant with each passing year

A recent bankruptcy influences chiefly the price of credit; credit is still available

You recover for home buying purposes faster than for unsecured credit

Parts of your credit score will go up immediately after the discharge

As the economy improves, I doubt that we will return soon to the way it was before: credit given out indiscriminately almost irrespectively of the borrower’s ability to repay. I hope not.

I think that going forward credit in general will be more limited and even based on an estimate of the borrower’s ability to repay. I hope that borrowers will take on debt with the same thoughts in mind.

But even if credit is less available, I suspect that the principles I’ve been reciting will remain true. People with little or no debt will be better candidates for credit than those who have lots of outstanding credit, even if they are current on that debt.

The other fundamental issue is that one’s financial health is not measured by how much money you can borrow. It’s measured by your net worth, your available cash flow, and the stability of your income. The elephant in the room for most of my clients is that, whatever their age, they are under-prepared for retirement. Rather than thinking about what kind of “things’ they can acquire on credit, they need to be living beneath their means and saving for retirement.

But I am certain that whatever the availability and terms of future credit, 99.9% of the people in my office asking that question will be better off shedding impossible debt in bankruptcy.

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