Does Filing For Bankruptcy Make Me A High Risk To New Lenders And Credit Card Companies?

February 16, 2012
Barrios Machado

Not necessarily.

In fact, most lenders (including credit card companies) view post-bankruptcy applicants as low risks for the following reasons:

1) Once a debtor files for Chapter 7 relief and receives a discharge, they cannot successfully file again for another 8 years. Meaning: new creditors will know that a debtor cannot push the "eject" button to escape new debts for many years after a bankruptcy.

2) After a successful Chapter 7, there is little if any debt remaining. New creditors realize that a new debtor is now ripe to incur new debts or be in need of new credit.

3) It is presumed that a debtor will have some sort of income after filing for bankruptcy, and new creditors would presume this as well. Meaning, there will be money to pay for new debts.

4) A person who has filed bankruptcy has experience with credit and debt. New creditors often rely on this experience to issue new credit.

In short, the only way lenders and creditors make money is by charging interest. They cannot make this money if they do not issue credit. Issuing credit to low-risk applicants is the safest bet for a lender. Applicants of new credit with a recent bankruptcy are often seen as lower risks because of the reasons listed above.

Keep in mind, however, that when it comes to borrowing large amounts of money, say for a home, a fresh bankruptcy may have to age several years before qualifying for decent interest rates again under both FHA and conventional loan programs (giving a new mortgage applicant some time to build up savings for a decent down payment). Also bear in mind that, under current standards, the most important factor in qualifying for these new loans will be income.

It is important to recognize that the major point of life after a bankruptcy is to allow an individual to build up income and savings, not necessarily credit. It is financially better to build something that is yours (income, cash, savings) rather than build up something that is borrowed.

But, when it comes to rebuilding both, a bankruptcy is one of the wisest financial strategies available, allowing people to eliminate or restructure debts impossible to otherwise pay back and allowing them to rebuild oftentimes much faster than they would have anticipated.

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