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Oregon Bankruptcy Blog

Chapter 7 & Chapter 13 Bankruptcy Information

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This may be the most common question I am asked by potential clients who are considering filing a bankruptcy case.  The answer I give usually surprises them and may surprise you as well.  

If you file a bankruptcy case, the bankruptcy case WILL be reported on your credit report for up to 10 years.  This DOES NOT mean that it will ruin your credit for 10 years.   In fact, it may help to improve your credit more quickly than you might expect.

You have to think about credit as your ability to borrow money.  If your credit report shows that you have a large amount of debt but have a good payment history, you may not be able to borrow money.  This is because potential creditors can see that you have more debt than you can afford to pay.  In other words, you have a high debt-to-asset or debt-to-income ratio.  After you receive a discharge in bankruptcy, your debt-to-asset or debt-to-income ratio should improve.  Many people find that they have an easier time obtaining mortgage and vehicle loans after filing bankruptcy because creditors can see that this ratio has improved.  They suddenly have less debt than they had before the bankruptcy case was filed, but their income and assets remain the same.  Imagine that you are a creditor considering loaning money to two individuals.  Both make $30,000 per year.  One person owes $20,000 to creditors and the other owes $0.  You as the creditor are aware that the person with no debt received a bankruptcy discharge but you also know that this person cannot file another bankruptcy case and receive a discharge for at least 4 years (the timing depends on which chapter of bankruptcy was filed previously and what chapter is being considered currently.  See www.willamettevalleybankruptcy.com/faq for more details).  You are probably more likely to loan money to the person who has no debt than to the person that you imagine is struggling to pay $20,000 in debt on a $30,000 income.  In fact, you as the creditor would probably be concerned that the person with $20,000 in debt will borrow from you, find that this additional debt puts them over the edge, and will file a bankruptcy case.  When you think about credit and debt from a creditor's perspective, it is a little easier to understand why bankruptcy will not necessarily make it more difficult for you to obtain credit for long even though the bankruptcy will continue to be reported on your credit report.  This example illustrates the "fresh start" that many people refer to when they talk about filing a bankruptcy case.  

It is important to understand that I am guaranteeing that you will be able to obtain a mortgage or a low interest credit card with high credit limit immediately after filing bankruptcy.  Your financial recovery depends on you making sound financial decisions after filing the bankruptcy case.  Taking advantage of your fresh start involves building credit after bankruptcy, but doing so carefully.  Obtaining a secured loan such as vehicle loans and paying off this loan is a good place to start.  At first, you may only be offered credit at high interest rates.  As you rebuild your credit, you should receive offers for much lower interest loans.  

The impact that a bankruptcy will have on your credit score depends in part on what your credit score was pre-bankruptcy.  If your credit score was high before filing a bankruptcy case, the filing of the bankruptcy case will likely reduce your credit score.  What is important to remember, however, is that if you have more debt than you can afford to pay and begin to default on your payments, it is likely that your credit score will drop as a result.  If your credit score was low prior to filing a bankruptcy case, the bankruptcy will have less of an effect on your credit score.  It will be better for your credit score if you simply pay off all of your debt.  However, if you are considering filing bankruptcy, it is unlikely that this is an option for you.  If you spend years trying to pay off debt, slowly default on your debts, and then find that you have to file a bankruptcy case because you are unable to pay the debt due to mounting interest you may damage your credit as much or more than you will if you file a bankruptcy case as soon as you can see that you will not be able to completely pay off the debt. Filing a bankruptcy case sooner than later will allow you to start rebuilding your credit sooner than later.
Facing foreclosure is a very scary reality for many Oregonians.  While there are many government programs that may help, bankruptcy can be used as a means of delaying a foreclosure or stopping it completely.  When a Chapter 7 or Chapter 13 bankruptcy case is filed, the "automatic stay" goes into effect.  This "stays" (or stops temporarily) any collection action by a creditor, including foreclosure.  A creditor in a bankruptcy case can file a motion with the Bankruptcy Court to lift the automatic stay, which allows the creditor to move forward with the foreclosure process.  This is what sometimes happens in Chapter 7 bankruptcy cases or in Chapter 13 cases where the Chapter 13 plan does not propose to "cure" or catch up the back mortgage payments, or "arrears."  In these cases, the bankruptcy really just delays the foreclosure process.  However, in many cases, the debtor in bankruptcy is given new opportunities to work with the mortgage company to restructure the loan outside of bankruptcy.  Filing a bankruptcy case can delay a foreclosure by months or even years in some cases.  

Many people facing foreclosure use Chapter 13 bankruptcy cases to stop the foreclosure and to catch up the missed mortgage payments. This is done by proposing a repayment plan, called a "Chapter 13 Plan" to repay the back mortgage payments over a 3 to 5 year period. The debtor in the bankruptcy case must also resume regular mortgage payments at this point.  Chapter 13 cases that propose to catch up back mortgage payments are very useful for individuals who suffered job loss or some other sort of financial set back but who are now back on their feet and able to make ongoing payments but unable to make up all of the payments that were missed.  You should consult a bankruptcy attorney regarding your specific situation before deciding to file a bankruptcy case to stop a foreclosure.  Chapter 13 bankruptcy cases are particularly complicated, so you will probably need to hire a bankruptcy attorney if you plan to file a Chapter 13 case.  Many bankruptcy attorneys offer free consultations to discuss both Chapter 7 and Chapter 13 options.