FICO and Personal Bankruptcy

 FICO and Personal Bankruptcy

When clients contact me for a consultation with respect to a personal bankruptcy filing, they will often ask how this could impact their FICO score. My reply is that the impact of a filing on their FICO score is of secondary importance; how to rehabilitate their credit after filing, is of primary importance.

A wonderful article regarding one’s FICO score was recently published at Groovy Post and can be found at:     https://www.groovypost.com/explainer/what-is-a-fico-score-why-important/?utm_source=newsletter&utm_medium=email&utm_campaign=daily 

Reader’s with questions regarding FICO should review this post.

Generally, a bankruptcy filing results from a “triggering event” such as being sued, losing a lawsuit and being subject to a judgment, failure to make a payment on credit cards, or defaulting on car lease payments. A person contemplating a bankruptcy filing usually has a FICO score of 550 to 650 and is unable to get credit.

Accordingly, a chapter 7 bankruptcy filing would not lower the FICO score since it is already low. 

However, a chapter 7 bankruptcy filing can increase a person’s ability to obtain credit. Yes, let me repeat, a chapter 7 filing can make a person more credit-worthy. 

Why? For two reasons: 1) one can only file for chapter 7 bankruptcy once every eight years and 2) the bankruptcy filing cleans up one’s personal balance sheet: liabilities are discharged in and exempt assets are kept.

Banks are aware of these factors and are thus more likely to loan money to a debtor after a bankruptcy filing with credit rehabilitation than before a filing.

So how does a debtor rehabilitate their credit? 1) By getting a secured credit card, charging the card and repaying it, and finally asking the bank or credit card company to increase their credit limit. 2) By working, reducing their expenses, and saving as much money as possible.

For these reasons, filing for bankruptcy and rehabilitating one’s credit is more important than the impact of chapter 7 bankruptcy on one’s FICO score.

People with questions regarding FICO and credit rehabilitation should contact:

Jim Shenwick, jshenwick@gmail.com, (212) 541-6224