Creditors May Have to Change Rules as Bankruptcy Numbers Rise
The struggling economy, housing crisis and high national unemployment rate are causing Americans in increasing numbers to seek help from their mounting debt in bankruptcy courts across the nation. With more than 6,000 new filings for bankruptcy protection each day, the numbers are on track to reach more than 1.4 million total filings for 2009 up from 1.1 total filings last year.
With so many Americans struggling with debt and either filing for or considering bankruptcy to relieve some of their financial stresses, bankruptcy is posed to lose at least some of its social stigma and become more acceptable.
There is a common notion that only irresponsible people who want to get out of paying their debts file for bankruptcy. This is not true. There are many reasons why someone may file for bankruptcy, especially in the current economy: losing a job and falling behind on mortgage payments or other bills, for example, or being injured in an accident and swamped by resulting medical expenses. Not everyone who files for bankruptcy is looking for an easy way out.
Many people may be worried about filing for bankruptcy because of the effect it will have on their credit score and their ability to obtain future credit. Some creditors push the misconception that no credit will ever be extended to those who have a bankruptcy on their credit report. This also is not true.
Under the Fair Credit Reporting Act (FCRA), the credit reporting agencies have the legal right to report a bankruptcy on a credit report for 10 years. The big three credit reporting agencies Experian, Trans Union and Equifax usually report a Chapter 7 bankruptcy for the full 10 years and a Chapter 13 bankruptcy for seven years from the date of filing.
The agencies are less lenient with Chapter 7 filings because these types of bankruptcies allow the debtor to discharge most if not all of his or her debt something creditors obviously do not want to happen. In a Chapter 13 bankruptcy, the debtor sets up a payment plan restructuring the debt and repays at least some of his or her obligations, making Chapter 13 more palatable to creditors.
Just because a bankruptcy may be on an individual’s credit report for up to 10 years does not automatically mean that he or she will be unable to get a credit card, mortgage, car loan or other type of credit during that time period. For some, bankruptcy can improve credit scores which most likely were already damaged by removing bad debt off of their credit reports. It is not uncommon for those who have just filed for bankruptcy to begin receiving offers for credit cards or other types of credit.
However, as creditors begin to tighten their hold on funds and become more selective in whom they extend credit to, some worry that it may make it harder for those with recent bankruptcies to get mortgages and other types of loans. While this may be true, the current economy and sheer number of bankruptcy filings may make it impossible for banks and other lenders to use bankruptcy as the determining factor in credit decisions.
With so many Americans filing for bankruptcy in the last year, creditors may be forced to change their lending practices.
It may become unreasonable for them not to lend to a person for no other reason than that they have a bankruptcy on their credit report. Banks and other financial institutions make money by lending money, not by keeping it. If they want to remain profitable institutions, then they are going to have to revise their strategies and consider more factors about each applicant.
The bottom line is this: Given the current fiscal straits in which our country finds itself, some people perhaps many are going to find themselves weighed down under an insurmountable financial burden. If you and your family are struggling with debts you cannot meet, don’t let the misconception that filing bankruptcy will make it impossible for you to secure a mortgage or a car loan keep you from doing what is necessary. Banks and other creditors need to make loans to stay afloat; as the number of potential borrowers forced to file bankruptcy rises, so too must the number of loans made to those with a bankruptcy on their record.
For more information, contact an experienced bankruptcy attorney today.