Bankruptcy and the Almighty FICO Score

02 Feb Bankruptcy and the Almighty FICO Score

ficoPeople filing for bankruptcy ask before anything else, “what is my FICO score going to be?” The general response is, “[l]ook what your FICO score has done for you so far.” If you listen to Dave Ramsey that comment will certainly be familiar to you. In the past the FICO score was not the main reason for filing a bankruptcy. However, in today’s FICO score driven society that view may be changing. Previously bankruptcy would lower your credit score but recovery was possible once you made regular payments and when your debt to income ratio came back into alignment. Today it is harder but certainly not impossible to make that recovery if you cannot prove your creditworthiness. This is true irregardless of filing bankruptcy. If your credit score is low it WILL affect many aspects of your everyday life.

The two major areas relying on your credit score needed for your recovery are employers and insurance companies. The Fair Isaac Corporation or FICO as it’s known to many people, states your credit score on average will drop like a lead balloon to approximately 530 when you file a bankruptcy. This is regardless of where the FICO score is reported at the beginning of the bankruptcy. Therefore, someone who has a higher credit score, let’s say in the 700s is going take a 200 point drop as opposed to somebody who is in the 600 range. The bottom line is your credit score will drop with the filing of the bankruptcy.

Now you have filed for bankruptcy and are debt free. With that freedom you believe you are ready to look for better job. You polish up your resume and the job hunt begins. Application after application is filled out and you attend a few job interviews but no job offers are placed on the table. Finally you speak to one of the potential employers and ask why you were turned down for the position. It is then you discover the culprit as the credit check they ran to verify your current FICO score. In fact 47% of employers run credit checks before promotions or making the final decision to hire an employee.

So now you’re stuck at your current job where you cannot receive a promotion because you filed bankruptcy. To add insult to injury you opened the mail and find out your insurance premiums are skyrocketing. You pick up the phone and call your insurance agent and ask why are your premiums going up. You haven’t had an accident, you haven’t had a speeding ticket and there’s nothing you can think of being been reported that you are a high risk driver. So why in the world would your insurance premium be increasing?

The answer is the insurance industry uses an insurance score based in part on your FICO score. The insurance industry believes people with a low FICO score are bad drivers. The basis for their reasoning is if you cannot maintain a clean credit history by paying attention to the financial details of your life, you cannot pay attention on the road. Therefore you are placing others as well as yourself at risk by driving. There continues to be a debate as to the validity of this train wreck of thought. But for now the government says that it is legal and logical to base your insurance premium on your FICO score.

Whether it’s for employment or insurance coverage it makes no sense to use a cut and dry approach of basing someone’s ability to work or drive on this score. About three years ago I had an engineer as a client and he applied to work at Radio Shack part time. This gentleman was a high level engineer in a very prominent company here in Kansas City. He was turned down for that part time job based on his FICO score. That decision made no sense to me as one would think having an engineer on board would actually be a plus in an electronics store.

The insane hiring logic seems to have gained momentum over the past couple of years. This week a young lady retained my office to file a Chapter 7 bankruptcy. I am going to call her Jane for the purpose of this article. Jane currently has a part time job but has been unable to obtain full time employment. She has been told because of her FICO score she would not be offered a full or part time job. This is the perfect example of being stuck in a continual loop of financial insanity.

Jane cannot pay off her debt because she originally lost a job. Miraculously she was able to find part time work but this barely provides enough income to cover her basic living expenses. Jane began to look for full-time employment in an attempt to payoff her debt and get her financial life back on track. No one will hire her because her debt to income ratio has tanked her FICO score.

This conundrum leaves Jane with two basic choices. The first choice is to continue her part time job, not pay her bills because there are no funds, allow her FICO score to continue to drop and wait for the creditors to sue and garnish her already meager wages. Or Jane can file bankruptcy and discharge the debt. The bankruptcy discharge can place her on a slow and steady road to financial recovery.

The recovery happens when the discharge eliminates the debt so that her debt to income ratio will begin to realign. Jane has a vehicle payment and must make those payments on time each and every month. With the debt to income ratio coming back into alignment and the monthly on time payments her FICO score were will begin to climb again.

Jane has a plan and hope that she can come out of this FICO hole that is preventing her financial recovery. But for many others the FICO jungle continues to entangle them almost to the point of strangulation. If you are one of those people trying to fight their way out of the FICO jungle and break the strangulation of debt, you should contact a local bankruptcy attorney near you.

Bankruptcy will not be a magical cure and it it will not be easy. But bankruptcy can provide you with a fresh start to begin again if you were ready to take that first step on the road to financial recovery.

Remember that knowledge is power. The more knowledge you have about how your FICO score affects your everyday life the more power you will have to regain financial control.

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Former Bankruptcy Attorney to the Kansas City UAW: Ford and GM workers, now assisting the general public in Missouri and Kansas with regaining financial control using the Bankruptcy Code. 816-472-HELP (4357).

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