What Are The Real Benefits Of The Bankruptcy Discharge?

by Carmen Dellutri, Esq.

April 28, 2013

income for bankruptcy--profit loss statementA bankruptcy discharge is one of the primary reasons that a person files for bankruptcy protection.  We all should know this, but do we really know what the bankruptcy discharge allows us to do?  This is the question that really needs to be answered.  First, we need to discuss what the bankruptcy discharge is and then we can speak about the benefits.

The discharge can be defined in lawyer terms or in a way that non-lawyers can understand.  A legal definition of the bankruptcy discharge is that the discharge creates a statutory permanent injunction against the collection of all dischargeable debts of the debtor.  In non-legal terminology, the discharge prevents creditors, whose debts were properly included in the bankruptcy and legally discharged, from taking any or all steps to collect on their debt.

But the question still remains:  What are the real benefits of the bankruptcy discharge?  When a debtor obtains a bankruptcy discharge, it will take some time before their credit reports will be updated.  I usually give Equifax, Experian and TransUnion approximately ninety (90) days to make the corrections to the tradelines.

After the tradelines are corrected, you should notice a change in your credit score because your debt to income ratio has changed.  I’ve previously written about debt to income ratios and how to calculate them.  It should be no surprise to anyone that after your bankruptcy discharges all or most of your debts that your debt to income ratio becomes more favorable.

The reason that you are working on your debt to income ratio is three-fold.  First, if you are ever going to purchase another home or car, you will want to get the best interest rate and the most favorable loan terms.  Second, if you have to purchase insurance, your debt to income ratio may save you some money; and Third, if you have debts that you carried through the bankruptcy, you will want to make sure that they are being properly reported by the credit reporting agencies so that you will not encounter any problems later.  I’ve seen people ignore their credit reports for up to ten years after the bankruptcy and then wonder why they are having trouble getting insurance or a car loan.

Here is how you can make it even better.

First:  Set aside a time where you can review your finances on a weekly basis.  this may take 5 – 10 minutes per week.  Know which debts you owe and calendar the payments.  For example, you know that your car payment and rent or mortgage are due on a certain date.  After bankruptcy, it is critical that those debt be paid timely.  Remember that you are rebuilding your credit and that any stumbles after bankruptcy are going to be with you for a long time.

Second:  Make a list of any debts that survived the bankruptcy and create a plan of action to pay those debts off.  For example, you may owe the IRS or some student loans.  Make a plan to start paying those debts down.  I don’t care if it is $10 a month.  Create a plan and stick to it.  If it makes more sense to pay off the car first, then great, focus on the car payment until it is gone.

Third:  Make a plan to revisit your credit reports annually.  In the past I’ve spoken about pulling a credit report every 4 months.  The reason I say this is because you get one free credit report each year from each of the three biggest credit reporting companies.  Use the free pulls to your advantage.  Check them thoroughly to make sure everything is being reported properly.  This is only once every four months, so it will not take a huge chunk of your time or energy.  Look at each and every detail of the credit report.  I always ask myself:  Would I loan this guy money knowing xyz?

Fourth:  You may want to get a secured credit card or gas station credit card.  Tread lightly here.  If you do not think you will be able to control yourself, then do not even apply for a credit card, stick with your debit card.  However, if you do decide that this step is necessary, do your homework and make sure that you are making the proper decision on the right credit card for your needs.

Fifth:  Be extra careful this time by creating an emergency fund.  This way, if you ever run into an unexpected problem, you can tap the emergency fund and save your credit report from being blemished.

I sincerely hope this further explains the real benefits of the bankruptcy discharge.  I have always believed that bankruptcy is financial planning, and if it is used wisely, can and will create a brighter financial future for those taking advantage of all it has to offer.

 

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Carmen Dellutri is a proud member of the Florida Bar, and he is a Board Certified Consumer Bankruptcy Attorney, Certified by the American Board of Certification. He practices in the areas of Consumer Bankruptcy and Plaintiff's Personal Injury. He is the principal attorney at The Dellutri Law Group, P.A. The firm supports many charitable and civic causes by donating time and much needed capital to our community. Mr. Dellutri and the other attorneys in the firm routinely speak to students of all ages about various legal and societal issues.

Last modified: April 28, 2013