The Truth About Your Credit

19 Sep The Truth About Your Credit

In my capacity as a consumer Bankruptcy Attorney I get a lot of questions about the so-called “devastating” effect of filing for bankruptcy on one’s credit. Sure, a chapter 13 bankruptcy will show up on the report for 7 years and a chapter 7 bankruptcy will stay there for 10 years.

But, what’s the practical effect of that? My friend and colleague, Jill Michaux wrote an excellent post on predicting your credit after bankruptcy, noting that, for the most part, your credit score will return in a year or two, anyway. And, my friend and colleague Gene Melchionne wrote a terrific post on the irrelevancy of credit scores for someone in debt.

Well, let’s look at the real numbers and what happens if your credit score dips 100 to 150 points or so. Your ability to borrow money goes down. In reality, that only means that you’ll pay more for what you do borrow. So, if you need a new car, instead of getting the 5% interest rate that the car companies are advertising (upon appropriate credit), you’ll end up paying more like 8% or even 9%.

The bottom line: if you finance a typical $20,000 car for 5 years at 5%, you’ll pay $2645.48 in interest over the course of the loan. Contrast that with the same loan at 10%: you’ll pay $5496.45 in interest. That means that the allegedly ‘devastating’ effect of bankruptcy on your credit score is going to cost you $2850.97. Since most of the clients I talk with are considering filing bankruptcy to discharge $30,000 or more in credit card bills or medical expenses, worrying about the effect on their credit is just foolish.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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