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Bankruptcy Basics

MoneyWise

Christian talk radio with Rob West

July 7, 2022

Economists have long linked a decline in economic activity with an increase in bankruptcy, both business and personal. But bankruptcy isn’t the easy way out that it once was. We’ll explain today on MoneyWise. With the Federal Reserve dramatically increasing interest rates to slow inflation, many analysts are predicting a recession will hit the U. S. within the next year. But bankruptcies are seen as a lagging indicator of a slowing economy. It takes time for companies to begin laying off people as revenues shrink. The unemployment rate remains low, but that trend will end if we enter a recession, especially if it’s a prolonged downturn in the GDP. That said, it may be time for a refresher course on an unpopular topic bankruptcy. When someone can no longer pay their bills and has mounting debt, bankruptcy often seems like the only way out. But there are things you should know before ever considering bankruptcy. We’re not saying that bankruptcy is never the answer to financial difficulty. Sometimes you have no choice. But, we often get calls from folks who are considering bankruptcy, and in many cases, they still have other options, like getting into a debt management plan like the one offered by our friends at Christian Credit Counselors. And you always want to explore those options first because while bankruptcy might seem like a quick way to end your debt problems, there’s nothing quick about it. It has a long-term impact on your credit score. That’s why bankruptcy should only be considered as the absolute last resort. It’s one of the worst things you can do for your score and credit report in general. The exact impact will vary depending on the individual and the credit scoring agency, so you can only estimate how much it might drop. It’s definitely counter-intuitive, but the higher your credit score before bankruptcy the more it will drop after. For example, let’s say your FICO score is 700, which is in the good range. After bankruptcy, expect it to drop by 200 points or more. But if your score was only 680, it might only drop around 150 points. But either way, the effect is huge. The long-term damage is also significant, but here again, the length of the damage depends on several factors, the most important one being the type of bankruptcy you file. This is where a lot of confusion comes in. You’ll hear the damage lasts seven years or sometimes 10 years. So which one is it? Chapter 7 bankruptcy stays on your credit report for 10 years, and then only the public record of the bankruptcy. All other references remain on your report for only seven years and they would include: A Chapter 13 bankruptcy any accounts included in a bankruptcy of either type, and any third-party collection debts, judgments and tax liens discharged through a bankruptcy of either type. Now, why the difference 7 years or 10 years? Because with a Chapter 7 bankruptcy, your debts are wiped out, or discharged. But with a Chapter 13, you agree to make at least partial payment on your accounts. So it would seem the court is trying to give you a break there. But it ll take time for your credit score to make any significant improvement. The black marks from a bankruptcy will be factored in for as long as they appear in your credit report. Still, the damage will gradually decrease over time. FICO estimates that it takes roughly 5 years for a person with a 680 credit score before bankruptcy, to get back to that score, and that’s only if they don’t get into more credit trouble along the way. Now, how should Christians view bankruptcy? As we said, it should only be considered as a last resort. But if it’s inevitable and if you’ve sought godly advice, you may have to file. But remember, Christians should never look at bankruptcy as a way to get out of paying what we owe. Look at Proverbs 3: 27, which says, Do not' withhold good from those to whom it is due, when it is in your power to do it. If your circumstances change and you can begin to repay your creditors, even after bankruptcy, you should do it. Companies write off bad debt, and for ease of bookkeeping, they might decline to receive your payment, but even then, imagine the powerful testimony you’d give by trying to pay a debt that’s been legally discharged. On today’s program, Rob also answers listener questions: ● Should you entertain a cash offer to sell your home? ● Can you give a rental property to an adult child or should you sell it to them? ● How should you tithe on investment gains? ● When is it wise to dip into savings funds to buy a car?

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