How Does Chapter 7 Bankruptcy Affect My Credit Score?

By
Mortgage and Lending with Academy Mortgage.......We are a Equal Housing Lender CO NMLS2421 : NMLS 264534

How Does Chapter 7 Bankruptcy Affect My Credit Score?

This a question I get occasionally from a loan applicant, generally one that has filed a Chapter 7 Bankruptcy either recently or within the last couple years. 

I start by explaining how a credit score is determined, and I use the Fair-Isaac Corporation (FICO) Credit Score as an example. The credit score is based on these factors: 35% is payment history, 30% is utilization/outstanding debt, 15% is credit history, 10% is credit inquiries, and the final 10% is the type of credit used. FICO quotes that 40% of the population has a score of 690 or below, with 40% scoring 745 or higher, with the final 20% being above 780 (the FICO range is a low of 300 with a high of 850.) There are other factors lenders use to determine if someone is a good credit risk, such as education, length of time in residence and current job, etc.

Now that they understand how a credit score is determined, I answer the 'How Does Chapter 7 Bankruptcy Affect My Credit Score' question. Obviously bankruptcy will affect their credit score, but there is good news and bad news. The bad news is: the score will likely be pretty low due to payment history not being so great, or maybe some (if not all) of the credit cards were maxed out, etc. The GOOD news is: after a person files bankruptcy, their credit is compared only with others who have filed bankruptcy!

Chart Success by Francesco Marino

 

I explain to them what an exciting opportunity they have in front of them, and it may be easier than they think to raise their credit score. I advise they sign-up for one of the outrageous interest rate credit cards they've gotten in the mail, charge a little, pay it off. Then repeat the cycle in two months. Pretty soon better card offers will arrive in their mailbox. After six months, come back to me, I'll re-run the credit report and we'll re-start the loan application process.

A recent bankruptcy does not have to be the end for potential home buyers. If they're willing to methodically work on the score, and check back in six months, chances are they'll hear GOOD news!

Photographer: Francesco Marino - FreeDigitalPhotos

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_______________________

Ellen Adams with Academy Mortgage 

18 YEAR VETERAN IN THE MORTGAGE INDUSTRY

    Phone: 541-521-7192

    Cell: 541-521-7192

    Email :Ellen.adams@academymortgage.com

   Website: www.academymortgage.com/ellenadams

    NMLS: 264534 

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Comments (4)

Curt Baumgarth
Mesa, AZ
inactive

Oh, I had no idea. Thats good news and good to know.  Thanks for the post!

Nov 02, 2010 03:39 PM
Richard Wilson
Cherry Creek Properties, LLC - Colorado Springs, CO
Town or Country, in Colorado, we do it all.

That is great news for many folks right now.  How does a business BK affect credit history?  Many small business owners have had to bankrupt their S-corps or LLC's. 

Nov 02, 2010 03:44 PM
Ellen Wright Adams
Academy Mortgage.......We are a Equal Housing Lender - Eugene, OR
LoansByEllen- Licensed in Oregon

Curt, Thanks for responding to my post.  I just received my license for AZ.  and I was in Scottsdale at a Mortgage Girlfriends Master mind at the McCormick Ranch.  Your weather was beautiful. 

Ellen Adams

 

Nov 02, 2010 04:27 PM
Ellen Wright Adams
Academy Mortgage.......We are a Equal Housing Lender - Eugene, OR
LoansByEllen- Licensed in Oregon

Richard,  First off , you are with a GREAT company.  I have heard Gary Keller speak many times, and my favorite book of his is the Millionaire R/E Agent.  it is all marked up with highlights, and I avidly use his 8 x 8 plan.  i also gave copies of SHIFT to my Realtors / and Loan Officers in my office. 

To answer your question.  I used to work in the Commercial Dept of a big bank & found that sometimes commercial loans are not reported on ones Credit report.  That is not always true in every case.  I also have found that when an LLC or a Corp. files BK
, it does not follow the individual person, unless they had loans that were in their personal name.  The only way one would know is to wait for the dust to settle and then run a  credit report & start the process of recovering.   Good luck in 2011....Do you need a great biz plan?  just email LoansbyEllenAdams1@Gmail.com,  & I will get one out to you.

Nov 02, 2010 04:38 PM

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