Like so many Minnesotans that call us every day, we hear one common concern over and over again. Minnesotans worry about how bankruptcy affects their credit score and credit life after the bankruptcy is filed. If you are contemplating Filing Chapter 7 Bankruptcy in Minnesota, but you just need a better handle on how bankruptcy affects your credit, here it is. The obvious question so many ask about their credit relates to their future dreams and ambitions.
Wes, I would really like to buy a house in a few years. Or, Wes, I need a credit card for my business. Or, Wes, my car is falling apart and I need to buy a car, will I be able to do so? I think for many Minnesotans, the idea of filing a bankruptcy is akin to a nuclear explosion, where your credit after math is destroyed for life and you will never, ever, get credit again.
Folks, I am here to tell you that is pure bullshit. Yes, I said bullshit. To understand why this is not true, we first have to understand a little know truth banks don’t want you to know.
1) TRUTH: BANKS DON’T CARE IF YOU PAY OTHER CREDITORS, WHAT THEY REALLY CARE ABOUT IS ARE YOU GOING TO PAY THEM?
You would think that banks would care whether you pay other creditors right? Maybe it would be seen as a good sign of whether you will pay that particular bank back too. There may be a sliver of truth to that. However, what the bank really cares about is are you going to pay us back!
Don’t believe me? Ponder this: I recently met with a couple whose credit score was 750 or so. They had 40k in credit card debt and they were current on all the payments. They went into their banker, and the banker denied them a loan. Why?? Their credit score is awesome and they were current on all of their payments.
This story illustrates perfectly my point. The bank would not issue a loan in this case. The reason they would not issue a loan is the bank was worried that their loan might become the straw that breaks the camels back. The bank is worried that they would not get paid back. So, this bank did not care about the fact this couple was current on all their debts to other creditors the bank was worried they would not get paid back.
2) TRUTH: BANKS DON’T CARE IF YOU FILE BANKRUPTCY AS MUCH AS THEY CARE ABOUT WILL THEY GET PAID BACK OR NOT!
That same couple, if they filed a Chapter 7 Bankruptcy, and received a discharge where their liability on the debts was eliminated, would lend them money. Why?
First, when you file a Chapter 7 Bankruptcy and eliminate your debt, you have no liability to pay the discharged debt, which gives you a greater ability to pay the bank back on their loan. The bank feels more secure knowing you have nothing else hanging over your head.
Second, filing a Chapter 7 Bankruptcy can only be done every 8 years. So, if the bank gives you a loan after filing a Chapter 7 Bankruptcy in Minnesota, and getting a discharge, the bank feels more secure because you cannot file a chapter 7 bankruptcy again for 8 years.
Years ago, I called a bank in northern Minnesota and I asked the banker if he would lend a debtor money after a bankruptcy discharge. He said absolutely not. I said would you lend a debtor money who had not filed bankruptcy but was knee deep in debt? He said sure. I said your bank must not be very profitable- he got mad. But, my point was simple. It makes no sense to lend to people on the “brink” of filing a bankruptcy- instead, it makes more sense to lend to people who already filed bankruptcy and are debt free.
This banker’s opinion was years ago and was not the main stream then and it is not even close to the mainstream now. Opinion have changed dramatically about bankruptcy from both creditors and debtors standpoints.
3) TRUTH: CREDITORS DO CARE ABOUT THE REASONS FOR FILING
If you think about our economic history, we used to be a manufacturing society- smoke stacks dotted the landscape. Promises were made between employees and employers. It was not unusual for employees to work at a plant for life and retire with a pension from that company.
Not only would employees work at a plant for life so would heir relatives and children. Those days are long gone. The factories are gone and we now have employees who are less secure than they were before. Employment is given to employers based on the highest bidder and loyalty is fleeting. A person who used to work for one factory may now have as many as 10 different jobs in their career.
What am I getting at? Simple- there is far more uncertainty in the lives our 2016 employees than ever before. Health insurance policies are crappier than they have ever been exposing employees and their families to medical catastrophes for even the smallest of medical problems.
4) TRUTH: THERE ARE ONLY 5 REASONS Minnesotans FILE BANKRUPTCY
Life is so amazingly humbling no? The humility of being alive right? Minnesotans we meet are not living a dream. They are living a nightmare. Overwhelming debt is not a laughing matter at all. Debt makes you question everything- including your own self-worth.
A) BUSINESS FAILURE: One of the most common reasons Minnesotans file for bankruptcy protection is when a business fails. Gee, most businesses that start up eventually fail. That is not interesting it’s just the truth. Nobody starts a business hoping it will fail.
Do you think a future creditor would find it reasonable that a business enterprise you started led to your eventually filing bankruptcy? I think so, and I don’t think the future creditor would find it very interesting either.
B) INCOME DROP: Have you ever worked for a company that instituted a pay “freeze” or had to scale back wages in order to stay in business? Have you ever worked for a company that laid off workers or instituted a mandatory no over time policy? I suspect most Minnesotans have. A drop in income can certainly lead to a bankruptcy filing since you have lost income to service debt you still have.
I don’t think a future creditor will find a drop in income as weird or unusual. Many bankruptcy filings are caused by income drops of some kind or another.
C) DIVORCE/RELATIONSHIP BREAKUP: If you think about it, most of us have had relationship breakups and/or divorce. I don’t think I have to tell you how financially devastating a divorce or relationship break up is to the family budget. It’s like a nuclear explosion in your wallet.
Do you think future creditors will be shocked if you tell them you filed a bankruptcy following a tumultuous divorce? Hell, I would suspect 50% of the bank employees have been divorced. It’s called life, and it happens.
When a divorce does not end in a bankruptcy, it surprises me to be honest with you.
D) MEDICAL PROBLEMS: I remember growing up in a family of 11 and my dad worked at a factory and my mom was a stay at home mom. My dad never made more than 12 bucks an hour. However, his health insurance was terrific. We had health insurance for all 11 of us and I never remember my parents complaining about co-pays etc. Quite honestly, I don’t there was co-pays when I was growing up.
My oh my how things have changed. Health insurance policies these days cover less and less and the up front out of pocket costs can put Minnesota families in bankruptcies. It’s terrible and a sad commentary to our overall health care industry.
When a minor hospital stay can bankrupt most Minnesota families, you would think our politicians would do something to remedy this. But, that is a different blog topic.
Medical bills are a huge reason why Minnesotans file bankruptcy. Do you think creditors really say gee, too bad you had heart surgery and filed bankruptcy, you are not good with money?
No, they do not say this. Creditors know that medical bills and medical problems face everyone- it is human.
E) BAD FINANCIAL DECISIONS: Look, we are all human, and we all make mistakes. If you ever talk with someone who says they have not made a bad financial decision, they are full of shit.
This section always reminds me of the commercial where the human being drives the car through the garage door or cuts the limb off and drops it right on top of the brand new car- we humans sometimes to do really dumb/human things. Big deal.
My wife and I actually went a year without auto insurance (not intentionally mind you). We were horrified to find out that we had no insurance. Don’t even ask me how it happened because its too long of a story- but the point is it did happen. Big deal.
We humans are also very optimistic people. We think that using the credit cards to tie us over until the next source of income comes is reasonable, and isn’t it? When the next job or source of income comes you have already sunk into the financial abyss with no other way out but to declare bankruptcy. Big deal.
My overall point in this section is to make you realize that when you file a bankruptcy and go to seek credit afterwards, creditors will want to know why you filed the bankruptcy so tell them!
Tell them you lost a business, had an income drop, divorce or relationship break up, medical problems and/or made some bad financial decisions- we all have!
The point is you did not incur debt knowing you were going to file bankruptcy and that is what the creditor needs to hear. The reality is most creditors will not ask you why you filed the bankruptcy because they already know why. They already know that it was one of the 5 reasons above.
5) WHAT IS THE ALTERNATIVE?
That is right, what is the alternative to Filing Bankruptcy. If your credit already sucks, can you get credit now? Of course not. Many Minnesotans I speak to relate to me that if they could get credit, which most can’t, they would definitely pay much higher interest to get the credit. So what is the difference?
I realize that credit is a concern for those thinking about filing a bankruptcy. But, I think it behooves you to think about the alternatives too. For most Minnesotans we speak to, their credit already stinks or it will soon because they can’t keep making the payments like they are now. As soon as you stop making the payments your credit score nosedives and with your debt and delinquency most creditors will not be interested in lending you money.
Getting rid of debt, however you can do it, is always a positive on your credit health. Obviously, if you get rid of debt you have a greater ability to make payments on a future debt with a future creditor.
We tell Minnesotans all the time, a Chapter 7 Bankruptcy improves your credit because you go from debt to no debt in 4 months. Why else do you think auto dealers would place signs on their business property stating bankruptcy- no problem. That is because you have no debt and they are able to find you financing.
CONCLUSION
While many Minnesotans worry about the impact a bankruptcy has on their credit, the truth is a bankruptcy on your credit is not as harmful as you think. For most Minnesotans suffering from overwhelming debt, their credit would be better if they simply filed a Chapter 7 Bankruptcy and got their lives back vs suffering with overwhelming debt. Bankruptcy can be the beginning to a bright new future for your finances. Contact our Lawyers today and learn more!
BRAINERD
Kain & Scott, P.A.
315 East River Road
Brainerd, MN 56401
218-822-3300
EAGAN
Kain & Scott, P.A.
860 Blue Gentian Rd. #200
Eagan, MN 55121
612-843-0525
EDEN PRAIRIE
Kain & Scott, P.A
6385 Old Shady Oak Rd. #250
Eden Prairie, MN 55344
612-843-0524
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Kain & Scott, P.A.
8530 Eagle Point Blvd. #100
Lake Elmo, MN 55042
612-843-0526
ROSEVILLE
Kain & Scott, P.A.
2355 Fulham St. N #400
Roseville, MN 55113
612-843-0523
ST CLOUD
Kain & Scott, P.A.
13 7th Avenue S
St. Cloud, MN 56301
320-252-0330
MAPLE GROVE
Kain & Scott, P.A.
13700 Reimer Drive #240
Maple Grove, MN 55311
612-843-0529
MINNEAPOLIS
Kain & Scott, P.A.
100 South 5th Street #1900
Minneapolis, MN 55402
612-843-0527
