What is the True Cost of Filing for Bankruptcy?
Many of our clients come to us only after struggling to keep up with debt payments for years. Bankruptcy is rarely a first choice for anybody, and many only choose to file when it is obvious that they cannot continue to service their debt.
What is the cost of filing for bankruptcy? Lending Tree tried to answer that question and published their results in a recent article in Yahoo Finance. The study is certainly interesting and informative, though it is missing some crucial information.
Credit Scores Recover Quickly
One reason people delay filing for bankruptcy is that they don’t want to tank their credit. Of course, if you have accounts in collections, then chances are good that your credit is shot anyway.
Lending Tree found that many people had managed to pull up their credit scores into the mid-600s very quickly after bankruptcy. In fact, over half had scores of 640 or better within a year of filing. Around 5% even had scores of 700 or higher.
After 5 years had passed since filing for bankruptcy, over 70% of borrowers had scores of 640 or better and 17% had scores of 700+. These numbers show that bankruptcy does not permanently impair your credit.
With a higher credit score, you look like a better applicant when looking for a job and an apartment. You can also qualify for better rates when you take out a loan.
Consumers Can Expect to Pay More on Debt, However
Even with a decent score, many consumers will pay more for loans after they file for bankruptcy. Lending Tree found that borrowers who obtained a mortgage two years after filing for bankruptcy protection paid almost $26,000 more over the life of their mortgage than those without a bankruptcy.
If you took out an auto loan less than a year after filing, you could expect to pay about $2,900 more for a five-year $25,000 loan than a borrower with no bankruptcy on their record. Five years after a bankruptcy, consumers are still paying around $2,000 more for the same loan.
Filing for Bankruptcy Still Makes Sense
Although consumers might fear paying more for a home or car in the future, the reality is that you will pay interest on your debt through the nose until you either clear the debt or file for bankruptcy.
At Nowack & Olson, we never claim that filing for bankruptcy is cost-free. It is probably true that you will pay more for your debt going forward, at least until your bankruptcy falls off your credit report.
However, you need to balance these costs with the costs of continuing to carry your debt. The Lending Tree study doesn’t really make that clear. If you have $10,000 in credit card debt at 24.99%, you are paying almost $2,500 a year on interest. This impedes ever getting out from under the debt. When looked at this way, doesn’t filing for bankruptcy make sense?
If you would like to discuss your options, please contact the Plantation bankruptcy attorneys at Nowack & Olson today by calling 888-813-4737. We offer a free consultation.