Pre-Bankruptcy Filing

I advise my Massachusetts clients considering bankruptcy to first sit down and think deeply about their financial situation. Oftentimes, after a thorough review of a person’s financial status, a client will arrive at the conclusion that filing for bankruptcy is unnecessary. Perhaps the client can work at a second job or improve their income in some other way. Perhaps the client can lower expenses by engaging in a well-planned budget. Or perhaps the client is better suited to settle existing debt, consolidate debt, or renegotiate the terms of various loans and financing. If, however, none of these debt management options are available, it may be time to consider filing for bankruptcy.

There are essentially three options that must be faced squarely when bankruptcy is the last stop at the station, they are as follows:

How Chapter 7 Bankruptcy Affects Credit

If you file for Chapter 7 Bankruptcy in Massachusetts, your credit score will be lowered. The precise amount that your credit score will be affected by bankruptcy is impossible to predict, however, generally scores of 700 or higher will drop by 200 or more points and those lower than 700 will lose somewhere between 130 and 150 points.

Again, it is not possible to predict with certainty how much your score will drop when filing for bankruptcy but you will be viewed as a higher credit risk than other potential debtors because you will have had most of your previous debt cancelled by filing for bankruptcy. Because, in Chapter 7, the debtor is getting a fresh start, that is, avoiding having to pay for the debt owed to creditors, future creditors may think twice about lending or extending credit to them.

However, there are some lenders that may work with you after filing for Chapter 7 bankruptcy, and there is a method that can be used to rebuild credit over time after filing for bankruptcy. Still, it will take 10 years or the major effects of Chapter 7 bankruptcy on credit score, and on lenders to lessen.

How Chapter 13 Bankruptcy Affects Credit

If you file for Chapter 13 Bankruptcy in Massachusetts, your credit score will be lowered. The Chapter 13 effect on credit last for 7 years. As in Chapter 7 bankruptcy, the fact that you have undergone a Chapter 13 bankruptcy can raise eyebrows for future creditors or lenders during that 7-year period, but the distinction between the two types of bankruptcies are that Chapter 13 involves the repayment of most of the initial debt. The fact that you are repaying some of your debt can lessen the effect of the bankruptcy in the mind of a creditor or lender.

As with Chapter 7 bankruptcy, you will maintain the ability to rebuild your credit over time.

How Doing Nothing Affects Credit

If you do nothing, that is, you make the conscious decision to avoid paying your debts you will have to face the inevitable result of those creditors repossessing property, foreclosing on property, obtaining liens against you, or taking other action to recover payment for the debts owed. As a result of all of that activity, particularly if this collection activity is combined with nonpayment of monthly debt payments, your credit score will be lowered.

Some Good News?

So, the bottom line with respect to Massachusetts residents who find themselves in the unenviable position of having too much debt or too little income to make payments owed to creditors is that bankruptcy may be the best option. There are three things that you want to make sure you do if you file for bankruptcy:

·        Do not allow yourself to be in the same financial position again.

That is, understand what got you where you are right now. Learn how to budget and manage your finances (if that is the source of your situation) to prevent future problems. I am not making a judgment here on any individual, please understand that I understand that sometimes things go wrong, sometimes we make mistakes, and even more perplexing, sometimes we do things that we know will hurt us. Still, no matter what the reason for the financial distress, there is a way out and a way to prevent future distress.

·        Develop healthy financial habits.

Keep a budget. Follow that budget. Live within your means, religiously.

·        Do not punish yourself.

Look at your current circumstance as a challenge to improve your mental, physical, and spiritual aspects of your life. If you are getting into a fresh start via Chapter 7, be grateful for the opportunity to have your debt relieved and for the opportunity to correct your habits (if needed) going forward. If you are getting into a repayment plan through Chapter 13 bankruptcy, be grateful that you will be able to keep many of your possessions, and that you can move forward in your financial life to the best of your ability.

I cannot stress the importance of not punishing yourself during a bankruptcy. The key is to understand, to gain insight, to learn from any past mistakes, and to move forward with new spending and saving habits.

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