Tip! The final step in considering bankruptcy is to actually engage the services of an attorney. At this juncture, you attorney will prepare a bankruptcy petition on your behalf that will be filed in the bankruptcy court.
Most of us are aware of the credit score - a numerical quantity widely used to assess your credit worthiness. But there’s another scoring tool that can debar you from getting credit. It’s the Bankruptcy Risk Score - a supplementary score that most creditors and lenders scrutinize prior to offering credit.
Personal bankruptcy seems to be a major consumer credit problem for lenders and credit providers. Since creditors cannot recover losses due to bankruptcy without litigation, so consumers filing bankruptcy are more costly for them. The year 2005 has experienced record number of bankruptcy filings - at least 31.6% higher than 2004 prior to the new law coming into effect.
Tip! It is true when they say that the bankruptcy laws can be rather complex. One of the most common is Chapter 7, which discharges all financial debts.
But the new law has hardly helped debtors. Reports suggest that only 3.3% of the debtors could get rid off debts using debt management plans. The mandatory credit counseling sessions under the new law proved useful to only a maximum of 5% and minimum of 1%-2% of the filers. Here lies the need for Bankruptcy Risk Score to make debtors more aware of how much credit they can deal with. On the other hand, creditors and lenders get the extra edge over traditional scores, as they are better informed of the consumers’ credit status. This helps them in making credit decisions accordingly.
Creditors assess the score when you apply for a mortgage, a credit card or any other bank card. Before extending credit, banks may also review the score while checking your accounts. Banks need to maintain a standard capital-to-risk ratio, and Bankruptcy score enables them to evaluate the risk within their portfolio. A combination of your credit score and spending habits (how you use credit card, shopping card, etc) helps in the evaluation.
Tip! Every single state in the United States has it’s very own interpretation on bankruptcy, some better than others. In some states you are permitted to hold onto your assets while other states grab hold of everything you own and require you to turn over ownership.
You may be looking for a single loan, either a mortgage or an auto loan. But multiple lenders may ask you for the credit report. In order to make up for this, while determining the Bankruptcy score, multiple auto or mortgage inquiries are taken as a single inquiry. Over applying for credit also matters a lot as far as this score is concerned.
Bankruptcy Risk Score Vs FICO Score
Unlike the FICO credit score that gives a general overview of your credit history, the Bankruptcy Risk Score highlights your chances of getting bankrupt. The score varies from -200 to 2018, with the most ranging between 0 - 1000. Higher score indicates greater risk of filing bankruptcy. This is in contrast to the FICO scoring model where a low score implies there is higher risk in offering credit.
With Bankruptcy Risk Scores, creditors can:
- Supervise existing portfolios
- Decide upon the initial credit limit
- Raise or lower the existing credit limits.
- Determine the collateral requirements for mortgages and other secured loans.
- Identify lower and higher risk debtors and then offer loan programs as per their payment ability.
Tip! The next step in filing for bankruptcy is to determine exactly what assets you have available to you. Your assets include your recurring income from your job, your home and major items of personal property that you might own (including such items as motor vehicles).
Bankruptcy scores are not available to consumers, only the creditors are informed about it by credit reporting agencies. However, the credit reporting agency, Experian has decided to provide consumers with such scores, knowing which consumers can anticipate debt problems and thus be more cautious. Experian has also compiled the following list of states with higher bankruptcy scores.
Texas
Nevada
New Mexico
Louisiana
Arizona
With a high bankruptcy score, you can hardly get credit at some of the best rates prevailing in the market. Just like you go for a credit repair in order to raise your FICO score, you should look forward to different means of improving the bankruptcy score.
Here are some easy-to-follow steps to guide you in the process.
Pay your bills in time:
Late payments or missed payments create a negative impact on the bankruptcy risk score. Other factors affecting the score are accounts being referred to collection agencies, repossessions or an already declared bankruptcy. You can avoid such situations by using automated payment system which helps you to pay in time. You may also check out with the credit reporting agencies for any error or dispute in your credit report.
Maintain a low debt balance:
Keeping a low debt balance, that is, a low balance-to-limit ratio is necessary. Using up a credit card beyond the limit affects your score. But you can have multiple cards with minimum balance on each. And, in case you have indeed crossed your credit limit, you may consult the creditor for an alternative repayment plan.
Tip! The first step in learning how to file for bankruptcy is to make a comprehensive list of all of your creditors and outstanding debts. When you are working to determine how to file for bankruptcy, you need to appreciate that if you to proceed with a bankruptcy case, you must be sure that all of your debts are disclosed and listed in a bankruptcy petition.
Open accounts only when required:
It’s better not to open several accounts within a very short period of time. This can lower both your credit score as well as Bankruptcy score. Credit report statistics show that an individual applying for new credit 6 times in the past 1 year is 8 times more likely to file bankruptcy than others are.
How To Recover Quickly From Bankruptcy. High Converting Guide To Recovering Fully From Bankruptcy And Bad Credit Rating.
Bankruptcy score depicts whether you will be bankrupt, delinquent or go through a charge off in future. With this score, analysis of your credit history becomes more precise with creditors being well-informed of your credit status. While creditors and lenders can judge your credit worthiness better, you too can decide as to whether you can afford to manage debts, provided you know your score.
Tip! Pay all of your bills on time. Bankruptcy is a means to financial recovery.
Jessica Bennet is a financial writer associated with the MortgageFit Community. With her knowledge and experience, she has made a mark in writing and advising on all financial issues. Her guidance and support has helped us in building up a strong Community where all the members contribute towards industry development.
