Photo (cc) by Fried Dough
This week’s question comes from someone who is ready to move on after completing a Chapter 13 bankruptcy, and wonders when his slate will be clean. Considering the number of people who were forced into bankruptcy during the 2007 credit crisis, he’s probably not alone.
I filed chapter 13 and was released in 2006, do I still have to admit I filed bankruptcy after it no longer shows on my credit report?
How long the pain lasts
Most dings to your credit history remain visible for seven years, although their effect diminishes as they age.
Many people believe that all bankruptcies stay on your credit report for 10 years. Not true: For Chapter 7 bankruptcies, the 10-year number is correct, but a Chapter 13 only remains on your report for seven.
James is right to be concerned about getting this negative off his credit history. As you might expect, a bankruptcy is one of the worst things that can happen to a credit score.
Back in 2009, FICO, creator of the most widely used credit score, released information on exactly how some common credit hiccups affected their credit scores. Here’s a look:
- Maxed-out card: 10-45 points
- 30-days late: 60-110 points
- Debt settlement: 45-125 points
- Foreclosure: 85-160 points
- Bankruptcy: 130-240 points
The higher end of the ranges above would generally apply to those with the highest scores and the lower end to those with lower scores. Keep in mind that a perfect FICO credit score is 850, and to get the best possible deals, depending on the lender, you’ll need 730 to 760.
Translating point losses into dollar losses
A bad score means less access to credit and higher interest rates if you can get it. And less access to credit could translate into lost opportunity, which in turn can make a huge difference in your life.
Consider the mother of all debt: a mortgage. Let’s say you’re borrowing 200 grand on a 30-year fixed mortgage at today’s average rates. Show up at the lender’s office with a 620 to 639 credit score, and you’ll pay 4.8 percent. If you make minimum payments, your total interest bill for that mortgage will amount to about $179,000 over 30 years.
But if you waltz in with a 760 score, you’ll only pay 3.24 percent, and your total interest bill over the life of the loan declines to about $113,000. (By the way, the information above came from credit score creator Fair Isaac’s calculator. Check it out for yourself.)
Bottom line? Over the life of the loan, a lousy score in this example cost the borrower $66,000 – enough to finance a business, put kids through college, or retire a year earlier. But wait: It gets worse.
The opportunity cost of bad credit
Another even more dramatic way of looking at the example above is to consider opportunity cost: what money you spend today costs you in terms of the opportunity to have more money tomorrow.
As an example, the low score on the $200,000 loan above means a monthly payment of $1,053 versus $870 for a borrower with the higher score. So the person with the higher score has the opportunity to save an extra $183 every month. If they invest those savings monthly for 30 years and earn 8 percent on them (historically possible in the stock market), they’ll end up with an extra $250,611.
This is one way the rich get richer and the poor get poorer.
Now let’s (finally!) answer James’ question.
When can James stop admitting to a bankruptcy?
As I said above, a Chapter 13 bankruptcy can appear on a credit history for seven years. We know that James’ bankruptcy was discharged in 2006. That’s when he completed his court-approved repayment plan. What he doesn’t say, however, is the date the bankruptcy was filed — that’s when the seven-year clock started ticking. Since repayment plans typically take three to five years, James probably filed more than seven years ago and is in the clear now.
But I think what James is really asking is when he can literally stop confessing he went bankrupt. The answer to that question depends on whom he’s talking to. If he’s talking to the guy sitting next to him on the bus, he doesn’t have to admit it at all. If he’s giving a sworn deposition or applying for a job or loan, however, he should admit it forever. The reason is simple: It’s the truth.
That being said, after a bankruptcy disappears from his credit history, there should be no way for anyone to find out. So if a court, government agency, employer or lender doesn’t ask that specific question, there’s no reason to volunteer the information. But if they do, he should be honest. And he shouldn’t worry too much about it. Bankruptcies aren’t uncommon. It’s unlikely that anyone with good credit today who filed a bankruptcy 10 years ago, especially a Chapter 13, will be harshly judged.
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I founded Money Talks News in 1991. I’m a CPA, and over the years I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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