Bankruptcy can lead to bumpy chapters in your financial future The Miami Herald - January 25, 2004 I don't like bankruptcy, because it's very hard on people It is neither quick nor simple. It does nothing to solve the problem of overspending, of credit too easily available, of people not being able to achieve their financial goals. If I wanted to be popular, I wouldn't say this. But hey, I think bankruptcy is oversold, that it is not a handy financial tool. Call me odd. Otherwise, how could we explain a 22.5 percent increase in the number of people filing for personal bankruptcy protection in Miami-Dade County in the past five years, compared with a 16.7 percent increase nationwide? Let's take a cold look at what the 1.6 million people who have recently filed for bankruptcy nationwide are going through. One argument that bankruptcy's backers make is that it is faster than debt repayment plans. So a person can start rebuilding his finances more quickly this way. But would you really want to use this option if you considered that: • A credit score, which is a tool that lenders use to judge your ability to repay your obligations, '"can sink by 200 or more points overnight after a bankruptcy filing,'" said Craig Watts, spokesman for Fair Isaac, the firm that developed the FICO credit score system. FICO scores, which range from 500 to 850, are the scores most widely used for mortgages and many other kinds of loans, including car loans. A low credit score generally means lenders will charge borrowers more interest. Another argument for bankruptcy is that it can be wrapped up in a few months compared with a debt repayment plan, arranged by a professional credit counselor, which generally lasts up to five years. • However, debt management plans, once completed, are wiped off your record. Bankruptcies -- the most common form of personal bankruptcy, Chapter 7 -- remain on your credit record for 10 years. If it's on your record, it will affect your score. Or perhaps something more than that. Because employers and landlords look at records and scores, that will have an impact on your chances of getting a good job, a promotion or even finding a place to live. You have to disclose it if you ever want a license to sell securities. Many bar associations, too, require that bankruptcy be disclosed and explained. A third argument: A person will have worse credit while repaying debts than by wiping the slate clean and building a new, better record. • However, bankruptcies, debt repayment plans and other big negatives are all viewed the same way when computing a credit score. Watts explains that three things affect the way a bankruptcy -- or anything else negative -- is factored into a credit score. They are: How severe was the problem when compared to your experience with credit; How long ago did this happen and how often have you stumbled with your finances, such as having delinquencies show up on your credit report. The older the bankruptcy filing is, the less it will impact your score. The better you do afterward, that helps, too. While the credit score folks have their own rules, so do the mortgage bankers. • Bankruptcy has to be considered for four years, under guidelines from Fannie Mae, which makes a secondary market for mortgages. Fannie will not automatically approve the mortgage if the bankruptcy is any more recent, although others will. ''Those are the high interest rate, high equity kind of loans,'' says Patti Hayhurst of Hayhurst Mortgage in Coconut Grove. ``Anyone who tells you bankruptcy will wipe everying out and you start over again, it doesn't happen that way.'' Once again, bankruptcy's supporters point out that in a few years after filing, sometimes sooner, people do get credit and mortgages. The most common form of personal bankruptcy, Chapter 7, actually does eliminate one's debts. They do not have to be repaid. But one important category cannot be cleaned out. Student loans can't be eliminated. A young person cannot get a completely fresh start if she or he carries this burden. Finally, some would say the reason I don't like bankruptcy isn't financial, it's moral. OK, you're right. I think you should repay what you owe. For many people, that entails more than is possible. By that, I mean that to get out of debt for many people means that they have to stop using credit. We all use it. And many people use it too much. Someone coming through bankruptcy has no choice but to give that up, at least initially. Then, that person ``has to completely change his lifestyle,` said Certified Financial Planner Benjamin Tobias of Tobias Financial Advisors. `"The person has to learn how to live well below his means. If he does, he might become a very good risk for a mortgage lender." Tobias blames the credit card companies for extending too much credit, calling them "enablers" for those who are addicted to debt. Jay Schechter, an attorney who specialized in bankruptcy law before becoming an investment advisor at Singer Xenos Wealth Management in Coral Gables, doesn't see it that way. He says there's no right or wrong answer about filing bankruptcy that fits every debtor. Schechter says bankruptcy could be the key to someone restarting his financial life or the person could make bad choices all over again. No matter what the outcome, bankruptcy ''is a traumatizing experience. For some people it's not a problem, for others it is,'" Schechter said. When do I think it's the right thing? When there's a major crisis, such as an illness, a death of a sole breadwinner, a catastrophe beyond one's control such as job loss or a plant closing. When it's not a matter of mismanaging your money.