Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
My husband and I recently went through a bankruptcy and foreclosure on our home. Due to a major medical issue that I have been diagnosed with, I have been unable to work for close to two years. I was a major income earner in the household.
Unfortunately, my husband and I relied on both of our incomes to run our household, as well as our two businesses. In addition to the loss of my income, my medical issues impacted our health insurance premiums (they skyrocketed) and our monthly costs for it and my medications (this figure does not include any premiums for surgeries or ongoing medical care) our costs are close to $3,500 monthly. Due to the size of the companies and my deteriorating health, our health insurance premiums cost over $2,100 monthly. Unfortunately, I don’t see those costs going down in the future.
Needless to say, our personal bills (credit card debt and household expenses) could only be paid for so long. Within a year and a half we had exhausted everything we had and had no choice but to file bankruptcy and let our house go to foreclosure. Due to the recession, our home had gone down in value close to $200,000. Any money we had spent updating it or that had been used for a down payment was gone.
Here’s my question: Between my husband and me, we had credit cards from every major credit card issuer and department store that had to be included in the bankruptcy. Will these companies ever extend credit to us again? My fear is that they won’t. I am 50 years old and my husband is coming up on it, I am very concerned about our future creditworthiness. Do the extenuating circumstances of my illnesses count for anything? Until four months prior to bankruptcy, we had never been late on any bills. Does that count for anything? I have applied for Social Security Disability and am waiting their decision. — Cathy
My main advice to you: Stop worrying so much about your credit rating. Right now you have far more pressing problems to concern yourself with than how creditors perceive you.
I get why you’re focusing on your credit. The desire to return to normal after so much upheaval is natural. However, putting your efforts into becoming the apple of a financial institution’s eye should be far down on your list of priorities. Credit cards are useful and terrific tools, but they won’t help you recapture what you lost: your health, a significant income source and the family home.
This doesn’t mean your questions don’t deserve answers. They absolutely do, and here they are.
Will the credit card companies that you included in the bankruptcy ever lend to you again? They might. Banks and retailers don’t hold grudges. When you apply for credit, they simply assess your financial circumstances. As before the discharge, they will analyze your credit reports and scores as well as your income to determine if you’re right for their product. At this point, the bankruptcy notation is still fresh so you’ll be judged negatively for it. While it will be on your reports for a total of 10 years and will drive your scores down for at least the first two, as time passes the impact will become less and less.
Does one’s illness (or other extenuating circumstances) count for anything to a credit card company? Not really. Again, these are impersonal decisions. The bank just wants to make sure that when it lends money, it will get it back. Your physical health isn’t a concern to them. Your financial health is.
Does your steady pre-bankruptcy payment history matter? Yes and no. When a business pulls and assesses your credit reports, it will see the bankruptcy notation as well as any positive activity that preceded it. That you sent money to your creditors on time for years is great and will be apparent. However, payment history is the most important FICO scoring factor, and because you stopped paying by legally discharging your debt, that recent action overrides the past.
So let’s look at what the bankruptcy did for you, rather than against you! It permitted you to let go of your financial obligations and free up cash for your monthly expenses. Now develop a budget that will allow you to live stress-free. You’ll need an accurate idea of income, since that will be the amount you can spend and save. Keep applying for Social Security Disability Insurance. Approval can take tenacity.
In fact, Cathy, securing that cash flow and living within it is your No. 1 task. After that, if you really want to, you can start charging again with an account designed to help people rebuild their credit, such as a secured credit card.
I wish you good health — both in body and in banking.
See related:Sometimes bankruptcy is the ONLY way out
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