bankruptcy: Myth v. reality

It is not unusual have a fear the bankruptcy process. After all, a common misconception about bankruptcy is that it damages credit scores permanently. However, filing for bankruptcy has the opposite effect in most cases. Colorado Law Group has completed hundreds of bankruptcy cases for clients whose credit scores improved as a result of their bankruptcy. In fact, bankruptcy will improve your income-to-debt ratio and eliminate past derogatory reporting on your credit report.




myth 1:

The filing of a bankruptcy can reduce your credit score to 0.


The mere filing of a bankruptcy will not reduce your credit score. In fact, your credit score will remain at the same level as it was right before the bankruptcy filing. However, your debt-to-income ratio will improve after the bankruptcy discharge is granted and derogatory credit reporting will case. In turn, your credit score is likely to improve after the bankruptcy case is complete.

Myth 2:

It may take years to rebuild a credit score that has been damaged by bankruptcy.


Bankruptcy will improve your debt-to-income ratio, which will likely increase your credit score rather than decrease it. 

Myth 3:

Creditors do not lend to individuals who have been through bankruptcy.


Auto loans and credit card lines become available to individuals in bankruptcy almost immediately after the bankruptcy filing. Again, this is due to the improvement in the debt-to-income ratio, which predicts a better ability to repay.

Myth 4:

Landlords would not lease to individuals who have been through bankruptcy.


Landlords would lease to anyone for as long as their lease cannot be included in a bankruptcy. Therefore, landlords prefer to enter into leases with folks who have completed the bankruptcy process rather than such who are about to start it. In some cases, landlords will wait until after the bankruptcy discharge has been issued before entering into a lease with the bankruptcy filer. Although bankruptcy will discharge prior eviction balance, it will not delete them from public record. Prior eviction judgments may be a disadvantage when looking to rent.

Myth 5:

You must wait for six years after bankruptcy to qualify for a mortgage.


The FHA requirement for a home loan after bankruptcy is two years from the date of discharge. In some instances, an FHA loan may be approved as soon as  one year after the bankruptcy discharge (if the bankruptcy was caused by circumstances beyond your control, such as a company wide layoff).