Bankruptcy: The Best Credit Repair for Most People
Bankruptcy is The Best Credit Repair for Most People
Is bad credit costing you thousands of dollars every year? It is, if you are paying more than 5% on your car loan. People with great credit are paying less than 3.0%. The difference between 3% car loan and an 18% car loan on a $24,000 car is $178 a month–$10,680 over a five year loan.
Some people try to fix this problem with “Credit Repair.”
What is Credit Repair Anyway?
Lexington Law says they are “the leading credit repair law firm.”
They say you have “the legal right to dispute inaccurate items on your credit reports with the credit bureaus and your individual creditors.”
Is your bad credit caused by inaccurate items—or accurate items?
From what I see, as a bankruptcy lawyer, most of the bad credit on most people’s credit reports is accurate. Credit repair firms hint, but don’t dare say, they can remove accurate items from your credit report. (Sometimes they do, obviously, but they can’t promise it.) So, they mostly don’t do much good.
Lexington Law admits as much, if you read closely. They say on average their clients have “24% of their presenting negatives, removed within 4 months.” That means that 76% of the negatives are still there!
How is bankruptcy better?
Bankruptcy repairs your credit because it gets rid of your debts. The Federal Reserve, in two different studies, found that filing bankruptcy helps your credit score. Why is that a surprise? Your credit is better because you don’t have all those bad debts!
Isn’t bankruptcy is black mark on your credit? Of course it is. Then why does you credit score go up?
Evan Hendricks explained how it works in a case where I used him as an expert witness in a case against Capital One. He testified that the credit scoring models support the fresh start in bankruptcy, because bankruptcy counts as only one “derogatory” no matter how many debts it covered.
Suppose your credit is wrecked. You have a repossession, three charge offs, three collections, and two accounts that are 60 days past due. That means you have seven derogatories, and two delinquencies. Try credit repair? On average, that gets rid of two of your nine problems. You still have seven.
Bankruptcy changes those nine problems into just one: the bankruptcy. (No, your credit history is NOT wiped clean; the bad credit is still there. But it does NOT drag down your score the way it did—because while the bad history is there, the debts are gone.)
Credit repair, on average, changes your nine black marks into seven. Bankruptcy can change them into one!
The Fresh Start is a second reason bankruptcy is better
Some of the time, credit repair does knock accurate information off your credit report. But that does NOT mean the debt is gone.
Suppose you have a $5000 credit card that went to charge off, and is now owned by a debt buyer like Midland. Credit repair may some of the time knock Midland off your credit report. But that doesn’t help you if the sheriff bring a warrant in debt to your door.
When you file bankruptcy, the law gives you a fresh start. Besides helping your credit score, the creditors can’t call you, they can’t send you bills, they can’t take you to court or garnish you. Credit repair can never do all that.