Obtaining new Credit After Filing for Chapter 7 Bankruptcy - Part I

The most common question asked by a debtor contemplating filing for Chapter 7 bankruptcy is whether he will be able to obtain new credit once he files for bankruptcy. The answer is yes, so long as the debtor is employed. If the debtor is unemployed, he will be unable to obtain credit regardless of whether he files for bankruptcy or not.

When a debtor files for bankruptcy relief, it is not just a situation of where he pays an attorney a fee and gets rid of debt. Rather, in filing for bankruptcy, the debtor is trying to put himself on a sound financial footing. Among other things, that requires that the debtor be able to obtain new credit once the bankruptcy is filed. If employed, the debtor will be able to obtain new credit, and so long as the debtor is responsible with the new credit, we encourage it.

When a debtor contacts a bankruptcy attorney, his credit is usually shot. The debtor finds that he cannot keep up with his monthly credit card payments and has started defaulting. This is why he calls a bankruptcy attorney. The debtor’s credit, already ruined, cannot get any worse by filing bankruptcy.

Once a debtor files for bankruptcy, his creditworthiness improves immediately. More often than not, he will start receiving credit solicitations within days of filing his bankruptcy. Many times the client shows up at his bankruptcy hearing (usually about 30 days after filing his case) with credit solicitations in hand that he received through the mail after filing bankruptcy. We constantly assure clients that these solicitations are legitimate, and while we advise and encourage the debtor to get new credit, we caution him to be wary of obtaining unnecessary, excess new credit.

There is good reason for this caution. Potential new creditors are not offering the debtor credit out of kindness or generosity. Rather, they have done a risk assessment, and have determined that the debtor is now a low risk to them. This is because once a debtor files for Chapter 7 bankruptcy, he cannot file another Chapter 7 for a minimum of eight (8) years plus one day. During that time, if the debtor acquires new credit and is then unable to repay, he can be garnished. The only way to stop a garnishment is to either pay what is owed or file for bankruptcy. Since the debtor cannot refile another Chapter 7 bankruptcy until the eight years plus one day have passed from the date of the previous filing, it is usually “pay or be garnished” for the debtor. Ergo, all that a debtor needs to obtain new credit once he files for bankruptcy is reliable income, such as from a steady job. The fact that he can be garnished in the event of default, with no real remedy, is what makes the debtor such an attractive proposition for new creditors.

The biggest problem a bankruptcy attorney has in not the inability of his client to obtain new credit, but rather the ease with which the client is able to obtain new credit once a bankruptcy is filed. A Chapter 7 bankruptcy client is able to file a Chapter 13 bankruptcy right after a Chapter 7 if he gets into difficulty repaying the new debt, but that does not deter potential lenders. In such a Chapter 13 the client is REPAYING, NOT DISCHARGING, the new debt (albeit at a lower periodic payment than if he were being garnished). However, the Chapter 7 client cannot refile another Chapter 7 for 8 years plus 1 day, and during that time he is wide open to garnishment unless he is repaying in a Chapter 13.

Please contact the Law Offices Of Joseph L. Grima & Associates P.C. at (313) 385-4076 so that we can explain how a Chapter 7 filing can put you on a sound financial footing, which includes obtaining new credit.

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