Recently, an associate professor of law at the University of Iowa, Katherine Porter wrote that “credit solicitations of recent bankruptcy debtors is rampant.”  She studied data collected by the Consumer Bankruptcy Project and found that nearly every debtor receives credit offers shortly after bankruptcy.  Most offers are for credit cards, however, some are for mortgages and car loans. 

It is interesting because this phenomenon contrasts with the picture painted by the credit industry and things most of us read and hear about from credit counseling agencies and debt settlement negotiators.  We’ve all heard proclamations throughout society that “bankruptcy ruins your credit” or “you will never be able to finance a house” or other similar doomsday forecasts (I’ve discussed before about how bankruptcy is a first step in the rebuilding of credit since most who need bankruptcy already have bad credit or are about to without bankruptcy).

The data collected by the Consumer Bankruptcy Project support what I and many others have been saying for years.  It is not only possible to obtain credit after bankruptcy, it might actually be easier to obtain credit after bankruptcy than after other non-bankruptcy options are attempted (usually unsuccessfully). 

 As Professor Porter says in her article, “Bankruptcy Profits:  The Credit Industry’s Business Model for Postbankruptcy Lending,” “despite debtors’ trepidations and creditors’ warnings before bankruptcy, borrowing after bankruptcy is not only possible after bankruptcy, such activity is actively encouraged by the credit industry.  These data suggest that creditors’ threats to refuse credit after bankruptcy are hollow.  The credit industry may tell consumers that they will not lend after bankruptcy and that paying the debt is the only option to maintain their credit access, but such statements are largely untrue.  Rather than resulting from a marketing mistake, the widespread availability of postbankruptcy credit more likely reflects a careful calculus about the profits of lending to consumers vulnerable to financial distress.  The bankruptcy system shapes creditors’ ability to profit from former bankrupts, and law can play a critical role in defining the appropriate boundaries of credit solicitation.”

The Fair Credit Reporting Act provides that “negative” information can be reported on a credit report for up to 7 years from the date of last activity. There is an exception for bankruptcy cases. They can remain on a credit report for up to 10 years. Many of my clients wonder, though, if the removal from the credit report happens automatically, or do they have to do something.

It’s always a good idea to take action. The credit reporting bureau should automatically update the credit report information, but that doesn’t always happen the way it should. Thus, there are four easy steps you can take to make it happen.

First, pull your report. The information on the credit report will be helpful to you in the event you have to dispute information. You’ll know the correct account numbers, etc…

Second, make copies. Make copies of your bankruptcy discharge notification, the debt schedules in your case, your driver’s license, your social security card, and a piece of mail (such as a utility bill) that verifies your address.

Third, send notifications. Send letters to all three national credit reporting agencies: Experian, TransUnion and Equifax. Keep the letters short. Point out that you filed bankruptcy 10 years ago and therefore all record of the bankruptcy must be removed. Include the copies you made in Step 2. Never send original documentation!

Fourth, wait. Wait at least one month before applying for credit or taking any action that would make someone look at your report. Once you’ve completed these steps, the bureaus will update your report within 30 days. After this 30 days (usually wait 35 days to give the bureaus time to receive your mailed letter) your report should be clear!

Some landlords (mostly large, corporate-owned) have a “strict” formula they use to determine whether to rent to someone. Bankruptcy counts as a negative, as would any other poor payment history. With some of these apartment complexes, it might be difficult. Of course, you could offer additional security as a deposit and that sometimes forces them to “recalculate.”

Individually owned, or smaller apartment buildings are generally not as strict and if the landlord takes a liking to you, the landlord can find a way to get the lease done. Again, offering a bit more security deposit would go a long way toward convincing the landlord you aren’t going to skip out on rent.

In my years of representing debtors in consumer bankruptcy cases, I’ve actually had a number of clients who were told by landlords to file bankruptcy first, then they would be willing to rent to them. Thus, some landlords are savvy enough to realize that renting to someone who is facing wage garnishment or a lawsuit by a creditor that isn’t getting paid is much more risky than renting to the same person who is debt-free!

I believe that a landlord who turns you down citing the bankruptcy would have turned you down even without the bankruptcy because of your debt problems. Bankruptcy tends to be a solution, not the problem. Thus, your real question is “will I be approved for an apartment if I have trouble paying my bills and will bankruptcy make my chances better or worse?”

Taking the question this way, the answer is, in my opinion, that bankruptcy makes your chances better. Landlords often turn prospects down because of their poor payment history and poor debt to income ratio. But, bankruptcy is a way to eliminate the debt so that you can begin rebuilding and so you can use your available cash to pay necessities like rent, utilities or groceries. It’s a way to demonstrate to the landlord that you are a good risk because the landlord is your priority and there is no one else who has a claim to your income that would prevent you from paying your rent.

My last blog post discussed whether or not an employer could terminate someone’s employment because of a bankruptcy case. The answer was clearly no. Is the answer the same when it comes to a prospective employer hiring you?

If you review 11 U.S.C. Section 525(b) again, as I posted the other day, you’ll see that the answer is not quite as clear. The code says an employer can not discriminate “with respect to employment.” It could be reasonably argued that this would prevent any employer from discriminating in hiring practices just because a candidate had filed for bankruptcy. Most cases interpreting this provision, however, indicate that the statute only applies to the debtor’s current employer and not any employer, [In re Merriweather, 185 B.R. 235 (Bkrtcy.S.D.TX 1995), In re Briggs, 143 B.R. 438 (Bkrtcy.E.D.MI 1992), In re Patterson, 125 B.R. 40 (Bkrtcy.N.D.AL 1990]. Thus, it is questionable whether this protects the debtor from discrimination in applying for new employment.

However, keep in mind, that prospective employers pull credit reports. Many employers will rescind offers of employment or refuse to hire a person merely because of a bad payment history. Thus, if you find yourself considering a bankruptcy case, you are probably having trouble paying your debts as they are due. Even if you are current on payments right now, you likely won’t be in the future and any delinquent payments could equally affect an employment decision in the future.

In fact, some employers would prefer that you have discharged your debts. Many employers would rather not deal with creditors calling its employees during work hours on the job and don’t want the administrative headaches associated with processing wage garnishments. These employers would rather hire someone who is debt-free, instead of someone who has debt problems.