Is there a Difference Between Types of Bad Credit?

[Brian D]

I hear people talk about certain credit report issues being 'worse' than others. People talk about different options being better than others, but I'm not sure why. I'd been resisting Bankruptcy because I didn't want to ruin my credit in case I want to rent a new apartment or resume a corporate management position with a large company, but now I figure since I'm already 90+ days behind, a prospective renter or employer isn't going to be any more receptive to me if I have tons of 90 day delinquencies and/or chargeoffs than if I have a Bankruptcy on my report. It seems like with the exception of hardships due to a temporary setback like unemployment, most people looking at your report will basically view you as having 'good' credit, or 'bad credit' anyway, right?

[Radio_Guy]

HI Brian D.

You're right bad credit does have degrees of "Badness" technically Bankruptcy is worse that 90 days past due... Yes people basically put you in the category of Bad verses Good credit, however, the modern scoring models are beginning to differ with the different degrees of credit problems. Specifically I am talking about the apartment Credit reports which have only a recommendation for 1. Ok-to-rent, 2. marginal renter or 3. not recommended.

When you are 90 days past due and you get current (leaving the account open,) you can get rid of the late payment history after about two years. and you will probably be a Marginal renter.

However, If you declare bankruptcy, it will stay on your record for 7 years and there is nothing you can do to get this off your records sooner. You will probably be a Not recommended to rentAlso there are a few jobs that you will never qualify for because of the bankruptcy, (mostly high level DoD, State Department or Judiciary positions.)

There are pros and cons to each situation. You have to weigh the factors, and make a decision.

Good luck...

[Brian D]

Thanks for writing back. That's too bad (and in a way kind of simpleminded) that they figure that somebody who is IN THE MIDDLE of a bad money situation (90+ day past due) is considered a higher risk than someone who has used BK to put their debt burden behind them and is now in a position to finally become financially stable.

Sure, they could look at it as "well, this person obviously mismanaged their money to a crisis state and couldn't pay their debts, so they're a bad risk", but I would think that it would make sense to look at the person's situation and say for example, "well, they claimed BK X number of years ago, but they have a steady income, and they haven't run up any new debt since then, so maybe they're on the right track". I'd rather rent to that person than the person who has 'perfect credit', but is juggling $45,000 in CC debt on a $90,000 income! But I'm no financial expert for sure. Just makes sense to me.

Oh well, I'll just have to deal with it. If I don't file, my situation will just get worse. Unless some rich uncle I didn't know about...

[Radio_Guy]

Hi Brian D.

That's too bad (and in a way kind of simpleminded) that they figure that somebody who is IN THE MIDDLE of a bad money situation (90+ day past due) is considered a higher risk than someone who has used BK to put their debt burden behind them and is now in a position to finally become financially stable.

I think you are misunderstanding what I intended to say... and you are comparing apples and oranges... The credit report for a rental applicant is completely different a credit report for a loan applicant. The person in the middle of a bad money situation is much more likely to default on all their obligations in the near future.

What you say below is exactly correct for a person 2 - 4 years out of Bankruptcy...

"well, they claimed BK X number of years ago, but they have a steady income, and they haven't run up any new debt since then, so maybe they're on the right track".

but the person who declared bankruptcy ( Mr. Bankruptcy,) is still are going to be denied some loan programs and some credit until the Bankruptcy is off his/her history... (Which has nothing to do with getting an apartment...)

All I am saying is that if you work your 90 lates back to current and then pursue a goodwill letter from some creditors and push verification/disputes for the other creditors, you should be able to clear you credit and get back to a really good credit rating faster, ( like 2 years instead of 7...)

I'd rather rent to that person than the person who has 'perfect credit', but is juggling $45,000 in CC debt on a $90,000 income!

It is obvious that the person's situation you presented above (Mr. Maxed-Out) is obviously slowly sinking into financial trouble. However, he IS demonstrating that he is are paying his bills and has is successfully meeting his obligations. The landlord really doesn't care about the debt load and in fact doesn't even know what his debts are, just whether or not the applicant pays them on time.

HOWEVER, a lender loaning money will be looking at a completely different set of criteria. Mr. Maxed-Out is going to have just as many problems, if not more that Mr. Bankruptcy trying to get more credit. This is the Apples verses Oranges ...

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I personally worked (as their Banker,) with a couple whose Credit Card debt was more than their annual combined gross salary, ($265,000.00 in Credit Card debt, NOT including their mortgage,) They went on an austerity budget for 30 months and got out out of debt. It was grueling for them but they did it and got their lives back....

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If you are in over your head, and you cannot adopt an austerity budget for 2+ years to get out of this mess then maybe Bankruptcy is for you.

You need expert personal advice, go see a bankruptcy attorney soon, BEFORE the new laws take affect in the fall.

Good luck...

[Brian D]

Thanks for clariying. Well, it's not credit lenders I'm worried about -- I'm not interested in using unsecured credit anymore. And I can't get much more austere than I have been -- the late fees and interest are ridiculous, and the all creditors completely unreasonable.

So I'll just have to live with the negative effect of the BK on my real estate rental prospects. I'm in debt due to my choices/mismanagement, so I'll have to live with the consequences. But for me a BK is better than continuing to wastefully throw money at a debt that is mathematically set up to keep me indentured and penniless for much longer than the BK will be on my credit report.

[Radio_Guy]

Good, - it sounds like you have a plan.

Plan you moves, stick to it and you will be living a better life wthin 2 - 3 years. Bankruptcy isn't the worst thing that can happen to you... Remember that this affect on your rental prospects will be limited to the time during which you are going through the BK process after that shouldn't affect your rental CR anymore.

You will survive and hopefully you'll develop some new financial management techniques and in 4-7 years you won't even remember the difficulties at this time in your life...

Good luck...

[jq26]

I'm going to chime in because for three years I was Mr. Maxed Out and then in October 2004 (9 months ago) I became Mr. Bankruptcy. I can tell you that it has been a long emotional trip, but the day I was discharged was a new life. Felt like a 500lb weight was lifted off my back. Post BK7, I get credit when i need it and use it very responsibly. Generally, I use credit unions now so I get decent rates and low fees anyway. I do get denied occassionally and its annoying but not a big deal. Strangely, I've been denied for gas cards and crappy store cards, but recently received two platinum cards and yesterday I was even approved to trade on margin in my Scottrade account. But prior to filing, I couldn't get a stick of gum on credit anyway. Now my debt is close to 0, so other than the public record, creditors generally are willing to extend credit.

As far as renting, if you go to a small time landlord, they won't care. I'd say for two years after filing, you'd probably want to stay away from rental management firms if that's what you choose. But hopefully whether you'll file or not, you'll eliminate the debt and be in a position to buy your own place by that point. It will be tough and requires a completely different mindset, but it can be done.

Everyone's situation is different so what's best for you (filing vs settling vs paying off creditors) is no one's business but yours. I guess in general, RadioGuy has good advice- educate yourself, put a plan together, and then stick to it.

[Brian D]

Thank you both.

[Brian D]

Good, - it sounds like you have a plan.

Remember that this affect on your rental prospects will be limited to the time during which you are going through the BK process after that shouldn't affect your rental CR anymore.

Wow, that's encouraging if that's true. But hopefully, the next time I move, we can arrange it so my girlfriend with the perfect credit can get the lease in her name first, and I can get added on after the fact.

[jq26]

Brian,

My landlord was notified by the court last year when I filed. He couldn't believe it and called me to verify. He didn't care one bit since I had paid him 18 on time rent payments by that point. I told him only to be alarmed if the rent stops coming and he laughed about it. He really didn't care one bit (of course, this would have changed had the checks not come). I just contiued to pay my rent on time every month and it was a non-issue.

Six months after discharge (two months ago), my girlfriend and I bought a house so renting isn't an issue for me anymore. We ran it through her credit only due to my BK, similar to what you are thinking of doing. Except for us, it was much actually much cheaper for us and it made more sense to purchase than to pay high rent here in Philly. Plus she now gets a $20,000 tax write off every year for mortgage interest, so it was a no-brainer. I share this with you because if you have the means, it may be the way to go if you guys are long term.

[LadynRed]

Remember that this affect on your rental prospects will be limited to the time during which you are going through the BK process after that shouldn't affect your rental CR anymore.

Actually, that's not necessarily true. It may vary by area, but around here most of the large commercially-run apt complexes have very prominent signs that say if you have a bankruptcy less than 2 years past, they will NOT rent to you - stupid as hell, but true. They also add on the same sign that if you have lots of lates or charge-offs, they will not rent to you. Bottom line, if they see bankrutpcy or what shows as bad credit, you won't be living there.

The fact that a credit report has NOTHING to do with your reputation for paying your rent on time apparently means NOTHING. Even when I was scratching thru on unemployment my rent was NEVER late, but the credit cards didn't get a dime. I had enough for the necessities to live and work and that was IT.

Bad credit and bankruptcy most certainly DOES affect your ability to rent with anyone who's going to pull your credit.

For at least 2 years, you'll be better off looking for PRIVATE rentals, individuals don't pull your credit, not unless they're using a management company.

[Brian D]

Brian,

My landlord was notified by the court last year when I filed.

Geez, they NOTIFIED him? I knew it becomes public and anyone can find it if they LOOK for it, but I didn't know the b*****s went out and notified parties who aren't even included in the BK.

Who else do they notify?

[jq26]

As far as I know, my landlord was considered a creditor and the rent was included in my matrix. I'm not sure, but my lawyer told me they would contact him. My lawyer even put his address as my address so that the notification would go directly to me and into the shredder. But the trustee must have caught on, looked up my landlord's true address and sent notification. I had no idea of my landlord's true address and didn't include, yet he received a letter from the court at his home address. Like I said, he could have cared less, but had he not known me, he may have felt differently.

[Brian D]

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I personally worked (as their Banker,) with a couple whose Credit Card debt was more than their annual combined gross salary, ($265,000.00 in Credit Card debt, NOT including their mortgage,) They went on an austerity budget for 30 months and got out out of debt. It was grueling for them but they did it and got their lives back....

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I'm just curious how this is possible. With the kind of interest and late payments the credit card companies charge, how do you possibly pay back debt that's higher than your gross income in only 30 months? Even if you leave on peanut butter and shop at thrift stores? Did they have a lot of assets they could liquidate or something? Otherwise, I just don't understand how the math could possibly work out...

[Radio_Guy]

Hi Brian D.

Funny you should ask, this was a really weird story.

Basically, We developed a monthly budget of less than $2,000.00. This left about $4,000.00 per month for debt. During the process the value of their home went up and they finally qualified for a second trust on their home to pay the rest off. They reduced their debt by $100,000.00 in 30 months, dumped a $50k car and its loan, refinanced individual debts during the process and finally financed the rest on their second trust...

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First you have to understand that their annual Salary was $235,000.00 and they both worked for the Federal Government.

He was a HIGH ranking government bureaucrat, and his wife was a rather well paid bureaucrat as well.

I'm just curious how this is possible. With the kind of interest and late payments the credit card companies charge, how do you possibly pay back debt that's higher than your gross income in only 30 months?

Second, they were NEVER late on ANY debt payment in their entire lives, so there were no late payment penalties or interest. Their credit scores were over 760...

Third, they had no children.

Even if you leave on peanut butter and shop at thrift stores? Did they have a lot of assets they could liquidate or something? Otherwise, I just don't understand how the math could possibly work out...

Fourth, they were living high on the hog... I mean Donald Trump probably spent less each week to live and pay for "necessities."

Fifth, They each had their own wardrobe ROOM in their home (no- kids so each of two extra bedrooms were turned into a 10 X 14 Closet , one for each.) this was 10 years ago and I'll bet they still haven't used up all the clothes they had...

Sixth, They each got brand new Mercedes' every two years. Actually they got one new Mercedes each year, one year for her (The cheap-e $65 K one)and one year for him (The big $90K Sedan...) This had to stop (which it did,) or they were never going to buy a new car ever again... They dumped one car and were driving a 5 year old Mercedes when they were all done paying everything off...

Seven, they stopped collecting ridiculously expensive chrystal and home furnishings. I mean you have seen their house, it was a nice little 2000 Sq Ft townhome (worth about $600K back then) right across from the Washington Monument in Alexandria on the Potomac River, but inside it was amazing and looked like Ivanna Trump's bedroom.

Eight, they were spending more on Shirt-pressing and their Cleaning lady than most people make each week., The cleaning lady had to go and they had to learn how to press his shirts - poor babies.

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So that's how you pay off all your debts in 30 Months if you're flip' - flopped.

The idea here is it gets easier as you go through the process. I mean the first month they paid off their smallest balanced credit account and had one less payment to make the next month. As they paid their debt down, the Debt to Income ratio got them to the point where they could qualify for better loans etc... It just gets better and better from there...

Good luck,

[Brian D]

Hi Brian D.

Funny you should ask, this was a really weird story...

Thanks for all that detail. It prevents me from feeling 'guilty' about using BK -- I have no such extravagances to cut or valuable assets to sell.

[Radio_Guy]

Hey Brian D.

Yeah, that was a little over - detailed...

You shouldn't feel guilty about the bankruptcy. An Individual has to have a way to get out of a bad situation within a reasonable period of time.

If you can put the pedal to the metal and pay off your problems in 24 months or so, GREAT go for it.

If you can't, then you owe to yourself and society to declare bankruptcy and rebuild your life.

People frequently forget that this country was founded because of Debtors prisons. Yes, religious freedom was certainaly part of the equation, but the most universal injustice that all affected groups in Europe was this doctrine of serfdom - forever, through debtor's prisons.

Here in the US a person can screw up - numerous times and still be allowed to start over and carve out a decent life for their family. Like President Harry Truman a Four-time bankruptcy filer... Or Walt Disney and Nine-time filer, and the list goes on and on...

Good Luck,