Lately, I’ve gotten into reading Liz Weston’s (@lizweston) column in the Los Angeles Times Sunday papers I get delivered and it seems like a love/hate relationship at times. For the most part, I feel it’s important to keep an eye on these personal finance advice givers and share my perspective. In her column entitled, Consider Bankruptcy in Long Debt Struggles, I start with her statement that “A bankruptcy filing would devastate your credit scores . . .,” which is one of those myths I come up against in practice on a daily basis. I disagree with @lizweston that a bankruptcy filing would devastate credit scores. Contrary, eliminating the debt from one’s credit report often offsets the impact of a bankruptcy filing and actually improves a credit score. In the case of the 33-year-old mother, her filing bk while current on her debt repayment will have significantly lower impact to her credit score because it’s the ‘late payments’ and ‘collections’ activity that has a greater impact that filing bankruptcy.
Liz, I know you write nationally, which makes it important the readers understand this. In California, it is unlawful for an insurer to use credit scores to determine insurance premiums. Another important point to note is that anyone with preexisting utility accounts, wireless services and the like will see no impact on their service when they keep those accounts in good standing after filing bankruptcy. Also, we have the ability to provide planning and counseling to our clients and can eliminate past due accounts; and exit contracts where appropriate to do so with new agreements in place BEFORE they file, so this does not become an issue.
I do agree and have said it before that if you’re struggling to repay debts and your debt repayment plan is longer than five (5) years; or, if you find yourself tapped out of savings and/or drooling at your retirement accounts to save you, then you owe it to yourself to consider bankruptcy. At this point, I believe that our financial obligation to have enough money saved in retirement far outweighs our obligations to service and repay our debts.