PhotoPeople file for Chapter 7 bankruptcy protection for many reasons, whether because of a major financial setback or a series of smaller ones. The status gives a consumer the opportunity to discharge some debt and get a fresh start.

A bankruptcy carries a number of negative consequences, but it doesn't end a consumer's ability to borrow money; it just adds to the cost.

Online lending marketplace Lending Tree has produced a study that puts a price on bankruptcy when it comes to the extra costs of getting a loan. The findings may prove useful to a consumer contemplating a bankruptcy declaration.

On a credit report for seven years

A bankruptcy will stay on a credit report for seven years. While that initially causes a credit score to plunge, the study found the recovery time is much less than seven years.

The study found that 43 percent of consumers with a bankruptcy on their credit file have a credit score of 640 or higher within a year of the bankruptcy. After two years, 65 percent have a credit score above 640.

A 640 credit score is high enough to qualify for many loans, but it is also low enough to make those loans more costly because of a higher interest rate. However, Lending Tree found those extra costs go down quickly.

For example, an auto loan of $15,000 will cost an extra $2,171 in interest if you apply less than a year after a bankruptcy. If you wait at least two years, the extra charges fall to an average of $799.

The savings, of course, are based on an improving credit score. The authors stress that scores can recover quickly, as long as the consumer pays all bills on time and engages in other sound credit practices.

Mortgages

Even applying for a mortgage with a bankruptcy on the books isn't that costly. The study found that a three-year-old bankruptcy typically results in an interest rate that is only 0.19 percent higher than a borrower without a bankruptcy.

Over the life of the mortgage, that costs $8,887 more than the terms offered to someone without a bankruptcy.

While the costs of bankruptcy may be less than imagined, it is not a legal step to be taken lightly. Getting legal advice is highly recommended. To learn more, check out ConsumerAffairs' resource guide on the subject.


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