[hugh_]

The article says that fears of damage to your credit rating, if you do this, are "overblown". But surely the damage to your credit rating among rational creditors should be really severe?

If I were a bank and I found out a borrower had walked away from a previous loan leaving their creditors holding the bag, there's no way in hell I'd lend them a single cent, ever.

[ajross]

They'll have trouble getting another mortgage, that's true. But that's surmountable if you're happy with renting and/or can find a co-signer for your loan. Similar things are true for automobile loans.

But generally when people talk about "damaged credit", they mean an inability to get a credit card. And there, I'm willing to bet there are plenty of banks willing to do business with people with foreclosures on their records. The revenue model for credit cards is based on fees, not loan risk.

[wisty]

I wonder if credit card companies prefer people with a slightly dodgy credit rating, as they are more likely to get hit with late fees?

[beaker]

The funny thing is that folks who are deeply underwater on their mortgages are _already_ screwed with regards to credit - even if they have a good credit history and are up to date on all payments. I know someone who has high 700s credit score that was recently turned down for a credit card, the reason given was that the balance on their mortgage was too high. That was the straw that broke the camel's back for them and they have decided to do a short sale on their property.

[ryanwaggoner]

That makes no sense. Being underwater doesn't mean that your mortgage balance is too high, it means that it's higher than the value of the house. A credit card company would have no way of knowing the value of the house unless they had an appraisal done. What they likely meant was that either the balance or the monthly payment (or both) was too high for his income.

[beaker]

I understand what "being underwater" means - thanks though. The facts are that the credit card companies don't need to do an appraisal - the entire market where this person lives is down 50% from the time they took out the mortgage. The person maintains a good income and can easily pay the mortgage payment, it just doesn't make sense any more for them to throw good money after bad to hold on to a FICO score that really doesn't get them credit any more.

[ryanwaggoner]

Again, you're not making any sense. Let's say the mortgage that the person has is for $250,000. How does the fact that my market has supposedly lost 50% now mean that my mortgage is "too high"? Perhaps the house was worth $1m when I bought it and is now only worth $500k. Would the credit card company still think the mortgage is "too high"? It's still only 50% of the value of the house. I think you're missing some data.

[beaker]

It makes sense because the borrower has gone from having a positive net worth to a negative net worth due to the mortgage being underwater.

When they took out the mortgage, they were debt-free and had a mortgage equal to the value of their assets (the 1 million dollar house balances out the 1 million dollar loan), giving them a net worth of essentially $0. Now the house is worth $500,000 (but they still owe $1,000,000), so their net worth is essentially -$500,000.

Under these circumstances, it makes sense that the credit card company doesn't want to issue a card to someone that they know is worth negative a half million dollars, even if he did pay all his bills on time and can make the monthly payment on the amount he owes.

[ryanwaggoner]

How does the credit card company know he's underwater?

[nwatson]

Many have and will continue to have their homes foreclosed during this recession, and they will have "bad credit" for a long time. If/when the economy turns around in a few years, any bank that decides to not fund these same peoples' mortgages the next time they shop for a house will miss out on a huge piece of the market. The banks won't stick to this policy. They'll follow the credit card companies who are very eager to issue new cards to those who just finished their bankruptcy proceedings.

[ars]

Federal law limits how long you are allowed to do that. 7 or 10 years I believe.

[hugh_]

Really? Wow.

And people are complaining that the crash was caused by under-regulation? How about first removing all the laws which force banks to lend money to folks who are unworthy of credit?

[ghshephard]

Prior to 2007, the majority of Bankruptcies in the United States were a result of medical bills. Without socialized medicine, and a leaky private insurance system, getting seriously ill in the United States basically wiped you out financially.

This is actually one thing that I've never been able to make people from countries that have socialized medicine believe.

The sheer _concept_ of an illness wiping you out financially is typically beyond their comprehension. Most people in the United States without that experience also have a tough time understanding it as well.

Suggesting people can never get a reasonable loan because of a bankruptcy, and therefore likely because of an illness, is a little much.

You do maintain a running credit record that should accurately reflect your (illness free) creditworthiness.

(Disclaimer: I'm a Canadian working Silicon Valley with excellent medical insurance who has never had a hospital stay or need to call on said-insurance (knock-on-wood))

[anamax]

> Prior to 2007, the majority of Bankruptcies in the United States were a result of medical bills.

Not so fast.

The "study" that supposedly found that actually didn't. At most, it found that folks who went into bankruptcy had medical bills. They also had car payments, house payments or rent payments, and so on.

When you're going broke, bills for everything start piling up.

[jeromec]

Do you apply your indignation to bankruptcy to all cases? After all, bankruptcy is used strategically in business situations by everyone from General Motors, to airlines, to Donald Trump who usually come back with even larger undertakings, and often with more profits.

[evgen]

Yeah, and let's bring back debtors prisons while we are at it...

The general idea of these laws is that 7-10 years is a long-enough window into a persons financial state and habits to determine their current credit-worthiness and limiting this look-back window prevents lenders from subverting the purpose of US bankruptcy laws. There are no laws that force banks to lend money to people, only laws that limit the duration of certain items on your credit record.