Debtors' insurance costs often rise following bankruptcy filing
A damaged credit score following bankruptcy goes beyond a person's inability to obtain credit at competitive rates. Credit history is also reviewed by landlords renting apartments, companies making new hires and insurance firms issuing policies for homes and cars.
Once a case is filed in U.S. Bankruptcy Court, credit reporting agencies begin recording it as a derogatory mark against an individual. A person's credit rating and the accompanying credit score are predictors of risk for lenders and others who provide financial services, including insurance.
Insurers who provide automobile coverage typically consider an individual's driving record and how long he or she has been driving, just as a company that offers home insurance considers the age, size and condition of a home before agreeing to a policy. When bankruptcy enters the picture, the credit score becomes an important factor as well.
Such issues are weighed differently when being considered by insurers. For instance, how much debt a person carries counts for 30 percent of the risk score. Payment history is 35 percent of the score, while length of credit history accounts for 15 percent, new credit is 10 percent and types of credit held is 10 percent.
"The biggest difference is that insurance risk scores look for stability, but credit risk scores look for a reliable pattern. Insurance scores are more interested in how regularly you pay than in how much you already owe," Craig Watts, a spokesperson for Fair Isaac Corporation (FICO) told Insure. FICO provides insurance risk scores that are used by about 300 insurers nationwide.
According to My Insurance Place, an individual who goes through a bankruptcy could also have difficulty getting a life insurance policy or may be offered one with less coverage. Because people who have filed bankruptcy are seen as a higher risk, insurers believe they will stop paying their premiums and cancel their policies after only a few years rather than keep them for the long-term.
All of these issues come into play and may result in higher insurance rates when those who have filed bankruptcy renew their policies or try to find a new insurer. Comparing the rates of different companies becomes more important for people who have a bankruptcy on their credit record. After obtaining coverage, they may be able to offset the higher cost of an insurance policy by increasing their deductible amounts.
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