Ways Bankruptcy Affects Your Credit Score
One of the main reasons people hesitate to file for bankruptcy is because of the effect it will have on their ‘credit score”.
Credit Score and Debunking the First Bankruptcy Myth
What is a credit score? Credit scores are generated by the 3 major credit reporting agencies, Equifax, Experian, and Transunion. Many factors go into the creation of the score and each does it a little differently. Basically, the main criteria are prior to on-time payment history and debt to income ratio. The myth that stops people from filing bankruptcy is that their score will go down drastically. This is untrue. Think of a credit report as a report card and the “credit score” as your grade point average. If you are an “A” student, because you have been doing great juggling your bills, and get one “F” (assuming a bankruptcy is an “F”), your GPA may go down a little bit. However, what most people do not realize, is that once they get rid of all their bills, their “debt to income ratio” is drastically improved. Why is this? Obviously, because all those bills you have been so good at juggling, have been discharged. There is no more “borrowing from Peter to pay Paul” and no more interest to pay. Quite simply, you have a lot more disposable income to pay any new creditors who extend credit to you. That is why most clients of our office find that their scores actually GO UP, yes I did say GO UP, immediately (within 6 weeks) of filing Chapter 7. That is why most of our clients find they get credit card offers in the mail in about 3 months after discharge.
Debunking the Second Bankruptcy Myth- 7 to 10 years
Invariably people who come to our office believe that they will not get any credit after bankruptcy for 7 to 10 years. This is not true. They are mixing apples and oranges. I will explain. All information continues to appear on your credit report for 7 to 10 years. That includes good information, bad information, and neutral information. Accordingly, the filing of the bankruptcy appears and continues to appear until it rolls off like everything else. But for the reasons discussed above, it does not preclude you from obtaining credit. The truth is quite the contrary because of the drastic improvement in the “debt to equity” ratio. Moreover, an additional factor that future creditors will look at is that you can not file Chapter 7 again for 8 years after filing a previous Chapter 7. Of course, you are not looking to file a second case, but believe it or not it happens because life happens. This further protection makes the new creditors all warm and fuzzy about extending credit to you because you simply cannot discharge them in a second filing for many years.
Chapter 7 vs. Chapter 13 Effect on Credit
Creditors look at chapter 7 and chapter 13 debtors differently. In chapter 7, debts are discharged or “wiped out.” In chapter 13, the debtor repays all or part of their debts over a 3 to 5 year period. People file chapter 13 because they are ineligible for chapter 7 either on the basis of their income or assets. This is a blessing in disguise from the perspective of the impact on your credit score. Think about it logically. Would you be even more inclined to extend new credit to a person who repaid monthly over a 3 to 5 year period all or part of their debt and now have no debt? Of course, the answer is yes! Although our clients may be initially disappointed about the chapter 13 solution, down the road they are pleasantly surprised. The discipline imposed on the debtor by the monthly payments and responsibility shown by paying back something is looked upon favorably by the new creditors.
Rebuilding Credit after Bankruptcy
If you are still not convinced that your credit will be better than ever following either chapter 7 or chapter 13, you can buy yourself some insurance. The first thing I tell clients is that they can now have some money in the bank to secure a bank line of credit. Use that bank card to tide you over until you get those new cards in a few months. You may have also kept some cards off the bankruptcy filing (store cards that had a minimal balance). Use the cards monthly and then pay them off in full. Let me repeat that, pay them off in full! The new positive information which goes on to that credit report card will continue to dilute any adverse impact the bankruptcy may have on your score. In our experience and based upon lending guidelines, even mortgage lenders discount fully the bankruptcy after 1 year. In conclusion, do not be mislead by all the misinformation floating out there about “credit” after bankruptcy and get yourself a fresh start now without fear
Even the most conscientious people are unable to pay their debts and have to file for bankruptcy. During those times it is important to find someone who can help you make the right financial decisions. For over thirty-six years,Robert H. Solomon P.C. has been answering client’s financial questions and helping them with their bankruptcy needs. If you find yourself in need of help,call us for a free consultation.