Will my credit be damaged by filing for Bankruptcy?
This is a common question I get from prospective clients. And my answer is simple: it doesn’t really matter. Most people who meet with me for an initial bankruptcy consultation have various issues that have already damaged their credit. And without taking measures to eliminate some or all these debts, the credit will only get worse over time. Bankruptcy is actually a path to better credit!
It is true that your credit score will fall filing a Chapter 7 or Chapter 13 bankruptcy. Bankruptcy will have a negative impact on your credit health for the short term.
Most people who are looking into filing bankruptcy are having financial issues. The poorer your credit score, the lower your rating will fall upon filing for bankruptcy. For example, a good credit score of 720 usually falls around 200 points. However, a fair score of 670 will only fall roughly 130 points. Regardless, the impact will be temporary and the fresh start a bankruptcy discharge provides, will allow for a swift recovery.
There are two types of consumer bankruptcies: Chapter 7 and Chapter 13.
Under Chapter 7, a “straight bankruptcy”, the debtor will generally pay none of their unsecured creditors. Because of this, it can have a more negative impact on your credit rating initially. However, you are not eligible to receive another Chapter 7 discharge for the next 8 years. That means the debt is essentially non-dischargeable and recent Chapter 7 filers are a lower risk to creditors.
With Chapter 13, you’re making good on some or all of your debt. So, it is not reported on your credit report for as long as Chapter 7. Also, you may give future lenders a bit more of a desirable impression of your credit worthiness due to this payment history. This can translate to a slightly more beneficial outcome for your credit rating.
How soon can you improve your credit score after bankruptcy?
After a bankruptcy, there are many things you can do to improve your credit immediately. You should start by making sure that your bankruptcy has been reported correctly. You need to pull your credit reports to check on your bankruptcy debt discharges. They should be marked as discharged and show zero balances.
Next steps include establishing new credit and paying your bills. When obtaining new credit, stay within your means. Only take on debt that you are financially able to pay off responsibly. You should also track your credit reports and credit score regularly.
The bottom line is that there can be some negative lingering affects after filing for bankruptcy. But for people in financial distress, the benefits of filing bankruptcy usually out-weigh the risks. It is important to review your situation with an attorney. If you are experiencing financial difficulties call an attorney at Kelley, Lovett, Blakey and Sanders for a free consultation.
