In many states, your credit rating affects more than your ability to borrow money and the amount of interest you pay. Your credit score could also affect your insurance rates, your ability to get a job, and several other areas. People are understandably worried about how a bankruptcy filing affects their credit score. This worry often leads to bankruptcy-phobia, which is an unreasonable fear of filing bankruptcy.
Access to reliable information usually dispels an unreasonable fear. Unfortunately, there is a lot of misinformation about the interplay between bankruptcy and your credit score. At Bankruptcy Done Right, we help you make evidence-based decisions in this area. So, you have additional peace of mind in what is always an uncertain time. We do more than provide information. We also take care of the complex filing paperwork and stand up for you when your legal or financial rights are threatened.
How Does Filing for Bankruptcy Affect Your Credit Score?
Filing bankruptcy dramatically lowers your credit score. Anyone who tries to tell you otherwise is either inexperienced in this area or telling you what you want to hear. However, the effect is much less drastic than people think.
As an initial matter, a bankruptcy filing looks much better on a credit report than a repossession, foreclosure, or repeated charge-offs. These entries indicate that the debtor quit. People who file bankruptcy, especially Chapter 13 bankruptcy, at least acknowledged the problem and made some effort to regain control over their finances.
Furthermore, bankruptcy does not ruin your credit, at least in most cases. By the time most people file, their credit reports include several months of late payments and other negative information. And, a single late payment can trigger a 100-point credit score drop. Therefore, bankruptcy usually moves a credit score from bad to worse. But it almost never changes a score from good to bad.
With a little diligence, the limited effect fades quickly. Most lenders only scrutinize the last six months, or even the last ninety days. So, former debtors who quickly rehabilitate their credit scores make a powerful statement to future lenders, landlords, employers, and other people who use credit reports to make decisions. More on that below.
How Long Does Bankruptcy Stay on Your Credit Report?
Technically, Chapter 7 filings remain on a credit history report for ten years. Chapter 13 filings fall off your credit report after seven years. The reason for the difference is simple. Chapter 13 debtors usually repay all of their secured debt delinquency, as well as some unsecured debt. Chapter 7 debtors need not repay anything to get their fresh starts.
Ironically, if they have done little or nothing to raise their scores, many former debtors see their credit scores decrease when the filing information drops off. People who file bankruptcy are in a special category. There is an objective reason their credit score is low. Once they leave this category, for classification purposes, they simply ignored their obligations.
How Do I Rebuild Credit After Bankruptcy?
Simply paying your bills on time is one of the best ways to increase your credit score. To a prospective lender, past performance is a reliable indicator of future performance. And, as mentioned, most lenders only care about the last few months of performance.
Not all creditors report information to a credit bureau. For example, most individual landlords do not report payments. They are usually willing to start reporting on-time payment information if you ask.
Borrowing money is another good way to raise your credit score after bankruptcy. After all, your credit score measures your ability to responsibly manage credit. It does not measure your ability to pay cash for everything.
Even people with poor credit usually qualify for a secured credit card. Charge something every month and pay the balance in full every month. This approach could raise your credit score by as much as 100 points a month, especially in the early post-bankruptcy days.
Finally, build a financial reserve. If you filed Chapter 13, keep making the monthly debt consolidation payment, at least for a few months. But instead of paying the trustee, pay yourself. After several months, you’ll have several thousand dollars in the bank. That’s usually enough to withstand the next financial storm which comes your way.
Bankruptcy lowers your credit score, but you have the power to bounce back quickly. For a free consultation with a bankruptcy lawyer in Philadelphia, contact Bankruptcy Done Right. Convenient payment plans are available.