Often, clients come to me concerned about the impact that filing bankruptcy will have on their credit. Unfortunately, there may be no straightforward or easy answer to this question. However, there are a few things that we do know that can be helpful in addressing the issue.
A chapter 7 bankruptcy will appear on your credit report for 10 years from the date of filing and a chapter 13 case will appear on your credit report for 7 years from the filing date. Some individuals may experience difficulty in obtaining a mortgage for as much as two years after filing bankruptcy. It is also true that those with very good, to excellent, credit can expect a sharp drop in their credit scores by filing bankruptcy.
However, for many of the individuals I see, damage to their credit may not be as big of a concern. Those who already have delinquent accounts or have "maxed out" their credit limits may already have poor credit. Therefore, would-be employers, lenders or landlords can already see the signs of financial distress, even if you have not filed bankruptcy. In such cases bankruptcy may not be the financial "bombshell" that some have feared.
Further, those individuals who already own a home and a car may not have a need for credit in the immediate future, and therefore, are less concerned about the adverse consequences of bankruptcy. Finally, for those facing foreclosure, filing chapter 13 bankruptcy may be their only option for saving their home. In that case, any concerns about credit take a back seat to retaining the home.
There is also one fact that is universally true regarding bankruptcy and your credit: the more time that passes from your bankruptcy petition, the more your credit is able to heal. Therefore, I encourage my clients to start rebuilding their credit as soon as possible after filing bankruptcy. Some of the advice that I give includes:
1) Check your credit report often (at least every year), to ensure that information is accurately reported. You can obtain a free copy of your credit report by visiting annualcreditreport.com. This credit report will not contain your "credit score" but will contain all the information that is used to calculate your credit score, so making sure that the information is accurate can be critical.
2) When you start rebuilding your credit, pay close attention to the terms of the credit that you are obtaining. If you get a car loan, what is the interest rate, and can you afford to make the payments? If you are able, a safer choice may be to open a credit card (preferable one with no annual fee) and only make minimal purchases on the credit card, such as gas. Finally, pay off the credit card balance in full each month, not just the minimum payment.
3) Make timely payments. According to FICO, whose credit scoring system is used by up to 90% of top lenders, payment history accounts for 35% of your credit score. Combine timely payments with payments in full and you will be building a positive credit history for future lenders to view. The longer that you have a positive credit history, the better.
4) Keep your debt amounts low. The next highest factor affecting your credit score, after payment history, is amount owed. After your discharge, most of your unsecured debt will likely be eliminated, so as long as you are managing any new credit accounts responsibly, you should be able to keep outstanding debt to a minimal level.
*The content on this website is not, nor is it intended to be, legal advice. In order to obtain legal advice regarding your specific situation, you are encouraged to contact an attorney.