Credit Problem Basics

How Does Filing Bankruptcy Impact a Credit Score?

Many people considering bankruptcy think of the process as the end of their life. Often, individuals are discouraged to file bankruptcy because they believe that it will have a detrimental effect on their credit. Individuals are often under a misguided impression that filing bankruptcy means that they will never have credit again, will not be able to ever own property, and will be blacklisted from ever getting a credit card. This is far from true. Bankruptcy is a tool that is used to help individuals get back on their feet and start fresh. Filing bankruptcy wipes away debt and allows individuals to begin rebuilding their credit immediately. Filing bankruptcy does stay on an individual’s credit report for 7-10 years. However, not filing bankruptcy and continuing to accrue debt can put an individual in an even worse financial position. This article will discuss how filing bankruptcy impacts a credit score.

How Long Does Bankruptcy Stay on a Credit Report?

Many individuals considering Chapter 7 or Chapter 13 bankruptcy worry about how a bankruptcy will impact their credit score. The damage that bankruptcy does to a credit score can vary significantly depending upon individual circumstances. The determining factor as to how much an individual’s credit score will be impacted depends on how good their credit score was before they filed for bankruptcy.

Individuals that are delinquent on their accounts and have late payments on their credit history probably will not see it impact their credit score substantially. In fact, in some cases, individuals see their credit scores increase. This may come as a surprise to many. The reason that an individual’s credit score may increase is that once the person files bankruptcy, their debt is discharged and thus, do not have any more debt. This plays a big part when calculating a credit score. One of the major factors when calculating a credit score is the debt to income ratio. When individuals file for bankruptcy they have no debt so their debt to income ratio goes up.

Some individuals who have a high credit score before filing bankruptcy may see a modest dip in their credit score when they file bankruptcy. Depending on which bankruptcy chapter an individual files, the time frame of a bankruptcy filing remaining on a credit report varies. In Chapter 13 bankruptcy, it generally stays on a credit report for seven years. Individuals that file Chapter 7 bankruptcy will see the bankruptcy on their credit score for up to ten years. This difference is because, in Chapter 13 bankruptcy, individuals repay their debts over five years while in Chapter 7 bankruptcy individuals get their debts eliminated immediately.

Is Chapter 13 bankruptcy Better than Chapter 7 Bankruptcy for a Credit Score?

Neither Chapter 7 nor Chapter 13 bankruptcies make a difference as to how they impact a credit score. Most people think that filing a Chapter 13 bankruptcy is better for their credit score because they are paying back some of their debt and the bankruptcy falls off their credit report sooner than a Chapter 7 bankruptcy. However, some creditors will look at Chapter 7 bankruptcy more favorably because the filer has no debt. Thus, the individual may be viewed as someone who is less of a risk than someone who filed a Chapter 13 bankruptcy and still has debt. Moreover, creditors know that individuals who file Chapter 7 bankruptcy cannot file another bankruptcy for another eight years as compared to a Chapter 13 filer who can file another bankruptcy within two years.

 Will Creditors Extend Loans and Credit After Bankruptcy?

One of the biggest concerns for people considering bankruptcy is whether they will be able to get loans, credit cards, or a mortgage after bankruptcy. Most creditors will extend new credit to individuals who have filed bankruptcy. Below we will discuss how bankruptcy impacts the chances of getting credit cards, car loans, and mortgages.

Credit cards after bankruptcy – Most individuals who file bankruptcy can obtain credit cards immediately after they receive their bankruptcy discharge. Credit card companies know that individuals who file bankruptcy won’t be able to get another discharge for a few years which means they are less of a risk than someone who has debt. Most people will get credit card offers in the mail immediately after filing.

Car loans after bankruptcy - Most car companies will extend a car loan immediately to an individual who has filed bankruptcy. Individuals looking for a new car loan should be weary of high-interest rates that can make the terms of the loan unfavorable. To ensure that an individual will qualify for a loan they may need a cosigner to help them.

Mortgages after bankruptcy - Individuals can get a mortgage after filing bankruptcy. However, the time that an individual will have to wait to be approved for a mortgage depends on the lender. Most FHA mortgages can be given to an individual who filed bankruptcy within two years after a Chapter 7 bankruptcy. Individuals who file a Chapter 13 bankruptcy can sometimes be approved for an FHA mortgage during their Chapter 13 bankruptcy. Other mortgages may be a longer wait period. It is important that an individual who is planning to take out a mortgage seek out a mortgage professional sooner rather than later, to ensure that they are taking the proper steps to be approved for a mortgage loan.

How Can Bankruptcy Improve a Credit Score?

Although bankruptcy can stay on a credit report for a few years, individuals can begin rebuilding their credit right away. Individuals who cannot afford to pay their bills and continue to make late payments will continue to see a drop in their credit score. Late payments can stay on a credit score for up to six years. Filing bankruptcy can allow an individual to start taking the steps to rebuild their credit.

Credit bureaus compute a credit score by looking at several factors. Some of the factors they use to compute a credit score are payment history, outstanding debt, length of credit history, and how many credit accounts the individual has. After filing bankruptcy, individuals can start rebuilding their credit by making on-time monthly payments, paying their balance off in full each month, and keeping their debt load low. Individuals can have a perfect credit score after filing bankruptcy within two years.

Individuals who file bankruptcy can speak to a professional about ways to improve their credit score. Bankruptcy attorneys and credit counseling companies can provide different tools to help individuals rebuild their credit. Individuals should be very careful to use any credit repair companies that say they can remove a bankruptcy filing from a credit report. Many of these companies are scams.

Individuals do not need to hire a company to help them rebuild their credit after bankruptcy. Some ways that individuals can improve their credit is by disputing inaccurate or outdated information and adding financial information that will look good to creditors. Individuals can add their employment to their credit score to show financial stability.

Although opening a new line of credit seems far from what most people want to do after filing bankruptcy, it is the only way that individuals can start rebuilding their credit again after bankruptcy and begin the journey of financial recovery.

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