What Is the Effect of Bankruptcy on My Credit Score?
How does bankruptcy affect your credit? This is a major concern of almost everyone who is considering the benefits of starting over. Unfortunately, there is a lot of misinformation out there passed along by well-meaning friends and family members. The truth about how a consumer’s credit changes depends a lot on:
- what their particular financial landscape looks like prior to entering into bankruptcy and
- whether they take advantage of certain strategies after discharge in a Chapter 7 or after plan confirmation in a Chapter 13.
1. Effect Is Not a Full 10 Years
Although a bankruptcy filing will be listed on your credit report in the public information section for up to 10 years in a Chapter 7 and as long as 12 years in a Chapter 13, the effect on your credit score does not last nearly that long if your case is like the vast majority of cases we see in our office. In fact, the credit score of a person filing bankruptcy can jump up significantly in as little as six months using the proper tools and a little bit of guided discipline. We suggest employing a credit score consultant to those clients for whom the score is of vital importance, e.g., those wanting to buy a new house or car.
2. Some Scores Go Down; Others Go Up
It may seem incredible, but some of our clients have actually seen their scores improve with the filing of a bankruptcy petition. The reason usually has to do with their debt-to-income ratio. From the lender’s perspective, fewer competing debt obligations post-bankruptcy can reduce the risk that you won’t be able to pay them back in the future if they now loan you money. In some of those instances, the release of competing debt can boost a person’s score.
3. Worst Case Scenario
Depending on which chapter you file under, your credit score could decrease by as much as 160 to 220 points. However, don’t imagine for a minute that this decline is going to last. And it certainly won’t last for 10 years! You’ll notice that, over time, the bankruptcy will become less and less of an impact on your score. Especially, if you take your credit score consultant’s advice. I will predict that, if you work responsibly towards establishing new credit and stay financially disciplined, you will be able to qualify for almost any kind of debt in two to four years from the date of discharge. And that includes mortgages, vehicle loans and all kinds of unsecured credit.
Most importantly, compare this proposed path with the one you are on now. For many of you, the effect of missed payments or court actions has already taken its toll and the prospect may be only more of the same. A bankruptcy filing could very well end up being less harmful to your credit and your future than sticking with Plan A.
Speak to a Cleveland OH Bankruptcy Attorney
To learn more about bankruptcy and how it relates to your credit, contact Benson Law Firm today.