How Will Filing For Bankruptcy Affect My Credit?

It's important to realize upfront that bankruptcy will affect your credit, especially in the short term. Yet by managing the process well from the beginning and setting some realistic expectations, you can take steps on a path to restoring and even improving your credit in the long term. It's also important to realize that doing nothing and repeating past mistakes will leave you and your credit in even worse shape over the long term. Bankruptcy can be a time to rebuild and is a perfect time to learn from those past mistakes.

Impact to Credit Score

When you file for bankruptcy, your case is reflected in the public record section of your credit report. Chapter 13 remains in the public record section for seven years, Chapter 7 for ten years. As time passes, it will hurt less. However, initially, your credit score will take a hit.  There is no standard amount that your credit score will drop.  It will depend on many factors: the status of your credit prior to bankruptcy, the amount of the debts covered by your bankruptcy filing, and the number of accounts included in your bankruptcy.

Which is better, Chapter 13 or Chapter 7?

Generally, the specific type of bankruptcy you're entering — Chapter 7 vs. Chapter 13 — will not factor into a reduced credit score: BOTH will cause it to go down. However, down the road, a potential lender or creditor may take note of which type of bankruptcy filing you used and how the process played out. In this case, a person who entered Chapter 13 bankruptcy and successfully repaid debts under a payment plan may appear as less of a risk than a Chapter 7 filer whose debts were wiped out.

Early Benefits

There are many factors a lender uses to determine whether or not to lend you money.  The more recent one has a derogatory mark (delinquent payment) on their report, the more unlikely they are to receive.  One immediate benefit to your credit history is that upon the filing of a bankruptcy, each individual credit account, called tradelines, must cease negative reporting.  This puts a stop to the ongoing damage created by the continued reporting of delinquent accounts.  Futher, your balances and past due amounts should be zeroed out.  While your credit score will suffer initially, both your credit history and debt ratio will improve.

Recovery Strategies & Credit Repair

While bankruptcy may cause a disruption in your personal finances and limit some of your short-term options, it's important to recognize that opportunities also exist for you to begin repairing your credit and putting yourself on a better financial footing.

For credit accounts that are not part of a bankruptcy filing, continuing to make on-time payments and maintaining low balances (usually 25% or less of the available balance) will keep those accounts in good standing and avoid further damage to your credit score. These accounts may include store credit cards or even gas station card accounts.

For those in Chapter 13 bankruptcy, making on-time payments to your payment plan is critical to your success in the bankruptcy process. It will reduce your overall debts and indicate to creditors and lenders that you are working to correct your past mistakes.

At Patton, Knipp & Dean, clients benefit from The Complete Bankruptcy, a pioneering system that accompanies you through all stages of the bankruptcy process, including free credit repair services. It's important to know your consumer protection rights under the Federal Fair Debt Collection Practices Act when going through bankruptcy. Our firm is here to educate and empower you so that your rights are respected and enforced. Patton, Knipp & Dean attorneys will work directly with you to identify and remove any inaccurate information from credit reports and to end illegal harassment from creditors and debt collectors. We will be with you from the beginning until you are back on your financial feet. And we will be in your corner when creditors and debt collectors cross the line.

With responsible decision-making, low balances, on-time payments, and up-to-date credit reports, even an individual under bankruptcy protection could see their credit score begin to improve in just a few years.

Bankruptcy is never a desirable situation, but the ultimate outcome at the end of the process can be a positive one — little to no remaining debt, a higher credit rating, and improved financial awareness. Working closely with a bankruptcy attorney and educating yourself about bankruptcy details could help you emerge as a smarter consumer and a better borrower.


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