One of the biggest concerns for anyone considering bankruptcy is how their credit will be affected by filing. Everyone knows there are some repercussions. Most disagreed on the size or duration of the impact. That, and how to rebuild are two things I hope to explain in this post.
What if I just smile and endure it?
A question you should be asking yourself is, “What will happen to my credit score if I don’t file for bankruptcy?” For many people contemplating bankruptcy, they are already at a point where they cannot afford to pay their ongoing debt obligations. If this is you, your credit score takes a hit every month when you don’t make your monthly payments. To give you an idea, once you’re 30 or 60 days late, your credit score starts to take a hit. If you let a payment get to the point where it’s 90 days late, it will remain on your credit report for up to 7 years and will have a significant impact on your score. Having just a few of these occurrences can be as damaging or more damaging than filing for bankruptcy in the first place. Therefore, once you realize that you will not be able to find a quick way out of the situation, it may be best to turn the wheels of bankruptcy. The higher your score before filing the case, the higher after you file the case and get your acquittal.
Your Debt and Credit Settlement Company.
Many people try to do everything they can to avoid bankruptcy, for some this includes entering into agreements with companies that promise lower payments by consolidating their debts. These companies come in a variety of flavors. That is a topic for another time. What many of them will do is make an agreement with you where you make a monthly payment to them, then they hold the money until they have enough money to bid on one particular debt, or they make a small monthly payment for all. from creditors at once. The problem is, this doesn’t stop lenders from reporting negatively to the credit bureaus. It also doesn’t necessarily stop creditors from suing you in state court, obtaining judgments, and garnishing your paycheck. Another problem is that if they complete, it will appear as completed less than the full amount which is detrimental to your score. Also, if you do, you’ll likely get 1099 from the company and likely have to claim the pardoned amount as income on your taxes. That means you will have a smaller refund or will be in debt.
How long does it last on your report and what does that mean for you?
First of all, if you are in a difficult financial situation and are having trouble paying your rent or making your home payments, this should not be a factor in your decision to apply. That said, how long it stays on your report and how long the bankruptcy notation affects you negatively are two very different things. If you file for Chapter 7 bankruptcy, it will generally remain on your report for 10 years. If you file for Chapter 13 bankruptcy, it will remain on your report for 7 years after the case is over. Seven to ten years seems like a long time. It’s a long time, but in those seven to ten years you can still buy a car, a house, and get a loan. The general rule is about two years after chapter 7 you can get a home loan (sometimes just a year), immediately after the case you can get a car loan and a credit card. Not too bad right? You have to tread lightly here. Look at the offers you receive and only accept the best, it won’t help you if you start applying for multiple cards at once, limit it to one or two at most. When you can get credit will depend on your income, and on your credit score. I’ve seen clients with scores in the 500s before filing for Chapter 7 have scores in the 700s one year after the case was over. On the other hand, I’ve seen other low-scoring clients come back years later and they still have low scores. So what happened there?
How to increase your score after bankruptcy.
If you do as you do and nothing changes, your credit score probably won’t change much. The lowest possible score you can get is between 300 and 403 depending on the type of FICO score. The highest is around 850 but that also depends on the type of score. If you don’t use credit, your score isn’t going anywhere. So what can you do? The first thing I recommend is to go to http://www.annualcreditreport.com and get all three reports for free. This is something you can do once a year. Once you have these, you will want to review them, perhaps with the help of your attorney to determine if the credit reporting agency correctly reported your debt as discharged in bankruptcy. If they are inaccurate and they refuse to correct the error, you may have a solution either through your old bankruptcy case, or cause of action under the Fair Credit Reporting Act (FCRA). Once your report is done, you can start rebuilding. A good idea is to start with a secure credit card or with a store brand card. With a secure card, the lender usually asks you to lower $300.00 to $500.00 and that becomes your credit limit. There is very little risk to the cardholder because they have the security of your deposit, but the benefit to you is that they will report to the credit bureau. If you need a car, a car loan with reasonable payments is another great way to improve your credit score as long as you can afford it and actually make the payments on time. My secret credit score improvement weapon is the IBR. If you have federal student loans and you’re on a low income or living paycheck to paycheck, you should at least look into this program. IBR stands for Income Based Repayment, you can apply at the following site. https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven. The great benefit of this plan is that many people who have filed for bankruptcy may qualify for a $0.00 payment. If you qualify and you sign up, and are approved for $0.00 or any payment, each elapsed month in which you make that payment (yes, even a zero dollar payment, if you qualify) is the month that your lender reflects as timely payments to credit bureaus. The more on-time payments you have, the better your credit score will be.
Good luck,
Steven Palmer, Esq.
Licensed in Ohio and Washington