There is a direct connection between bankruptcy and credit report ratings; however, filing bankruptcy is not necessarily the end of the world. Sometimes, unexpected things happen, and with the current economic climate, there are many people experiencing financial difficulties.
Finding a Solution
If you find yourself looking for a solution to overwhelming debt, you are not alone.
More and more people are considering bankruptcy as a viable debt-relief option. In fact, nearly 1.5 million Americans have filed for bankruptcy in the last year. This marks an increase of approximately 80% over the 2007 totals of just more than 800,000 filings. And, financial experts are saying that it may be awhile before we begin to see a decrease in these numbers as people look for ways to resolve debt and re-adjust their budgets for a changing economy.
While bankruptcy should be a last resort, and only used when other options will not work, it is not a death sentence for your credit-worthiness.
Bankruptcy and Credit Report Rumors?
What happens to my credit report after filing bankruptcy?
You may have recently heard the rumor that filing will ruin your credit and leave you credit-paralyzed for the next ten years of your life.
Luckily, it’s just a rumor. These rumors often are spread by people who would prefer that you didn’t resolve your debt.
The truth is a little more complex – and more favorable to conscientious filers who are dedicated to improving their financial standing.
Many filers are able to improve their post bankruptcy credit report by following best credit practices in the months and years after their bankruptcy discharge.
Your Credit During Bankruptcy
There’s no denying the fact that a bankruptcy filing can impact a credit report and score; but the reality is that most people who file bankruptcy don’t have very strong credit before filing.
Late penalties, high balances, and delinquent payments or defaults will have a negative impact on your credit report. Filing bankruptcy will give you a “clean slate” and all your unsecured debts will be removed and marked as “included in Chapter 7 or 13 bankruptcy.”
What will your credit be like after bankruptcy?
But there are ways to resolve that debt and start working toward a better credit life and filing bankruptcy may be a debt relief option for you.
After Bankruptcy Credit Repair
Although it will remain on your credit report for 7-10 years (depending on the type you file) many creditors view bankruptcy as a positive action since your total amount of debt has been reduced. This makes your budget more manageable and increases your likelihood of being able to meet new payment obligations on time.
Credit risk is not determined by credit score alone. Many lenders will also compare your income with the amount of priority or secured debts that remain following discharge.
If you have a good income and manageable bills, then it is possible to begin rebuilding your credit rating right away. By paying your bills on time, maintaining checking and/or savings accounts, obtaining a secured credit card, or taking out a small loan, you can begin moving your credit score in a positive direction.
And, since lenders know that you cannot file Chapter 7 Bankruptcy again for at least another 7 years, they may actually consider you to be more credit-worthy than prior to your filing.
There is no denying that a bankruptcy filing can impact a credit report and score; but if your finances are already in a desperate situation, your score probably won’t fall as much as some people would like you to believe. In fact, many filers are able to improve their post-bankruptcy credit report fairly quickly by following responsible credit practices and proving to potential lenders that they have regained control of their finances.
As soon as you file for bankruptcy, you can take steps toward building a healthy credit identity for yourself and making your post-bankruptcy credit report what you want it to be.
More questions?
Where next? How about:
What are informal bankruptcies?
New bankruptcy laws make filing tougher.
Go to the Bankruptcy Article List.
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