The fact that a bankruptcy was filed is one of many items on a credit report. A credit score after bankruptcy will depend on the credit score prior to filing bankruptcy as well as the other previous items listed on the credit report. Filing bankruptcy will hurt a credit score, especially if the score was high prior to the filing. The lower a credit score prior to bankruptcy, the less the score will drop when after a bankruptcy is filed.
Though no one knows for sure (FICO, the most widely used credit scoring company, uses a formula that they do not disclose to the public), it is widely believed that the filing of a Chapter 7 bankruptcy has the same effect on your credit score as the filing of a Chapter 13 bankruptcy. The FICO score factors in items like your total debt, the length of your credit history, recent credit items and negative items.
For people that are struggling financially, their credit report may contain negative items such as strings of missed payments, repossessions, liens and judgments. Until a creditor is satisfied they can continue to report missed payments for many years. Negative items will remain on a credit report for 7 to 10 years from the date the item was last reported.
So what does a bankruptcy do to a credit report and how can it help my credit in the long run? Filing for bankruptcy stops the reporting of negative information so that the clock starts ticking on the negative items naturally falling of your credit report. The more time that passes since the last reporting of negative items, the more a credit score will heal.
People often believe they will not be able to get credit after bankruptcy. The opposite is true. After filing a bankruptcy debtors often receive several applications for credit cards and car loans in the mail (though I do not recommend applying for them). As long as a person is able to show proof of income, many “buy here, pay here” car dealerships will extend credit post-bankruptcy discharge. They will charge a higher rate of interest, but depending on the pre-bankruptcy credit score the interest rate may not be that much higher than if bankruptcy had not been filed.
The difficulty that will be faced for several years after a bankruptcy filing is being approved for a mortgage. Over the last several years the mortgage industry and the government have tightened restrictions on mortgage lending. A good mortgage broker can explain under what conditions a mortgage lender may be willing to make a loan post-bankruptcy.
After a bankruptcy filing, steps should be taken to help increase one’s credit score. Several months after discharge the debtor should check his or her credit report to check that all of the discharged debts are reflected as having been discharged in bankruptcy. Any debts that were discharged that are still reporting as being owed should be disputed with the three credit bureaus (each credit bureau has its own procedure for filing disputes).
Post-discharge, a secured credit card can be applied for (most banks offer them). A secured credit card is secured by cash. If, for example, the credit card is to have a $300 limit the bank will remove $300 from the bank account. Using this card for a few small charges on a regular basis (and paying it off timely each month) will help increase a credit score. Eventually, after a period of on-time payments the bank will refund the cash and convert the credit card to a regular unsecured card.
Finally, taking care to timely pay debts such as car loans and mortgages post-bankruptcy will help to rebuild a credit score (to the extent that these lenders choose to report the payments).
The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.