How Will Bankruptcy Affect My Credit?

28 Mar How Will Bankruptcy Affect My Credit?

FICO Corporate logo. (PRNewsFoto/FICO)

One of the major concerns people have when they consider filing for bankruptcy is the damage it will do to their credit. Understandably, they worry that their credit score will plummet and that it will be difficult to restore once they’re on the other side of the bankruptcy.

It is true that having a good credit score can be financially beneficial, while having bad credit can cause some serious inconveniences. It also goes without saying that a bankruptcy will negatively impact your credit score. However, for some people it may still be the best option to begin to pave the way to managing their debt and reorganizing their financial stability.

So, how will bankruptcy affect your credit and for how long? There’s really no clear-cut answer to that question. Two of the main factors will be what your credit score was before filing for bankruptcy and what information is on your credit report. For some clarity, an example given by FICO (the main company for calculating credit scores) illustrates that a person with a higher credit score can lose more points than a person with a lower credit score. However, in the end they do tend to wind up falling to a similar point range.

After bankruptcy, credit reports must report all non-reaffirmed loans as “$0 owed, discharged in bankruptcy.” If the debtor is making payments on a secured debt, that payment history should be included in the credit report, even if the debt is discharged.

The duration of time that a bankruptcy will impact your credit depends on which type of bankruptcy you file—Chapter 7 or Chapter 13. If you are filing Chapter 7, the bankruptcy will typically appear on your credit report for ten years from the date you filed. This will impact you

r credit score for as long as it appears on your report. If you file Chapter 13, the bankruptcy information will normally be removed after seven years. Since Chapter 13 involves the process of repaying debts over a period of three to five years, the duration of time the bankruptcy appears on your credit report will be greater than seven years. Discharged debts will also remain on your report for up to seven years after they have been discharged.

The United States Courts strongly recommend that you consult with a qualified lawyer when considering bankruptcy. After you have determined that filing bankruptcy is the best option, it’s good to keep in mind that you can soon work towards rebuilding your finances. Once your bankruptcy has been discharged and you have your finances back in order, you’ll be able to concentrate on reestablishing your credit. This starts by building a positive payment history with creditors. As time goes by and you rebuild your credit, the bankruptcy notations will begin to affect you less and less until they are finally automatically removed from your credit report.

Bankruptcy does negatively impact your credit report, and it will take time before it’s purged from it. But if after careful consideration you find it is the right option for you, it’s good to know that your credit will not be ruined forever.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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