What you Need to Know about Bankruptcy and your Credit
Filing bankruptcy is not the end of the world. While it is true that bankruptcy is a negative mark on your credit, erasing the debt is a positive mark and usually outweighs any negative effect of the bankruptcy.
If you use this period to rebuild your financial reputation and credit score, you will be in a much better situation than your pre-bankruptcy credit worthiness status.
How Bankruptcy affects your credit score
Whether or not bankruptcy affects your credit score depends on its position before you file for bankruptcy. If you had a perfect credit score before filing for bankruptcy, it most likely will go down for a period of time.
However, if your credit score was in the low to fair range before filing for bankruptcy, or if you had accumulated a lot of debt, then filing for bankruptcy can actually raise your score. By filing for bankruptcy, you get rid of all the debt obligations and continuing late payments that harm your credit score in the first place.
So, in essence, bankruptcy actually sets you up for improving your credit score, hence the term “fresh start.”
About 30% of your credit score is determined by your Payment history. Another 30 % of your credit score is determined by your how much you owe.
Credit scoring companies look at several factors when computing your score:
Payment history (whether you pay bills late or have filed for bankruptcy).
Length of credit history, and
How much new credit you have applied for.
How long will Bankruptcy reflect on your Credit Report?
The type of bankruptcy you file determines how long it will stay on your credit report. While Chapter 7 and 11 bankruptcy stays on the report for 10 years after filing, a Chapter 13 bankruptcy is listed for 8 years after the completion of the bankruptcy. Note that a Chapter 13 bankruptcy takes up to 3-5 years to be completed.
However, you should know that the Fair Credit Reporting Act (FCRA) allows a credit bureau to report any bankruptcy, including a chapter 13, for ten years.
Will you be approved for credit after Bankruptcy?
You can obtain credit after filing bankruptcy.
When you get your discharge from the bankruptcy court, you will probably start receiving new credit applications almost immediately. You may get new credit card offers after the bankruptcy is over.
You can also obtain credit while in a Chapter 13 as long as the bankruptcy judge rules that it is necessary and reasonable.
This is because after a bankruptcy discharge, you are debt-free and you cannot file another bankruptcy for several years. The implication is that you cannot discharge any accumulated debt during this period and the credit card companies are aware of this rule.
Be mindful that some of these credit card offers may have high interest rates and other high charges.
Bankruptcy does not necessarily hurt your credit score, and actually in most cases, improves people’s scores because they are clearing off all the outstanding debt.