We constantly hear about how people wish to avoid filing for bankruptcy because of the detrimental effect it will have on the person’s credit rating. Let’s dispense with some bogus notions out there. I hope to answer a few of these questions here in this post. This all applies in Idaho as much as it does anywhere else in this country.
It is true that a bankruptcy will show on your credit report for seven years and up to ten years. Bankruptcy does have a damaging effect upon your credit score, but this is usually of limited effect.
Depending on whether you file a Chapter 7 or a Chapter 13, the credit score will decrease by anywhere from 150 to 250 points. This drop could seriously affect the capacity to obtain the credit necessary to qualify for a loan or another credit card.
However, this has to be considered in light of the fact that unpaid and delinquent bills constantly showing on your credit will have a similar effect. This is all the more true if your delinquent accounts go to collection and if judgments appear on your credit.
Consider that bankruptcy will do all the damage to your credit in one blow and you can immediately begin to recover from that blow to your credit score. Where if you keep paying the bills, trying to make amends over the long run, the credit score will more likely stay down for a much longer period. One year after filing bankruptcy, your credit score can gain half or more of what it lost because of the bankruptcy. Without bankruptcy, your credit score will likely remain low and linger there until all the problems are resolved.
I have to make a few comments on the difference between how a Chapter 7 and a Chapter 13 will affect your credit. All discharged debts remain on your credit for up to 7 years (and can linger for as long as 10). Therefore, a Chapter 7 bankruptcy will discharge debts fairly quickly where a Chapter 13 will wait until the end of the payment plan to discharge debts. Seven years after your Chapter 7, your credit can be back to new. With a 5 year plan in a Chapter 13, it could be 12 years (or up to 15) before the discharged debts will be removed.
Either way, the longer debts remain on your account, the less effect you will see. The timeliness and type of bankruptcy can be effective within a year of bankruptcy on improving your score to better than it was before bankruptcy.
There is another issue with credit scores I have to mention at this point. Once these discharged debts fall from the credit score, it will leave you in a world of no credit. If you reaffirm a debt, then things will be differently, but a bankruptcy will have the same effect as coming of age. You will have no credit. Therefore, despite a bankruptcy, it is important that you begin to seek to reestablish your credit by opening accounts after the bankruptcy. Do not leave your credit with nothing once these discharged debts fall away. I am not advocating that you run up bills, just that you have accounts open and reporting to your credit. In the long run, this will help reestablish your credit and increase your score than not doing anything.
Besides, I promise that after your bankruptcy, plenty of credit card offers will come your way; choose wisely as rates will widely vary. Banks will also know that you cannot file a Chapter 7 for years to come, so you are a decent credit risk even for them. Be prudent in the rates and offers you choose or accept.
If you keep up on your payments, you will find even within two or three years after filing bankruptcy you can have a very decent credit score. Without bankruptcy this would be difficult because the debt load will not have been removed.
If you have more questions, feel free to contact us.