Being in debt means past-due balances on credit cards, loans, and other credit plus a plummeting credit score. Before many people become bankrupt, their credit scores take some hits. Aside from the opportunity to start fresh, some people use Chapter 7 bankruptcy or Chapter 13 bankruptcy to help prevent their credit scores from free-falling to the point of no return. Bankruptcy attorneys usually advise people questioning bankruptcy to check their credit score by contacting a free service that provides you with your credit report.
Bankruptcy and Your Credit Score
During bankruptcy, an automatic stay is issued that prevents creditors from taking collection action against the filer. With Chapter 7, unsecured debts are eventually wiped out and with Chapter 13, they are repaid over a three to five-year period. Both types of bankruptcy have the same effect on the credit score because each remains on the credit report for approximately ten years. However, a lender may view one type in a more positive way.
When deciding whether to lend money, prospective creditors review the credit history and credit score of the prospective borrower. Credit score is based on the amount of available credit, amount of debt, ratio of outstanding balances to credit limits, and any recorded judgments or bankruptcies. A lender may view a Chapter 13 filing more favorably than Chapter 7 because this involves repayment of some or all debt rather than wiping debt away.
Though both Chapter 7 and Chapter 13 place an individual in a position to obtain credit post bankruptcy, Chapter 13 represents a good faith effort to handle a negative financial situation. A lender may see this as a more responsible approach to debt management and as a result, may be more likely to issue a positive decision. Lenders look for the lowest-risk individuals and someone who is willing to repay as much debt as possible could be viewed as lower risk than someone who wipes away debt.
Life after bankruptcy should involve improving the credit score in order to qualify for the best credit terms. Any debts that could not be wiped out should be repaid through regular, timely payments that help rebuild credit. If no debt remains, getting a secured or low-limit credit card, using it sparingly, and repaying the balance each month will help improve the credit score.
When attempting to reestablish credit, it is especially important to verify accuracy of the Experian, Equifax, and TransUnion credit reports. Any errors found should be reported to the relevant credit bureau for investigation and revision. By following these steps, formerly bankrupt individuals should soon see their credit scores increasing. Speak to an expert today for a free consultation!