how does filing bankruptcy impact your credit rating?

8/13/2019 How Does Filing Bankruptcy Impact Your Credit Rating?

1/8


2/8

w Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

Many hard working Americans struggle to pay the bills each month despite

their hard work. All too often it only takes a minor emergency or illness to

send an already tight budget spinning out of control. If this sounds familiar

to you it may be time to consider bankruptcy as a long-term solution. Many

debtors hesitate to explore bankruptcy as an option because of concerns

regarding how bankruptcy will affect their credit rating. While bankruptcy

does typically have a negative affect your credit score when you file your

petition, the impact is usually only temporary. In fact, most debtors see a

significant improvement in their credit score in a relatively short period of

time after bankruptcy.

CHOOSING A CHAPTER

One of the first decisions you must

make when you decide to file for

bankruptcy protection is which chapter

to file under. The impact your

bankruptcy will have on your credit

rating will depend, to some extent, on

which chapter you file. Most individual

debtors use either chapter 13 or

chapter 7. An individual can use

chapter 11; however, chapter 11 is

typically only used by debtors who have a small business that will be

involved in the bankruptcy. Chapter 12 can also be used by individuals but

only if they are a family farmer or fisherman. Chapter 7 is the simplest


3/8


chapter and the only one that allows a debtor to discharge, or eliminate,

the majority of his or her debts without repaying them. To file a chapter 7,

however, a debtor must pass themeans test. Chapter 13 is used by

debtors who earn too much to qualify for a chapter 7 or who have valuable

non-exempt assets that would be lost in a chapter 7 bankruptcy.

FILING YOUR PETITION CREDIT SCORE DROP

There is no way around ityour credit score will drop when you file a

petition for bankruptcy. The extent to

which it drops will depend on a number of

factors and there is no way to know with

certainty how much it will drop. If you are

like most debtors considering bankruptcy

you probably do not have a stellar credit

score right now as a result of the financial

problems that led you to consider

bankruptcy. Some people, however, do

manage to keep their credit score intact

right up to the filing of their petition for

bankruptcy. As a general rule, these are the debtors who will see the

largest drop in scorethe higher your score is to begin with the larger the

decrease in most cases. On average, a debtors score will drop 50-150

points right after the petition is filed. Dont let this initial drop discourage

you from seeking protection through bankruptcy. In most cases, this drop

is only temporary.


4/8


DISCHARGE IN A CHAPTER 7AND YOUR CREDIT SCORE

A chapter 7 bankruptcy typically takes under six months to complete. At

the end of the bankruptcy all dischargeable debts of the debtor will be

discharged, or eliminated. As a result, chapter 7 debtors often see their

credit score begin to go back up shortly after discharge. This occurs for

two reasons. First, the debtor has eliminated most, if not all, of his or her

debt. Second, by eliminating the debt the debtors debt to income ratio

improves significantly. Your debt to income ratio is computed by dividing

your total monthly payments on debt by your monthly income. Lets say

that prior to filing bankruptcy you have a monthly mortgage payment of

$1,000, a car payment of $200, payments on medical bills of $300,

payment on a judgment of $100 and credit card payments totaling $400

for total monthly bills pre-bankruptcy of $2,000. If your monthly income is

$4,000 your debt to income ratio is 0.50 or 50 percent ($2,000/$4,000 =

0.50). Through bankruptcy you discharge the medical debt, the judgment,

and the credit card debts which lowers your monthly payments to just

$1,500 and reduces your debt to income ratio to 0.375 or 37.5 percent.

The lower your debt to income ratio the higher your credit score and the

more favorably lenders will look at an application for credit in the future.

RE-BUILDING YOUR CREDIT DURING A CHAPTER 13BANKRUPTCY

Chapter 13 works differently than chapter 7. A debtor in a chapter 13

bankruptcy is required to develop a repayment plan that contemplates


5/8


repaying most of the debtors debts over an extended period of time,

usually three to five years. At the end of the repayment period, assuming

you abided by the terms, remaining debts that can be discharged will be.

During the repayment period creditors are not supposed to report you as

paying late as long as you are paying according to the plan. This alone

helps your credit score. At the end, you have paid off, or paid down, most

of your debts and established a record of on-time payments. In addition,

remaining debts may be discharged at the end of the repayment period.

Therefore, in a chapter 13 bankruptcy your credit score should slowly

increase over the course of the bankruptcy and beyond.

YOUR CREDIT IN THE LONG-TERM

Filing bankruptcy will have a long-term impact on your credit score. How

much of an impact it has depends, to a

great degree, on what you do to try and

improve your score during and after the

bankruptcy. A bankruptcy remains on

your credit report for ten years if you file

chapter 7 or seven years for all other

chapters; however, it does not necessarily

have a negative effect on your credit

score for that long. Debts that were

discharged through bankruptcy are noted as such on the report.


6/8


Lenders know that you cannot file bankruptcy again for at least seven

years, significantly decreasing their risk that you will bankrupt a debt.

Debtors often find that they are able to qualify for a car loan not long after

discharge in a chapter 7 bankruptcy, assuming they have the income

necessary to make the monthly payments. A debtor in a chapter 13

bankruptcy may even be able to finance a vehicle during the repayment

plan period with court approval.

Qualifying for a mortgage loan is more difficult post-bankruptcy; however,

most debtors who file bankruptcy would not have qualified prior to the

bankruptcy anyway. If you filed a chapter 7 bankruptcy you will likely need

to wait about two years before applying for an FHA loan. The FHA rules do

allow a chapter 7 debtor to qualify after just one year post-discharge if

they can show they are responsible with their financial affairs, the

bankruptcy was caused by circumstances beyond their control, and that

the circumstances are not likely to occur again. FHA rules allow a chapter

13 debtor to potentially qualify for a mortgage if at least one year of the

repayment period has passed with payments being made on time and the

bankruptcy court grants permission.

WHAT YOU CAN DO TO IMPROVE YOUR CREDIT SCORE

AFTER BANKRUPTCY

Ultimately, the impact bankruptcy has on your credit score is in your

hands. Though filing for bankruptcy will cause your credit score to drop

initially, your score can bounce back rather quickly if you take steps to

improve your score. Experts advise doing the following:


7/8


1.Pay your bills on time. Paying your bills on time during and afterthe bankruptcy is the single most important thing you can do to

improve your credit score.

2.Re-establish credit.Although you may think applying for creditagain is a bad idea, you need a credit history to have a good credit

score. Be smart and dont apply for more than one or two

loans/cards, but do start re-establishing your credit history.

3.Keep accounts open. Some accounts were likely closed during thebankruptcy. If accounts remain open after discharge consider

keeping them open. The length of time you have had an account

open usually increases your credit score.

4. Monitor your score. Keep an eye on your score and be sure tocorrect any discrepancies. Make sure that all accounts that were

discharged through bankruptcy show as paid or discharged.

Now that you know more about bankruptcy and how it impacts your credit

score you should be better prepared to decide if bankruptcy is the best

solution to your financial difficulties. Concerns about your credit ratingalone should not prevent you from considering bankruptcy as you should

now know. Consult with an experienced Ohio bankruptcy attorney if you

have specific questions or further concerns.

MSN Money,7 Tips for after Bankruptcy

Oprah,How to Get a Mortgage after Bankruptcy

Bankrate,Bankruptcy Timeline:Rebuilding Credit
http://money.msn.com/credit-rating/article.aspx?post=f8f62f4a-9f7b-40e8-ad22-bb88f2399a77http://money.msn.com/credit-rating/article.aspx?post=f8f62f4a-9f7b-40e8-ad22-bb88f2399a77http://money.msn.com/credit-rating/article.aspx?post=f8f62f4a-9f7b-40e8-ad22-bb88f2399a77http://www.oprah.com/money/How-to-Get-a-Mortgage-After-Going-Bankrupt-Suze-Orman-Money-Advicehttp://www.oprah.com/money/How-to-Get-a-Mortgage-After-Going-Bankrupt-Suze-Orman-Money-Advicehttp://www.oprah.com/money/How-to-Get-a-Mortgage-After-Going-Bankrupt-Suze-Orman-Money-Advicehttp://www.bankrate.com/finance/debt/bankruptcy-timeline-rebuilding-credit-3.aspxhttp://www.bankrate.com/finance/debt/bankruptcy-timeline-rebuilding-credit-3.aspxhttp://www.bankrate.com/finance/debt/bankruptcy-timeline-rebuilding-credit-3.aspxhttp://www.bankrate.com/finance/debt/bankruptcy-timeline-rebuilding-credit-3.aspxhttp://www.oprah.com/money/How-to-Get-a-Mortgage-After-Going-Bankrupt-Suze-Orman-Money-Advicehttp://money.msn.com/credit-rating/article.aspx?post=f8f62f4a-9f7b-40e8-ad22-bb88f2399a77


8/8

w Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer com

About the Author

Scott R. Needleman

Every associate at The Needleman Law Office is committed to handling

your case in both a personal fashion and in a professional manner. In other

words, we treat you the way we would want to be treated. We will take a

personal interest in your situation, making sure you understand exactly

what is happening and what options you may have. Then well fight to

ensure the best possible outcome for your situation.

The Needleman Law Office5300 E. Main, Suite 109Columbus, OH 43213614-575-1188

http://thecolumbusbankruptcylawyer.com/
http://thecolumbusbankruptcylawyer.com/http://thecolumbusbankruptcylawyer.com/

how does filing bankruptcy impact your credit rating?

Documents