How Does Filing Bankruptcy Affect My Credit Score
Improving your credit score is important, but the fact of the matter is that if you file bankruptcy, it is going to reflect very poorly on your credit record, unfortunately. The reason for this is simple: if you file for bankruptcy, the first thing that lenders are going to take away from that fact is that you are irresponsible with your money. This is not necessarily the case, of course, as not all bankruptcy cases happen for the same reason. Some people file bankruptcy only because they got unlucky, or because they got taken advantage of by someone. But to lenders, it is all the same song and dance to them. This will, in turn, make future lenders a lot more wary to lend to you, although to be fair, this is not a death sentence, as one can do work to improve their credit score following the bankruptcy filing. So if you are worried about your credit score, the first thing you should do is determine whether bankruptcy is the only option you have available to you. The key takeaway from this is that you simply should not file bankruptcy unless there is no other option at hand.
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Build An Emergency Fund
Because much of your debt will likely be eliminated following a bankruptcy, its an ideal time to start building up your savings. By putting a portion of your income into a savings account or cutting back on nonessential subscription services or memberships, you avoid having to apply for loans which could put you back into debt if youre unable to keep up with the high interest rates that come along with bad credit.
Why this matters: Without an emergency reserve, it can be easy to fall into the same debt pitfalls that caused the bankruptcy.
How to get started: After your debt payments are removed as part of the bankruptcy process, make sure to create a budget based on your income and remaining expenses. Include building an emergency fund as part of your new budget.
How Does Bankruptcy Help Improve My Credit Score
You may be wondering how filing for bankruptcy can increase your credit score if you have a credit score that is less than 600. There are a few reasons. First, wiping your slate clean makes creditors realize that youâre more likely to pay them back. Just think of two different people, John and Sam. John is $40,000 in debt and owes three hospitals, four credit card companies, and five friends money. Sam, on the other hand, just filed for bankruptcy so he does not owe anybody.
Who are you more likely to give a loan to because you think theyâll pay you back? If you give a loan to Sam, you are going to be the 13th creditor that he owes. If you give a loan to John, you are going to be the only creditor that he owes. Of course, you are more likely to give the loan to John, even if he just filed for bankruptcy. The takeaway is that lenders look at your credit score to determine how risky you are as a borrower and how likely they are to lend you money.
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How Accounts Appear On Your Credit Reports
Before filing for bankruptcy, you probably had bills you struggled to keep up with credit cards, medical debt and more.
When you include those accounts in a bankruptcy filing, theyll still be reported on your credit reports. Accounts discharged in bankruptcy can be reported as discharged or included in bankruptcy with a zero balance. Even though you owe $0 for them, theyll still appear on your reports. If you apply for credit, lenders may see this note when they check your reports, and they may deny your application.
But heres that good news we promised: Accounts included in a bankruptcy filing wont be reported as unpaid or past due anymore, and you may feel relief without those financial burdens.
Your credit scores will eventually start rebounding with those positive effects, Huynh says. Thats assuming, of course, you use credit responsibly from here on out.
Apply For A New Line Of Credit
Adding a new line of credit can demonstrate that you can responsibly make on-time payments. In turn, itll help your credit score. However, when you apply for new lines of credit, the lender will do a hard pull on your credit. Every time you apply for new credit, your prospective lender accesses your credit report, says April Parks-Lewis, director of education and corporate communications at Consolidated Credit. Those inquiries can drag down your credit score.
As too many hard inquiries will ding your credit score, try to apply for credit lines you know you can qualify for. You can also apply to get prequalified, which results in a soft pull of your credit. When youre trying to build your credit after bankruptcy, here are some types of credit for you to consider:
Why this matters: A new line of credit can help you build your creditworthiness.
How to get started: Choose one of the options from above that fits your situation best and work on keeping that line of credit in good condition.
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How Long Do Bankruptcies Stay On Your Credit Report
The length of time that a bankruptcy filing stays on your credit report depends on what type of bankruptcy you filed. We took a look at Chapter 7 and Chapter 13, which are the two main types of consumer bankruptcies, and to see how their impacts on your credit score differ.
- Chapter 7 bankruptcy: Also known as liquidation bankruptcy, Chapter 7 is what Harrison refers to as “straight bankruptcy.” It’s the most common form of consumer bankruptcy and is usually completed within three to six months. Those who file for Chapter 7 will no longer be required to pay back any unsecured debt , like personal loans, credit cards and medical expenses, but they may have to sell some of their assets to settle secured loans. Chapter 7 bankruptcies stay on consumers’ credit reports for 10 years from their filing date.
- Chapter 13 bankruptcy: Harrison refers to Chapter 13 as the “wage earner’s bankruptcy.” This form of filing offers a payment plan for those who have the income to repay their debts, just not necessarily on time. About a third of bankruptcies filed are Chapter 13 . Those who file are still required to pay back their debts, but instead over a three-to-five year time frame. Chapter 13 bankruptcies stay on consumers’ credit reports for seven years from their filing date.
How Can I Improve My Credit Score After Bankruptcy
There are several deliberate steps that you can take to improve your credit score after bankruptcy. As long as youâre thoughtful about your finances after bankruptcy, you should be able to access new credit in a timely manner.
Unfortunately, despite the data behind the benefits of bankruptcy, many low-income Americans are still afraid to file due to misinformation. As a result, people who decide not to file even though it would improve their credit scores end up having difficulty getting credit cards and bank accounts. In many cases, they continue to deal with wage garnishment and have a tough time finding jobs.
We encourage you to take a look at the data and decide for yourself whether you believe bankruptcy will improve your financial situation. You can find more information in our Learning Center, file Chapter 7 bankruptcy for free with our online filing tool, or get advice from an experienced bankruptcy lawyer.
Upsolve Co-Founder Jonathan Petts explains bankruptcy basics in the video below â¬ï¸
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How To Build Back Your Credit After Bankruptcy
Rebuilding your credit after filing for bankruptcy can seem daunting, but there are some steps you can take to help your credit history begin to recover:
- Make sure all payments are on time going forward. Sometimes, the bankruptcy court will allow you to keep certain accounts open. If you still have open and active accounts that were not included in bankruptcy, be sure to make every payment on time.
- Open a new account. If you are starting from scratch with no remaining open accounts, it can be difficult to qualify for new credit after bankruptcy. Consider opening a secured credit card, getting a , or asking a friend or family member to add you as an on their credit card. Making small purchases and then paying the balance in full each month will help build a positive payment history, which in time can help offset the negative impact of the bankruptcy.
- Check your credit report frequently. Stay on top of your credit situation by reviewing your credit report often. You can also request your free credit score from Experian, which will include a list of the top risk factors impacting your scores.
- Sign up for Experian Boost. Adding your on-time cellphone, utility and streaming service payments with Experian Boost can help you increase your credit score so you can start to rebuild after bankruptcy.
Consider A Secured Credit Card
With a secured , you make a deposit to the lender in an amount equal or nearly equal to the maximum credit line on the card. If you stop making payments, the lender can keep the deposit to make up for what you didn’t pay.
On the surface, this can seem similar to using a debit card linked to a bank account. As with a debit card, a cash deposit backs up expenses charged to the card. However, there are some important differences.
On the negative side, you’ll pay extra fees for the privilege of using a secured credit card. Usually, the lender will charge an annual fee, perhaps an administrative fee for the setup of the account, and a high annual percentage rate. Those fees are usually charged directly to the account, and credit limits on secured cards are usually low . When you get your first statement, you could easily find that half of your credit availability has gone toward covering fees.
On the plus side, your payment history for the secured card will be reported to the credit reporting agencies. That means, unlike a debit card, using a secured credit card will help build credit. On your credit report, the secured card will look like any other credit account. If you pay according to the terms of the account, your credit score will rise. But keep in mind, if you fail to follow the card’s terms, your credit score will fall.
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Repairing Your Credit After Bankruptcy
If you want to buy a home or car, you need either a lot of cash or a large loan. Its been that way forever and things wont change just because you have filed for bankruptcy.
The problem is that after bankruptcy the sight of your credit report will repel lenders. If you want to get a mortgage after bankruptcy, you need to restore your credit score to a respectable value. A FICO score of 680 is considered good and would net you fair rates at most financial institutions.
Your recent actions have a bigger impact on your credit score than negative events in the past, so you want to make sure that you are feeding your credit report positive data in the years following bankruptcy to build up from a low score.
The best way to improve your credit score is to make on-time payments. Credit bureaus track the payments made to your open accounts, like loans or credit cards. However, you may not have any of these accounts open after bankruptcy.
This traps you in a ridiculous dilemma: you need an open account to improve your credit score, but you need an improved credit score to open an account. It will take some persistence, but there are ways to get around this pesky catch-22.
Here is a list of things you can do to improve your credit score after bankruptcy:
- Monitor credit report for accuracy
- Make on-time payments on debts not included in your bankruptcy
- Build credit with a secured or retail credit card
- Have someone cosign for a new credit card or loan
- Become an authorized account user
How Bankruptcy Affects Your Credit Score
As you might suspect, filing for bankruptcy has a negative effect on your credit report and score, as Hoorfar says an individual with a 780 or greater credit score can lose about 200 to 240 points due to bankruptcy.
While bankruptcy might seem like a final option for many, its not the death blow to your credit score that it might seem.
In my opinion, filing bankruptcy improves your credit profile. This is hard for some people to understand. But I ask them how is your credit now? If you have a 100k in credit card debt and you are delinquent on your payments, your credit already stinks, says Scott. Even if you are current on your 100k in debt payments, and your credit score is high, to me, you are a poor credit risk. Why? Because if I am a future lender do I really want to climb on top of this pile of debt and risk that I might be the straw that breaks the camels back and you file bankruptcy?
Scott adds that at the end of the day, having less or no debt is better than having 100k in debt. Future lenders dont care if you are currently $100k in debt. What they truly want to know is will you be able to pay the loan I give you now?
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Dont Close The Accounts:
It may seem like a good idea for you to stay off of the credit cards, but this will damage your credit score further. When you are closing a credit card, you will be reducing the amount of credit that is available to you and it further decreases your credit score. It is best to keep all the credit lines open and if you believe that you will spend on your credit card, cut it off and choose a credit card that will not charge you a high annual fee and keep paying it to retain the credit that is available to you.
Dont lose your patience, it took time for you to reach bankruptcy and it will take time for you to recover from it. Take loans that are easy to obtain. Make all the payments on time. Utilise low credit and dont close a line of credit as it will reduce the amount of credit that is available to you. Keep a close eye on your CIBIL report annually for the errors and inconsistencies. When you are bankrupt, it is the best time for you to start an emergency fund to rely on as you will not have any debt. Take a car loan so that it helps you improve your credit and it will also be a part of an investment. Learn from your previous mistakes and avoid it.
How Much Will Bankruptcy Affect Your Credit Score
In 2010, FICO released a report that showed examples for the average credit score after bankruptcy. The decrease when you started with a high score is more significant.
|Starting Credit Score|
In both cases, you end up with a bad credit score. But the decrease from fair to bad is less than from excellent to bad. Essentially, you have more to lose when you have good or excellent credit. If you already have bad credit then the point-damage may not be that bad. Remember, FICO scores only go down to 300, but its rare to see anything below 500.
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Contact Our Experienced New York Firm
Bankruptcy, for many people, is a frightening endeavor. Fortunately, with the help of an experienced attorney, it does not have to be. If you require the services of an experienced Business Law or Bankruptcy attorney, contact the Law Offices of Allen A. Kolber, Esq. today to schedule a consultation and discuss your options. We will have your back every step of the way.
Your Credit Report After Bankruptcy
For the years following your bankruptcy, monitor your credit reports regularly. Watch for errors and then file disputes. Get help from a who can spot inaccuracies, dispute the errors and coach you toward your best credit score possible.
Lexington Law has helped clients work towards fair and accurate credit scores by leveraging their rights. Weve helped hundreds of thousands of clients remove unfair, inaccurate and unverified accounts from their credit reports.
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Keep A Close Eye On Your Credit Reports And Credit Scores
Every year, you are entitled to one free copy of your credit report from each of the three major credit-reporting institutions: Equifax, Experian and TransUnion. Take advantage of this and regularly examine your reports for errors or missing information. If you find any inaccuracies, such as a delinquent account that doesnt belong to you, you can report it to the appropriate credit-reporting agency. When the negative mark is removed, your credit score will likely rise.
Why this matters: Inaccurate information on your credit reports can cause a low credit score.
How to get started: Use AnnualCreditReport.com to access each of your credit reports for free. Through April 2021, you can access each of your reports once a week. Many credit card companies also provide you regular updates of your credit score to monitor.
Why You Should Never Pay A Collection Agency
On the other hand, paying an outstanding loan to a debt collection agency can hurt your credit score. … Any action on your credit report can negatively impact your credit score – even paying back loans. If you have an outstanding loan that’s a year or two old, it’s better for your credit report to avoid paying it.
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