Bankruptcy And Your Credit Score
Your FICO credit score is often the most important determinant in whether you receive credit, how much, and at what interest rate. A higher score means that you can borrow more and at a lower interest rate. Filing bankruptcy can cause your credit score to drop dramatically. If a lender is willing to accept your credit application despite your low score, it is likely to be on less favorable terms.
FICO states that your payment history makes up 35% of your total credit score. It is possible that a bankruptcy filing will not cause a major drop if you already have an inconsistent payment history. Another 30% of your score is the total amount of debt that you owe, which bankruptcy discharge can actually help. However, it is rare that a bankruptcy does not damage your credit score.
Fresh Start Credit Rebuilding Program
At Hoyes Michalos we want to help you take full advantage of the fresh start you can achieve by filing bankruptcy or a consumer proposal to eliminate your debt. To help, we have developed a comprehensive education and support program for our clients designed to provide you with the skills and resources you need to rebuild your finances and your credit after filing insolvency. The Hoyes Michalos Fresh Start Recovery Program enhances the mandatory credit counselling required when you file insolvency with additional tools, support and special online resources about budgeting, credit repair, dealing with creditor calls and much more. Our goal is to help you achieve a full financial recovery.
Returning To Good Credit After Bankruptcy
A personal bankruptcy filing will affect your credit report for a certain amount of time depending on how you file:
- Chapter 13 bankruptcy stays on your credit report for 7 years after final discharge
- Chapter 7 bankruptcy stays on your credit report for 10 years after final discharge
Having a bankruptcy on your record for 7-10 years does not mean it will take you this long to repair your credit score or get out of debt.
Right away, the “final discharge” releases you from personal liability in most debts. You need this bankruptcy discharge before you can take steps to build toward better credit, otherwise, you will continue to have large debts.
Once the process starts, you can decide what choices to make to rebuild your credit.
How Long Do You Have To Wait To Buy A House After Bankruptcy
Your bankruptcy filings remain on your credit reports for seven to ten years after the date of filing. However, that does not mean that you must wait until the bankruptcy cases fall off your credit reports to buy a house after bankruptcy.
The main requirements for buying a house after bankruptcy is whether you can afford the mortgage payments and have you been able to save enough money for a down payment. Those are the same two requirements that anyone faces when they purchase a home.
Another consideration is your credit score and debt-to-income ratio. Again, those are two of the same factors that influence all applications for mortgage loans, regardless of whether the person has a bankruptcy filing on his or her credit report.
The main difference in buying a house after bankruptcy is the mandatory waiting period required for certain loans.
Most government-backed loans have a mandatory waiting period for eligibility after a bankruptcy filing. For instance, a standard FHA loan generally has a two-year waiting period after a person receives a bankruptcy discharge. However, that waiting period could be as little as one year in some cases.
VA and USDA loans also have waiting periods. Still, those periods can be reduced if you can prove you filed bankruptcy because of extenuating circumstances and maintained good credit after filing your bankruptcy petition.
What Happens To Your Credit When You File For Bankruptcy
Your payment history is the most important factor in determining your credit score, and filing bankruptcy means that you won’t be paying covered debts in full as you initially agreed.
As a result, filing bankruptcy can have a severely negative impact on your credit score. A Chapter 7 bankruptcy will remain on your credit reports and affect your credit scores for 10 years from the filing date; a Chapter 13 bankruptcy will affect your credit reports and scores for seven years.
Regardless of which type of bankruptcy you choose, lenders will be able to see it on your credit reports in the public records section and it’s likely to be a factor in their decision-making. Once you’ve completed the legal process, it will show that both the bankruptcy and the debts included in it have been discharged.
If you apply for credit, lenders may not approve your application unless the bankruptcy has been discharged. Even then, you may have a hard time getting approved for certain types of loans. If you do get approved, you may face steep interest rates and other unfavorable terms.
How Do Bankruptcies Affect Your Credit Score
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Editors note: This post has been updated with new information.
Before starting on a pursuit to accumulate points and miles, its important to understand how your credit score is calculated and mistakes you should be careful to avoid. Your credit report follows you around for a long time, and you should only consider opening credit cards if youre able to manage them responsibly.
With every credit card Ive opened, Ive become even more attentive to paying my bills on time and monitoring my accounts for fraud. However, its possible that before you found the world of points and miles, you may have made some mistakes such as missed payments, carried a balance, or even had to declare bankruptcy. Today, were going to take a look at how bankruptcy affects your credit score and what you can do about it.
The contents of this post are not meant to represent legal or financial advice, and you should consult with a lawyer and/or financial professional before making decisions regarding a bankruptcy filing.
What Is Consumer Proposal And Bankruptcy
A Consumer Proposal is “a legally binding debt settlement agreement to repay your creditors a percentage of what you owe in exchange for full debt forgiveness.” Bankruptcy on the other hand is “a legal procedure in which you assign your property to a Licensed Insolvency Trustee as part of a process that relieves your debts”.
If you find yourself buried under a mountain of debt that is impossible to pay back, bankruptcy might be the solution youre considering. It will sweep away most of that debt, with a few exceptions such as student loans, child support, and fines. Youll be protected from legal action relating to your debts, some assets will be protected, and if you had already been experiencing wage garnishes related to your debts, theyll cease once youve declared bankruptcy. In short, you get a do-over. It sounds like a good deal, but the toll it takes on your credit is huge.
Three Types Of Bankruptcies
Not all bankruptcies are created equally. There are several different options for businesses and individuals, but today well cover the types of bankruptcies available for individuals.
Before you decide to file for bankruptcy, you should consult a bankruptcy attorney or financial professional to determine the best option for you.
What Is The Credit Score Cost Of Waiting To File
While a 240-point drop is certainly worth noting, its also worth noting how much waiting to file or not filing at all can negatively impact your score.
Bankruptcy can give you a clean break from debt, which means you can focus on rebuilding. On the other hand, digging yourself out of debt can take years and lead to more damage.
- Missed payments remain on your credit report for seven years.
- Collection accounts remain for seven years from the date the original account became delinquent.
- Debts that get settled remain on your credit for seven years from the date of filing.
So, while bankruptcy will negatively affect your credit, not filing can also have a significant negative impact. And the damage can last just as long.
Talk to a debt relief specialist to see if bankruptcy is the best option for you.
What Are Fico Scores
One of the leading purveyors of the credit score is a company called Fair Isaac. Scores calculated using formulas and algorithms developed by the Fair Isaac Company are called FICO scores. Fair Isaacs formula is proprietary, meaning that Fair Isaac owns the process and doesnt have to provide that formula to anyone. Because of this, sometimes it is difficult to explain or predict how the company calculates any particular credit score.
FICO credit scores range from as low as 300 to as high as 850. Most lending banks consider a credit score of 720 to be good.
The Fair Isaac Company uses the information contained in your credit report as the raw material for calculating the score. The three main credit reporting agencies, Equifax, Trans Union, and Experian, may not have the same information, and therefore, your credit score could differ from one agency to another. Usually, this difference is not more than a few points.
For Fair Isaac to calculate a credit score at all, you must have at least one account that has been open six months or longer, and at least one account that has been reported to the credit bureau within the last six months.
Fair Isaac uses various pieces of credit information, both negative and positive, to calculate your score. According to the companys own materials, here are the percentages that each type of information contributes to the overall score:
- Payment History: 35%
- Length of Credit History: 15%
- New Credit: 10%
- Types of Credit In Use: 10%
Is Bankruptcy Right For Me
The first question you need to ask yourself, therefore, is, do I need to declare bankruptcy or is there a better option for me? Make sure you know what you’re getting into. It’s important that you understand whether it’s the best option for you, your family and your collective financial future. Declaring bankruptcy, while the only option for some, may be a knee-jerk reaction for others, without first exploring other options.
Some Scores Go Down; Others Go Up
It may seem incredible, but some of our clients have actually seen their scores improve with the filing of a bankruptcy petition. The reason usually has to do with their debt-to-income ratio. From the lenders perspective, fewer competing debt obligations post-bankruptcy can reduce the risk that you wont be able to pay them back in the future if they now loan you money. In some of those instances, the release of competing debt can boost a persons score.
Why You Need To Work On Your Credit Asap
If you have a 550 credit score, borrowing is going to be challenging. A credit score of 550 or lower is usually too low to qualify for a mortgage. However, youre not that far off from the score you need to qualify for this good debt. With FHA financing options, you only need a 560-600 to qualify. Of course, if you want to use traditional financing options, you generally need at least a 600 credit score.
However, besides loan approvals there are other concerns that come with a low score:
So, is bankruptcy bad for your credit? Yes. But it might not be as bad as you think. And there are financing options specifically designed to help people in your situation. For instance, there are solutions for buying a car after bankruptcy.
Good Debt Vs Bad Debt
The biggest impact you will feel from bankruptcy is initially having higher credit interest. So, a missed payment on a credit card bill is going to hurt much harder after bankruptcy than it would if you were in good credit standing.
Of course, the best way to avoid being in debt is to not put yourself in debt. In some aspects of life, this is doable. Make payments on time, budget appropriately, and do not spend more than you have but there are some debts, that for the average person, are unavoidable. This kind of debt can be considered good debt.
What is Good Debt?
Good debt is typically a large scale purchase the average person cant pay for upfront, so they take on a loan to pay for it with a payment plan. These are cars, mortgages, etc. Many people also like to have credit cards for large purchases such as repairs, and this can be good debt too. As long as you are making payments on time, paying off your credit card bill on time, and making housing payments and car payments, then you are taking advantage of good debt.
What is Bad Debt?
Bad debt is exactly how it sounds. The kind of debt that is going to not only harm your credit score but can quickly put you right back into bankruptcy court if you arent careful. Bad debts are loans that arent being paid back on time, missing payments on your house or car, and stacked up credit card interest. This is the exact kind of debt that got you in this situation in the first place.
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.
You Have The Ability To Pay Off Your Debt
If you can afford to pay down your debt after making some lifestyle changes but are not willing to, then bankruptcy is not for you. The thing is, you will be expected to make those exact lifestyle changes during bankruptcy. Reports to your trustee will show him or her everything on which you spend your money. Whether you do it now without the penalty of bankruptcy to be able to pay down your debt, or you do it with the scar of bankruptcy, you’re going to have to make those changes.
Is Your Credit Rating Really Worth Stressing About
Are you current on all your debt payments? Yes? No? Maybe?Â
If youâre behind on any debt payments, your credit score could probably be better. So, rather than worrying about possibly making your already bad credit worse, think about how a bankruptcy discharge could help you build credit.
So, what happens to my credit score if I file bankruptcy?Â
Like all negative information reported to the credit credit bureaus, filing any type of bankruptcy will have a negative impact on your credit score. Since a bankruptcy filing is public record, they will find out, even if theyâre not directly notified by the bankruptcy court.Â
But, unlike other things that have a negative effect on your FICO score, a bankruptcy filing is often the first step to building a good credit score.Â
Review Your Reports Once The Time Is Up
Once your bankruptcy has been completed and the seven- or 10-year clock has expired, review your reports again to make sure the bankruptcy was removed.
A bankruptcy should fall off your credit reports automatically, but if it doesnt, notify the credit bureaus and ask to have the bankruptcy removed and your reports updated.
Revive Your Credit After Bankruptcy
If you decide to file bankruptcy, know that your credit isnt lost forever. Once youre out of bankruptcy and your finances are back on track, you can focus on rebuilding your credit score. That involves building a positive payment history with new creditors or with any accounts that survived the bankruptcy. You might be surprised to see how soon after bankruptcy you begin receiving credit card offers again.
Bankruptcy remains on your credit report for up to 10 years, but it impacts your credit less as time passes and as you add positive information to your credit report. Its possible to get to an excellent credit status after bankruptcy, but you have to get through the process first. If, of course, thats the best option. If you’re struggling with your debt payments, it may be in your best interests to temporarily forgo your credit score to get your finances back on track.
Can I Improve My Credit Score After Bankruptcy
Even though bankruptcy remains on your credit report for up to ten years, you can start rebuilding your credit right away. Credit scoring companies look at several factors when computing your scores:
- your payment history
- your outstanding debt
- the length of your credit history, and
- how much new credit you’ve applied for.
You can start to improve your credit after bankruptcy by making all of your payments on time. Keep your debt load low, especially as compared to your available credit. And when you are ready, get a credit card, make small charges, and pay the bill off in full every month.
When Does A Bankruptcy Discharge Occur
The timeline for a bankruptcy discharge varies greatly depending on the bankruptcy chapter. Chapter 7 bankruptcy discharge occurs relatively quickly60 to 90 days after the scheduled meeting of creditors. The timeline for Chapter 13 bankruptcy is much lengthier, as discharge only occurs at the end of a successful repayment plan. This typically takes three to five years.
Your Credit Score After Bankruptcy
When you declare bankruptcy, it’s not all bad news. Your credit score after bankruptcy will drop, but you won’t have the exasperating debt and payments to make every month. This gives you the chance for a fresh start.
You can put that money towards payments for a new low-credit or secured credit card, and work on increasing your credit score. There are several other steps you can take towards rebuilding your credit score after bankruptcy.
Bankruptcy Affects High Credit Scores More Than Low Credit Scores
The higher your FICO score is before a bankruptcy filing, the more it will affect your credit rating:
|Note: Scores do not go lower than 300||130-150 points|
You will likely drop to a poor credit score no matter what score you started with. Your credit history already shows you filed for bankruptcy, but credit bureaus want to ensure you take steps to improve your bad credit before you take on more debt and new credit.
The sliding scale system will generally knock your credit points however much it takes to show you have poor credit. Your score may barely change if you already have bad credit . It is not common to see credit scores lower than 500 even after a bankruptcy filing.
Do Your Homework On Credit Card Offers
One thing that puzzles many people who file bankruptcy is that they receive multiple credit card offers right after their bankruptcy is completed. Youd think that a fresh bankruptcy would be a strong deterrent to lenders.
However, the banks know you wont be able to file again for several years, so you are actually a better risk than you were before. Just make sure to read the fine print on any new debt you apply for, as many companies intentionally prey on people who recently filed bankruptcy by offering new lines of credit stuffed with fees, minimum payments, and extremely high interest rates.
Over time, reports from these debts will start to raise your credit score, provided you use credit cards and rewards wisely by paying by the due date and in full every month. Initially, the only lenders to extend you credit will probably be small banks and credit unions. But, within a few years, you may be able to get approved with the national banks, which is important because big names on a credit report can potentially sway future credit decisions like a home mortgage in your favor.
The passage of time alone will increase your score. Plus, as long as your report is filled with nothing but A+ grades, you should have a decent credit score within a few years, and even a good score by the time the bankruptcy drops off your report.
What Is A Credit Rating
Your credit rating is derived from your credit file, which contains information about your credit balances, limits, and payment history , as well as personal details such as your occupation and employment history.
Canada’s largest credit bureau, Equifax, uses a simplified scale of R1 to R9R1 being a perfect scorewhile TransUnion measures credit scores on a scale of 300 to 900, with 650 generally considered to be the dividing line between good credit and poor credit. Declaring bankruptcy will likely reduce your credit rating to the lowest level.
How Do Chapter 7 And 13 Bankruptcy Affect My Credit
Its a question we hear often: How long does a Chapter 7 bankruptcy stay on a credit report?
A Chapter 7 bankruptcy will remain on your credit report for 10 years, but the real impact of a bankruptcy on your credit is not as simple or as harsh as one Q&A tells you. There are factors pertaining to your financial situation that need to be weighed and considered to determine whether bankruptcy is right for you and how a bankruptcy filing will affect your credit going forward.
Sasser Law Firm can provide you with knowledgeable advice about your legal options if you are considering bankruptcy. We proudly represent clients in the Triangle and across North Carolina. Contact us today to learn about your options for getting out of debt.
How Long Does A Chapter 13 Bankruptcy Stay On Your Credit Report
A Chapter 13 bankruptcy stays on your credit reports for up to seven years. Unlike Chapter 7 Bankruptcy, filing for Chapter 13 bankruptcy involves creating a three- to five-year repayment plan for some or all of your debts. After you complete the repayment plan, debts included in the plan are discharged.
If some of your discharged debts were delinquent before filing for this type of bankruptcy, it would fall off your credit report seven years from the date of delinquency. All other discharged debts will fall off of your report at the same time your Chapter 13 bankruptcy falls off.
Bottom Line: Bankruptcy And Credit
Deciding to file for bankruptcy isnt easy, but it can be the right choice for some people. And while bankruptcy may hurt your credit for a while, following it up with responsible credit use can help you rebuild your credit while you wait for the bankruptcy to fall off your credit reports, and afterward.
I have personally seen the impact of the bankruptcy petition on some debtors five to seven years later and most are doing fine, says Arnold Hernandez, an attorney in Tustin, Calif., who handles bankruptcy cases. Bankruptcy is not forever.