8/13/2019 How Does Filing Bankruptcy Impact Your Credit Rating?
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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
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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.
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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
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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.
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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:
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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-bb88f2399a778/13/2019 How Does Filing Bankruptcy Impact Your Credit Rating?
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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/
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