FILING BANKRUPTCY

Credit Score and your

Erin B. Shank Bankruptcy Attorney

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For most debtors, bankruptcy is a course of last resort. Along

with the social stigma that goes along with declaring

bankruptcy, debtors are often worried about how filing

bankruptcy will impact their credit score for years to come after

the bankruptcy is finished.

Unfortunately, there are no black and white rules regarding credit in the

aftermath of bankruptcy; however, there are some general guidelines

that might help you decide if bankruptcy is the right option for you.

BANKRUPTCY CHAPTERS

The impact a bankruptcy will have on your credit score will depend, to

some extent, on the chapter under which you file your bankruptcy. The

United States Bankruptcy Code provides several options for individual

debtors including chapters

7, 11, 12, and 13. A chapter

11 bankruptcy, though

available to an individual, is

typically used by a small

business. Chapter 12 is

available to individuals who

are considered a family

fisherman or farmer and

therefore is only used in

limited circumstances. A

chapter 13 bankruptcy,

commonly known as a wage-earner’s bankruptcy, allows a debtor who has

valuable non-exempt assets and/or significant income to repay his or her

debts over an extended period of time. Finally, a chapter 7

(“liquidation”) bankruptcy is for individuals with relatively little income

and predominantly exempt assets. While a chapter 7 bankruptcy is usually

completed within about four to five months, all other chapters take a few

years to conclude. Also of import is the fact that a chapter 7, 11 or 12

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bankruptcy will remain on your credit report for ten years while a

chapter 13 drops off after seven years from the date of filing.

IMMEDIATE IMPACT OF FILING BANKRUPTCY ON YOUR CREDIT

SCORE

The immediate impact to your credit score upon filing a petition for

bankruptcy will depend on your credit

score prior to filing. Some debtors manage

to retain a fairly high credit score despite

serious financial struggles while others

watch their credit score plummet for

months, even years, prior to filing.

Therefore, if your credit score suffered

prior to filing, it may not move

considerably after filing. If, for instance,

your credit score was around 600 or below

when you filed, it may only drop 50 points

or so when you actually file. On the other

hand, if you managed to hold on to a

credit score over 700 before making the

decision to file bankruptcy, your credit

score will likely plummet by 100-200

points or more when you initially file your petition.

SHORT TERM IMPACT – RIGHT AFTER DISCHARGE

An interesting aspect of bankruptcy as it relates to your credit score

often shows up shortly after your bankruptcy is discharged. Your credit

score is determined by a complicated formula that looks at several

important factors, one of which is your debt to income ratio. Your debt to

income ratio is determined by dividing the total amount of monthly debt

payments you are required to make by your total monthly income. For

example, if your mortgage payment is $800 per month and your car

payment is $200 per month and the combined payments for all credit

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card debts equals $500 per month then your total monthly payments

equal $1,500. Then let’s assume that your total income each month is

$4,000. Your debt to income ratio is 0.375 or 37.5 percent

($1,500/$4,000 = 0.375). If you discharge all of the credit card debt

through bankruptcy your debt to income ratio becomes 0.25 or 25 percent

($1,000/$4,000). Your debt to income ratio just became much better.

This factor alone can cause your credit rating to go up not long after your

bankruptcy is discharged. Of course this factor alone will not result in

your credit score soaring into the 700s, but it often helps more than

people realize.

Along with the fact that your debt to income ratio changes for the better

upon discharge, potential lenders also realize that you cannot file for

bankruptcy again for at least seven years. These two factors can actually

make you look like a fairly decent credit risk to many lenders.

LONG-TERM IMPACT

The long-term impact of a

bankruptcy on your credit

score should not be ignored

by a debtor. Although your

debts will show as

discharged, they will

indicate that they were

discharged through

bankruptcy. The long-term impact this has on your credit score depends

largely on what you do to try and increase your score after the

bankruptcy and on the importance that an individual lender places on the

fact that you filed for bankruptcy in the past. While the fact that you

filed bankruptcy will remain on your credit report for seven to ten years,

it does not have to have a negative impact on your actual credit score for

that long.

Because you cannot file for bankruptcy again for at least seven years,

some lenders actually consider you to be a fairly safe credit risk,

“You may find that obtaining a

credit card or securing financing for

the purchase of a vehicle can be

done as early as six months to a

year after filing bankruptcy.”

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assuming you have an established employment record and sufficient

income. As a result, you may find that obtaining a credit card or securing

financing for the purchase of a vehicle can be done as early as six months

to a year after filing bankruptcy. Qualifying for a mortgage, on the other

hand, may be more difficult after bankruptcy. Most mortgage lenders

depend heavily on your credit score when making decisions, meaning that

you may need to wait for two to three years after a bankruptcy before

applying for a mortgage loan. Although there are lenders that will

approve you for a loan sooner, an FHA lender will typically want you to

be at least two years post-bankruptcy if you filed a chapter 7 bankruptcy.

You may be able to qualify for a mortgage earlier if you filed a chapter 13

bankruptcy.

STEPS TO IMPROVE YOUR SCORE AFTER BANKRUPTCY

Once the decision has been made to seek protection through bankruptcy,

a debtor should start thinking about repairing his or her credit score post-

bankruptcy. Many debtors are leery of credit after they have been

through bankruptcy. While this is understandable, repairing your credit

score often involves re-establishing a positive credit history. Although

each debtor’s situation is unique, the following are common tips used to

improve your credit score after a bankruptcy:

Bills – the single most important thing you can do is to pay all your

bills on time every month after a bankruptcy. A single late payment

can destroy your re-building efforts.

Credit cards – do not go out and apply for every card you can;

however, you should apply for at least one credit card that you then

use sparingly and pay off each month. You may need to apply for a

secured credit card to get started.

Loans – a vehicle loan or mortgage loan goes a long way toward

improving your credit score. When you feel you are ready, and

financially stable enough, try and take out a loan.

Accounts – some lines of credit will be closed during your

bankruptcy but closing all of them is not a good idea. Having no

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information on your credit report can be as bad as having negative

information.

Monitor – take the time to monitor your credit score on a regular

basis. For a post-bankruptcy debtor, even a small inaccuracy or

error can be devastating to your efforts to improve your score. In

addition, you need to ensure that all of the debts that were

discharged during the bankruptcy reflect that on your credit report.

If you find an active debt that should show as discharged, contact

the credit bureau and/or your bankruptcy attorney immediately.

If you are considering filing for protection under the U.S. Bankruptcy

Code, chances are that your credit score is already less than stellar or is

headed that direction if you do not find a solution to your financial

troubles. Keep this in mind when you consider the impact that

bankruptcy will have on your credit score. Moreover, although the

bankruptcy will likely decrease your credit score when you file the

petition, you can begin to re-build your score the very next day. With

careful financial planning you may find that your score improves

dramatically in a relatively short period of time.

MSN Money, 7 Tips for after Bankruptcy

Oprah, How to Get a Mortgage Post Bankruptcy

Bankrate, Bankruptcy Timeline: Re-Building Credit

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About the Author About the Author

Erin B. Shank

With extensive training and years

of experience helping families

throughout Central Texas, Erin B.

Shank is here to help you conquer

your financial obstacles. Whether

you need guidance and advice

regarding bankruptcy, debt

consolidation, tax debt or other

financial problems, our friendly and

qualified team can help you find

solutions that will enable you to

manage or eliminate your debt.

Erin B Shank, PC

1902 Austin Avenue Waco, TX 76701 (254) 296-1161

1711 East Central Texas Expressway

Suite 107 Killeen, TX 76541 (254) 690-4110

www.centraltexasbankruptcy.com