One of the biggest concerns for anyone considering bankruptcy is how their credit will be affected by filing. Everyone knows that there is some impact. Most disagree as to the size or duration of the impact. That and how to rebuild are two things I hope to shed some light on in this post.

What if I just smile and bear it?

One question to ask yourself is, “What is going to happen to my credit score if I don’t file bankruptcy?” For many people contemplating bankruptcy, they are already at the point where they cannot pay their ongoing debt obligations. If this is you, your credit score takes a hit with each passing month that you’re not making your monthly payments. To give you an idea, once you’re 30 or 60 days late, your credit score starts to take a hit. If you let a payment get to the point where it’s 90 days late, it will stay on your credit report for up to 7 years and have a significant impact on your score. Having just a couple of these events could be just as damaging or more damaging than filing for bankruptcy in the first place. Because of this, once you recognize that you won’t be able to find a quick way out of the situation, it’s probably best to set the wheels of bankruptcy in motion. The higher your score is before you file, the higher it will be after you file and get discharged.

Debt resolution companies and your credit.

Many people try to do everything possible to avoid bankruptcy, for some people this includes entering into agreements with companies that promise a lower payment by consolidating their debt. These companies come in a variety of flavors. Although that is a topic for another time. What many of them will do is come to an agreement with you where you make a monthly payment to them, then they hold the money until they have enough to make an offer on any particular debt, or they make small monthly payments to everyone. of the creditors at the same time. The problem is that this does not prevent creditors from reporting negatively to the credit bureaus. It also doesn’t necessarily prevent creditors from suing you in state court, getting a judgment, and garnishing your wages. Another problem is that if they settle, it will show up as settled for less than the full amount, which hurts your score. On top of that, if you settle, you’ll probably get a 1099 from the company and probably have to claim the forgiven amount as income on your taxes. That will mean you will have a smaller refund or owe.

How long does it stay on your report and what does that mean to you?

First, if you are in a difficult financial situation and are having trouble paying your rent or making a house payment, this should not be a factor in your decision to apply. That being said, how long it stays on your report and how long the bankruptcy notation negatively affects you are two very different things. If you file a Chapter 7 bankruptcy, it will generally stay on your report for 10 years. If you file a Chapter 13 bankruptcy, that will stay on your report for 7 years after the case is discharged. Seven to ten years seems like a long time. That’s a long time, but within that seven to ten year period you can still buy cars, houses and get credit. The general rule of thumb is that about two years after a chapter 7 you can get a home loan (sometimes just a year), almost immediately after the case you can get a car loan and credit cards. Not bad, right? You must tread carefully here. Look at the offers you are receiving and only accept the best ones, it will be of no use if you start requesting many cards at the same time, limit yourself to one or two at most. When you can get credit will depend on your income and your credit score. I have seen clients with scores in the 500s before filing a Chapter 7 have scores in the 700s a year after the case was dismissed. On the other hand, I have seen other customers with low scores come back a few years later and they still had low scores. So what’s going on there?

How to improve your score after bankruptcy.

If you do what you did and nothing else has changed, your credit score probably won’t change much. The lowest your score could be is between 300 and 403, depending on the type of FICO score. The highest it can be is around 850, but that also depends on the type of score. If you don’t use credit, your score won’t go anywhere. So what can you do? The first thing I recommend is to go to http://www.annualcreditreport.com and get all three reports for free. This is something you can do once a year. Once you have them, you’ll want to review them, possibly with the help of your attorney, to determine if the credit reporting agencies are correctly reporting your debts as discharged in bankruptcy. If they are inaccurate and refuse to correct errors, you may have remedies through your old bankruptcy case or a cause of action under the Fair Credit Reporting Act (FCRA). Once your report is in order, you can start rebuilding. A good idea is to start with a secured credit card or store brand card. With a secured card, the creditor usually asks you to deposit $300.00 to $500.00 and that becomes your credit limit. There is very little risk to the cardholder because they have the security of their deposit, but the benefit to you is that they will report it to the credit bureaus. If you need a car, a car loan with a reasonable payment is another great way to improve your credit score as long as you can and really make your payments on time. My secret credit score repair weapon is IBR. If you have federal student loans and are low income or living paycheck to paycheck, you should at least consider this program. IBR stands for Income Based Payment, you can apply for it on the following site. https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven. The great benefit of this plan is that many people who filed for bankruptcy may be eligible for payments of $0.00. If you are eligible and sign up for a payment of $0.00 or any payment, and you are approved, each month that passes that you make that payment (yes, even the zero dollar payment, if you are eligible) is a month that your lender reflected as punctual payment to the credit bureaus. The more on-time payments you have, the better your credit score will be.

Best of luck,

Steven Palmer, Esq.

Licensed in Ohio and Washington