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The Effects of Bankruptcy on Your Credit
One of the biggest concerns for anyone considering bankruptcy is how their credit will be affected by the filing. Everyone knows there are some effects. Most disagree on the magnitude or duration of the effects. That, and how to rebuild are two things I hope to shed light on in this post.
What if I just bear it with a smile?
One question you should be asking yourself is, “What will happen to my credit score if I don’t file for bankruptcy?” For many people considering bankruptcy, they are already at the point where they cannot pay their ongoing debts. If this is you, your credit score takes a hit every month because you don’t make 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 is 90 days late, it will stay on your credit report for up to 7 years and will have a significant impact on your score. Just a few such events can be as damaging or more damaging than filing for bankruptcy in the first place. Because of this, it’s best to get the wheels of bankruptcy turning once you realize you can’t find a quick way out of it. The higher your score before filing your case, the higher your score will be after you file your case and are discharged.
Debt resolution companies and your credit.
Many people try to do what they can to avoid bankruptcy, and for some, that includes striking deals with companies that promise to lower payments by consolidating debt. These companies come in a variety of styles. However, that’s another topic. What a lot of them will do is come up with an arrangement with you where you pay them a monthly payment and then they either hold that money until they have enough to make an offer on any one particular debt, or they One monthly payment to all creditors in small sums. The problem is, that doesn’t stop those creditors from making negative reports to the credit bureaus. It also doesn’t necessarily prevent creditors from suing you in state court, obtaining judgments and garnishment of your wages. Another problem is that if they do settle, it will show up as settled for less than the full amount, which can hurt your score. On top of that, if you settle, you may get a 1099 from the company and may be required to claim the forgiven amount as your tax income. This either means you’ll get a smaller refund, or you’ll owe money.
How long does it stay in your reports and what does it mean for you?
First, if you are in a poor financial situation and are having difficulty paying rent or making housing payments, this should not be a factor in your decision to submit an application. That said, how long it stays on your report and how long the bankruptcy symbol negatively affects you are two very different things. If you file for Chapter 7 bankruptcy, it usually stays on your report for 10 years. If you file for Chapter 13 bankruptcy, the filing will stay on your report for 7 years after the case is discharged. Seven to ten years seems like a long time. It’s a long time, but in those seven to ten years, you can still buy a car, buy a house, get credit. The general rule is that you can get home loans about two years after Chapter 7 (sometimes as little as one year), and you can get auto loans and credit cards almost after the case. its not bad, right? You should tread carefully here. Look at the offers you get and only accept the best ones, it won’t help you if you start applying for many cards at once, limit to one or two at most. When you can get credit will depend on your income and credit score. I’ve seen clients who scored 500 points before filing Chapter 7 score 700 points a year after their case was discharged. On the other hand, I have seen other clients with low scores come back years later and their scores are still low. So what’s going on there?
How to improve your score after bankruptcy.
If you do as you are and nothing else changes, your credit score probably won’t change much. Depending on the type of FICO score, your minimum score may be between 300 and 403. It can go up to around 850, but it also depends on the type of score. If you don’t use the credit, your score isn’t going 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. Here’s something you can do once a year. Once you have these, you’ll want to review them, possibly with the help of your attorney, to determine if the credit reporting agencies are properly reporting your bankruptcy settlement debt. If they’re inaccurate and they refuse to fix the error, you can get redress through an old bankruptcy case or a lawsuit under the Fair Credit Reporting Act (FCRA). Once your reports are 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 will typically make you pay $300.00 to $500.00, which will become your line of credit. The risk to the cardholder is minimal because they have the security of your deposit, but the benefit to you is that they report it to the credit bureaus. If you need a car, paying a reasonable car loan is another great way to improve your credit score, as long as you can and do make your payments on time. My secret credit score repair weapon is IBR. If you have federal student loans and you are low-income or living paycheck to paycheck, you should at least look into this program. IBR stands for Income Based Repayment and you can apply for it at the following website. https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven. The great benefit of this program is that many people who file for bankruptcy may qualify for a $0.00 payment. If you qualify and you sign up and get approved for a payment of $0.00 or whatever, then every month you make a payment (yes, even a $0 payment if you qualify) is the month your lender reflects as paying on time to the credit bureaus. The more you pay on time, the better your credit score will be.
Steven Palmer, Esq.
Licensed in Ohio and Washington
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