Ch 7, 13

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Filing for bankruptcy can help you start with a clean slate. It is a good way to bring your financial life in order while rebuilding your credit.
But building your credit with a bankruptcy filing in your credit report can also be a very lengthy process.

Although you can start restoring your credit rating immediately after having filed for bankruptcy by paying your bills on time and using your credit responsibly, bankruptcy filing can stay in your report for up to ten years, making it a slow process to achieve high digits for your three digit credit rating again. A low credit rating will prevent you from getting favorable interest rates for credit cards, auto loans or a mortgage if you qualify for a loan at all. Higher interest rates in turn may overextend your ability to pay and therefore put you at a higher risk for bankruptcy filing.

Entering this vicious cycle can easily be avoided by using the bankruptcy filing to straighten out your finances and spend within your means to avoid subsequent bankruptcy filings. Making a budget and learning to live with it will prevent you from defaulting on your debt, allowing you to build your credit rating for a sound financial future.

If you are thinking about filing bankruptcy, you probably already have a few dings on your credit report, and are wondering how much more bankruptcy can lower your credit score. Your overall credit score is based on your income to debt ratio, how long you’ve had a credit history, how often you pay late, how many times you apply for credit and other factors.

Your credit score is important not only for gaining additional credit such as a mortgage or car loan, but for employment, insurance, utilities and other daily life needs. Knowing your credit score and how it will be affected is important unless you are independently wealthy and don’t need credit at all. So let’s see how some common financial mistakes will affect your credit score.

Judgments – Judgments are basically lawsuits that creditors have brought against you and won. A judgment can lower your credit score 50-150 points depending on how large the judgment is and how earlier late payments have already affected your credit score.

Late Payments – Probably the biggest culprit of lowered credit scores is late payments, meaning you have simply paid your debt late one or more months. Late payments are usually reported as 31-60, 90, 120, 180 days on your credit report, and the later the payments are, and the more late payments you have, the more your credit score is affected. Late payments can affect your score 50-200 points, especially if you are late paying large debts like your mortgage.

Charge Offs – If you are seriously behind on payments, eventually a company will “charge off” your debt, basically wiping it from their books. That doesn’t mean you don’t still owe it, you do, and they may even sell it to another company to have them try to collect it, but on their books they have written you off and notified the credit bureaus. Charge offs can lower your credit score 50-125 points depending on the type of debt.

Bankruptcy – While a bankruptcy lets you wipe out your debts, it definitely doesn’t clear your credit up immediately. When you file bankruptcy, your credit score can fall 100-300 points depending on how long you waited to file after you were unable to pay your debts. If you waited a long time it may not fall far due to your other late payments, charge offs and judgments. If you had fairly good credit and file bankruptcy it will likely fall farther.

It’s important to think about the consequences of paying debts late and filing for bankruptcy as your credit score can affect your ability to get a new job, get a mortgage and even be approved for a new rental. Depending on the types of debts you have, filing bankruptcy may not make sense at all so it’s important to speak with a bankruptcy attorney or get a free bankruptcy review.

Filing bankruptcy has a lasting effect on your credit score and your ability to gain lines of credit. However, filing bankruptcy can improve your credit, and there are steps to take to raise your credit score after bankruptcy.

If you are thinking about or already planning on filing bankruptcy, chances are your credit has already been affected, by slow or late payments, repossessions, extended credit or even foreclosures. Because of this, your credit after bankruptcy may actually be better than before, since the debts no longer count against your income once they have been discharged. A bankruptcy filing stays on your credit report for up to ten years, and late payments stay on for up to seven years, so the effects are similar, but bankruptcy gives you a chance to improve your credit faster because you will have an improved debt to income ratio to help.

So how do you rebuild your credit after bankruptcy? In some cases you may be able to keep one of your credit cards, this can happen in two ways. One way is to keep a card that you have no debt on, you don’t have to notify the company that you are filing, though they may find out anyway and cancel the card. The other way is to reaffirm a debt on a card, that means that you sign a contract with the company after you file bankruptcy that says you will pay off the debt anyway if they allow you to keep the card. Companies are usually willing to do this because they get paid for the debt, whereas if you didn’t reaffirm, it would be discharged in the bankruptcy.

Getting a new credit card after bankruptcy may improve your credit. You will pay higher interest rates and usually have a lower limit, but it is possible to get a credit card after bankruptcy. In order to improve your credit you must pay off the credit card each month instead of carrying a balance.

Once you do file your bankruptcy petition you will actually receive LOTS of credit card offers, lines of credit and more in the mail. Why? Because the companies know that you can only file bankruptcy once every 6 years. It’s easy to get caught up in the credit race again and fall behind, so choose wisely and spend even more cautiously. Your rule of thumb should be, if you don’t have the money to cover a purchase in your checking account, you should not use credit to purchase the item. By doing this and paying off your credit purchases each month your credit rating will increase rapidly.