Bankruptcy Effect On Credit Score | Law Office of Jonathan M. Peake, LLC

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BANKRUPTCY EFFECTS ON CREDIT

What Occurs to Credit Scores After a Bankruptcy

Consumers are led to believe that filing for bankruptcy will forever ruin their credit, which is simply not true. There is a lot of misinformation about how a bankruptcy affects credit scores. The simple fact is that a bankruptcy action will appear as a notation on a consumer’s credit report for ten years; however, the real impacts of this have a temporary impact.

Immediately upon filing, bankruptcy may lower a credit score and may prevent consumers from getting credit on large items, such as houses and vehicles; however, immediately after filing, an individual can work on building their score to levels higher than before the filing. In many cases, a consumer’s score can actually increase based on one of the main factors for score being a person’s debt-to-income ratio. Any accounts included in a bankruptcy must be updated by the creditors to report as zero balances with zero past due.

For lines of credit, individuals will probably start receiving new credit applications immediately following discharge. This is because an individual’s debts have been wiped out, leaving them in a very healthy range for debt-to-income ratio. For larger purchases (houses, vehicles), consumers may have to wait around two years after filing for bankruptcy to receive credit on normal terms. During those two years, a consumer is still able to explore different options to obtain a house or a car, such as seller-financing or land-sales contracts.

At the end of a two year period, the bankruptcy notation will be of less consideration than the individual’s credit history for the two years after filing the bankruptcy. This will be an important time to make timely payments on all accounts, especially any secured debts.

Although bankruptcy does cause a negative effect on an individuals credit, it is often the lesser of two evils when the other alternatives are default, foreclosure, settlements, and repossession. Within a couple years, and individual may expect to receive credit on normal market-terms if they make efforts to show good credit skills in those two years.

What Occurs to Credit Scores When An Individual DOES NOT File for Bankruptcy

Even though a bankruptcy will negatively effect a consumer, it must be considered in fact of the alternative of not filing for bankruptcy protections. In that scenario, many people turn to credit counseling agencies, which forcefully default on all accounts in an attempt to negotiate with credit card companies and lenders. This process may take several months to years to complete, all the while the consumers score drops lower with every passing months payments not being made. Any “settlements” that are reached are once again reported in a negative light, dropping a credit score even though the account is successfully ‘closed’ pursuant to negotiations.

Outside of lines of credit, other actions may happen outside a bankruptcy which will have negative impacts, such as the foreclosure of a property, the repossession of a vehicle, or a lawsuit resulting in a judgement, which, like bankruptcy, will remain on your credit report for ten years.

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