If you are having trouble making your debt payments and meeting your basic living expenses, you might be considering filing for bankruptcy and wondering whether it will have a large negative impact on your credit score. In your larger financial picture, however, this might not be as devastating as you fear.
Filing Doesn’t Harm Your Credit Score as Much as You Might Think
Credit reporting agencies calculate your credit score by running your personal financial history through a specialized software program. The result is called a FICO score. There are many factors that go into calculating a FICO score, and how the calculation works is a closely guarded secret. No one can predict how much your score will drop after filing for bankruptcy, but studies have shown drops of 150-300 points (or even more) are common.
It’s important to remember that your credit score matters only if you are trying to get a loan, lease, or another extension of credit. By the time most people file bankruptcy, their credit scores are already low. Missed loan payments, defaulted credit cards, court judgments, and repossessions inflict a lot of damage on credit scores.
Planning for a Drop in Your Credit Score
If you file for Chapter 7 or Chapter 13 bankruptcy, you will find it difficult to get credit on good terms for some period afterward. If you plan for this period, you can mitigate some of the negative effects of filing for bankruptcy.
For instance, if you know you will need to move at some point in the future, you may wish to get a rental agreement on a new place before filing. Some landlords will rent to tenants on a case-by-case basis if factors beyond their control led to the filing, such as divorce, job loss, or disability. Others automatically screen out applicants who have a bankruptcy filing on their record. You will have more rental options available to you pre-filing. And of course, to make yourself an attractive candidate you should always pay your rent on time and not stiff previous landlords.
If your vehicle is on its last legs, you may wish to purchase more reliable transportation before filing, particularly if you are going to be in a Chapter 13 repayment agreement, which can last several years. Be aware, however, that the bankruptcy trustee, the court, and your creditors have the right to scrutinize financial transactions you make before filing bankruptcy. Buying a reliable, reasonably priced vehicle so you can continue working and generating income is one thing – splurging on a brand-new sports car when you can’t pay your other creditors is another. You should consult an attorney first if you think you may need to purchase a new vehicle before filing for bankruptcy.
It may take a few years after your bankruptcy filing before you can get a home mortgage. How much time varies depending on the lender and on how well you rebuild your credit rating.
Rebuild Your Credit After Bankruptcy
A bankruptcy filing can stay on your credit history for up to 10 years. The negative toll a filing takes on your credit lessens with each year that goes by after filing, particularly if you take steps to rebuild your credit. When your credit score improves, the interest rate you are charged for borrowing money decreases. Even a small reduction in the interest rate can add up to big savings over the life of a loan.
One step you can take is to check your credit reports six months after your bankruptcy case is over to make sure your old debts are reported accurately. The Fair Credit Reporting Act requires credit reporting agencies to maintain accurate records of your debts. Debts included in the bankruptcy filing should be listed as having a zero balance. The report should also say these debts were “discharged,” “included in bankruptcy,” or some other similar language to show they are no longer personally owed.
Debts listed as still owed after bankruptcy can pull your score down. If a credit reporting agency is not reporting information on your debts accurately, you should dispute the incorrect information with the agency.
After filing bankruptcy, you may swear to avoid debt for the rest of your life. While this is an understandable reaction, having no credit history can be as negative as having a bad history when it’s time to qualify for a house or car loan.
To rebuild your credit history, consider taking out a secured credit card through your bank or credit union. A secured card is backed by a cash deposit you give the lender to hold against the possibility of default. Charge small amounts on the card regularly, and pay off the bill in full each month. After you have built a consistent history of payment, the lender may be willing to move you to a regular unsecured credit card.
You might be surprised to get offers of new credit lines immediately after filing bankruptcy. These lenders know that there are limits to the number of times you can file bankruptcy, so they extend credit on very expensive terms. Avoid these offers and use your “fresh start” to build a solid credit foundation. It takes more time, but it’s worth it.
Questions for Your Attorney
- How do I check my credit reports?
- How do I file a credit report dispute?
- Can you help me improve my credit score after my bankruptcy ends?