HOW DOES FILING BANKRUPTCY IMPACT YOUR CREDIT RATING?

Many Debtors Hesitate to Explore Bankruptcy as an Option Because of Concerns Regarding How Bankruptcy Will Affect Their Credit Rating

SCOTT R. NEEDLEMAN
OHIO BANKRUPTCY AND FORECLOSURE DEFENSE ATTORNEY

Many hard working Americans struggle to pay the bills each month despite their hard work. All too often it only takes a minor emergency or illness to send an already tight budget spinning out of control. If this sounds familiar to you it may be time to consider bankruptcy as a long-term solution. Many debtors hesitate to explore bankruptcy as an option because of concerns regarding how bankruptcy will affect their credit rating. While bankruptcy does typically have a negative affect your credit score when you file your petition, the impact is usually only temporary. In fact, most debtors see a significant improvement in their credit score in a relatively short period of time after bankruptcy.

CHOOSING A CHAPTER
One of the first decisions you must make when you decide to file for bankruptcy protection is which chapter to file under. The impact your bankruptcy will have on your credit rating will depend, to some extent, on which chapter you file. Most individual debtors use either chapter 13 or chapter 7. An individual can use chapter 11; however, chapter 11 is typically only used by debtors who have a small business that will be involved in the bankruptcy. Chapter 12 can also be used by individuals but only if they are a family farmer or fisherman. Chapter 7 is the simplest

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

chapter and the only one that allows a debtor to discharge, or eliminate, the majority of his or her debts without repaying them. To file a chapter 7, however, a debtor must pass the means test. Chapter 13 is used by debtors who earn too much to qualify for a chapter 7 or who have valuable non-exempt assets that would be lost in a chapter 7 bankruptcy.

FILING YOUR PETITION CREDIT SCORE DROP

There is no way around it your credit score will drop when you file a petition for bankruptcy. The extent to which it drops will depend on a number of factors and there is no way to know with certainty how much it will drop. If you are like most debtors considering bankruptcy you probably do not have a stellar credit score right now as a result of the financial problems that led you to consider bankruptcy. Some people, however, do manage to keep their credit score intact right up to the filing of their petition for bankruptcy. As a general rule, these are the debtors who will see the largest drop in score the higher your score is to begin with the larger the decrease in most cases. On average, a debtors score will drop 50 -150 points right after the petition is filed. Dont let this initial drop discourage you from seeking protection through bankruptcy. In most cases, this drop is only temporary.

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

DISCHARGE IN A CHAPTER 7 AND YOUR CREDIT SCORE

A chapter 7 bankruptcy typically takes under six months to complete. At the end of the bankruptcy all dischargeable debts of the debtor will be discharged, or eliminated. As a result, chapter 7 debtors often see their credit score begin to go back up shortly after discharge. This occurs for two reasons. First, the debtor has eliminated most, if not all, of his or her debt. Second, by eliminating the debt the debtors debt to income ratio improves significantly. Your debt to income ratio is computed by dividing your total monthly payments on debt by your monthly income. Lets say that prior to filing bankruptcy you have a monthly mortgage payment of $1,000, a car payment of $200, payments on medical bills of $300, payment on a judgment of $100 and credit card payments totaling $400 for total monthly bills pre-bankruptcy of $2,000. If your monthly income is $4,000 your debt to income ratio is 0.50 or 50 percent ($2,000/$4,000 = 0.50). Through bankruptcy you discharge the medical debt, the judgment, and the credit card debts which lowers your monthly payments to just $1,500 and reduces your debt to income ratio to 0.375 or 37.5 percent. The lower your debt to income ratio the higher your credit score and the more favorably lenders will look at an application for credit in the future.

RE-BUILDING YOUR CREDIT DURING A CHAPTER 13 BANKRUPTCY

Chapter 13 works differently than chapter 7. A debtor in a chapter 13 bankruptcy is required to develop a repayment plan that contemplates

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

repaying most of the debtors debts over an extended period of time, usually three to five years. At the end of the repayment period, assuming you abided by the terms, remaining debts that can be discharged will be. During the repayment period creditors are not supposed to report you as paying late as long as you are paying according to the plan. This alone helps your credit score. At the end, you have paid off, or paid down, most of your debts and established a record of on-time payments. In addition, remaining debts may be discharged at the end of the repayment period. Therefore, in a chapter 13 bankruptcy your credit score should slowly increase over the course of the bankruptcy and beyond.

YOUR CREDIT IN THE LONG-TERM

Filing bankruptcy will have a long-term impact on your credit score. How much of an impact it has depends, to a great degree, on what you do to try and improve your score during and after the bankruptcy. A bankruptcy remains on your credit report for ten years if you file chapter 7 or seven years for all other chapters; however, it does not necessarily have a negative effect on your credit score for that long. Debts that were discharged through bankruptcy are noted as such on the report.

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

Lenders know that you cannot file bankruptcy again for at least seven years, significantly decreasing their risk that you will bankrupt a debt. Debtors often find that they are able to qualify for a car loan not long after discharge in a chapter 7 bankruptcy, assuming they have the income necessary to make the monthly payments. A debtor in a chapter 13 bankruptcy may even be able to finance a vehicle during the repayment plan period with court approval. Qualifying for a mortgage loan is more difficult post-bankruptcy; however, most debtors who file bankruptcy would not have qualified prior to the bankruptcy anyway. If you filed a chapter 7 bankruptcy you will likely need to wait about two years before applying for an FHA loan. The FHA rules do allow a chapter 7 debtor to qualify after just one year post-discharge if they can show they are responsible with their financial affairs, the bankruptcy was caused by circumstances beyond their control, and that the circumstances are not likely to occur again. FHA rules allow a chapter 13 debtor to potentially qualify for a mortgage if at least one year of the repayment period has passed with payments being made on time and the bankruptcy court grants permission.

WHAT YOU CAN DO TO IMPROVE YOUR CREDIT SCORE AFTER BANKRUPTCY

Ultimately, the impact bankruptcy has on your credit score is in your hands. Though filing for bankruptcy will cause your credit score to drop initially, your score can bounce back rather quickly if you take steps to improve your score. Experts advise doing the following:

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

1. Pay your bills on time. Paying your bills on time during and after the bankruptcy is the single most important thing you can do to improve your credit score. 2. Re-establish credit. Although you may think applying for credit again is a bad idea, you need a credit history to have a good credit score. Be smart and dont apply for more than one or two loans/cards, but do start re-establishing your credit history. 3. Keep accounts open. Some accounts were likely closed during the bankruptcy. If accounts remain open after discharge consider keeping them open. The length of time you have had an account open usually increases your credit score. 4. Monitor your score. Keep an eye on your score and be sure to correct any discrepancies. Make sure that all accounts that were discharged through bankruptcy show as paid or discharged. Now that you know more about bankruptcy and how it impacts your credit score you should be better prepared to decide if bankruptcy is the best solution to your financial difficulties. Concerns about your credit rating alone should not prevent you from considering bankruptcy as you should now know. Consult with an experienced Ohio bankruptcy attorney if you have specific questions or further concerns.

MSN Money, 7 Tips for after Bankruptcy Oprah, How to Get a Mortgage after Bankruptcy Bankrate, Bankruptcy Timeline:Rebuilding Credit

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com

About the Author Scott R. Needleman

The Needleman Law Office 5300 E. Main, Suite 109 Columbus, OH 43213 614-575-1188 http://thecolumbusbankruptcylawyer.com/

Every associate at The Needleman Law Office is committed to handling your case in both a personal fashion and in a professional manner. In other words, we treat you the way we would want to be treated. We will take a personal interest in your situation, making sure you understand exactly what is happening and what options you may have. Then well fight to ensure the best possible outcome for your situation.

How Does Filing Bankruptcy Impact Your Credit Rating? thecolumbusbankruptcylawyer.com