Obviously, understanding how a bankruptcy might impact your credit score is critical information that you need to know before you (potentially) make this major decision — not after. Unfortunately, this is also one of the most misunderstood and misinformed topics in the financial world.
Why is this the case? It’s because some firms in the credit counseling and debt consolidation fields are on a mission to prevent people from filing for bankruptcy — not because they have their clients’ best financial interest in mind, but because they have their OWN financial interest in mind. In other words: they don’t (and can’t) help facilitate and support a bankruptcy filing. And a major way they generate new business is, basically, by trying to terrify people from filing for bankruptcy.
Of course, many companies in the credit counseling and debt consolidation fields aren’t like this. They are credible and legitimate, and run by professionals who sincerely want to help. But every industry has its “bad apples,” and these firms understand that people are very worried about their credits score. The more fear they spread, the more money they make. It’s as simple as that.
If you’re facing a difficult and probably unsustainable debt situation — i.e. you cannot bridge the gap between your income and debts, and your creditors are unwilling to negotiate and may have commenced (or at least threatened) to start collection and/or legal action — then what you need most at this time are FACTS.
And so, to help you understand what the road ahead may look like, here are some clear and objective facts about how filing for bankruptcy may impact your credit score:
- Your credit score fall as a result of filing for bankruptcy. The exact amount depends on your current score. Essentially, the higher your score, the more it will fall. Generally speaking, if your score is around 680, then it will likely fall by about 130-150 points. If your score is around 780, then it will likely fall around 220-240 points.
- Filing for bankruptcy will wipe out debts that are probably lowering your credit score at the moment, and have been for months.
- In terms of credit score reduction, there is no material difference between filing for chapter 7 (liquidation) or chapter 13 (3-5 year payment plan). However, a chapter 7 filing will remain on your score for 7 years, while a chapter 13 filing will remain on your score for 10 years.
- Raising your credit score after a bankruptcy filing is probably easier than you have been led to believe. For example, immediately after filing you can apply for a secure credit card (i.e. one that uses an asset you own as collateral). In a few months or possibly even sooner, you will likely be approved for a conventional credit card and/or department store credit card. Provided that don’t exceed about 25% of the available credit limit at any given time, and that you pay your balance due in full and on time, your credit score will gradually improve. With the right plan, many people have raised their credit score into the 700s within a few years of filing for bankruptcy.
The Bottom Line
The purpose of this article is not to persuade you to file for bankruptcy, or not to file for bankruptcy — since that is not a decision that you should make based on one (or even several) articles. Rather, it is to help you understand that while filing for bankruptcy will indeed lower your credit score, it is not the catastrophic financial disaster that some companies would like you to believe it is.
On the contrary, for hundreds of thousands of people each year, filing for bankruptcy is a safe, smart and financially responsible response — instead of a fear-based reaction — to a difficult, but 100% solvable and temporary financial challenge.
To learn more about filing for bankruptcy, and for a confidential consultation on whether this may be a viable decision that is in your best current and long-term financial interest, contact the Law Office of Charles H. Huber today.