Your Credit Score After Bankruptcy
“I never thought I’d consider bankruptcy” Does this sound familiar? As you research the impact of bankruptcy you may be questioning what will happen with your financial future if you move forward.
It can be difficult to find resources that describe the aftermath because every bankruptcy experience is unique. While we feel comfortable going to our friends for advice on where to shop, or what kind of car we should buy, financial troubles are rarely discussed.
People who have experienced bankruptcy first hand aren’t eager to broadcast their experiences because of the stigma involved.
The various types of bankruptcies available to individuals are based on the United States bankruptcy code and their qualifications for each chapter.
There are six chapters of bankruptcy in the United States, Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. Chapter 7 and Chapter 13 are by far the most common forms filed by individuals.
Types of Bankruptcy for Individuals
- Chapter 7 — Liquidation Bankruptcy
- Chapter 11 — Large reorganization usually involving a partnership
- Chapter 12 — Family Farmers
- Chapter 13 — Repayment Plan
- Chapter 15 — Used in cases of foreign debt, or debt across borders
If you file a chapter 7 bankruptcy case you won’t be required to pay back your debt in installments like chapter 13. Instead, a bankruptcy trustee will make a list of your valuable possessions and assets and sell them to repay your debt. In Chapter 7, you can petition for certain assets to remain exempt, or protected from seizure.
Who Should File for Chapter 7 Bankruptcy?
Chapter 7 usually works well for individuals who:
- own little property
- have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy)
- whose family income doesn’t exceed the state median for the same family size.
Who Should File for Chapter 13 Bankruptcy?
Chapter 13 may be a better choice for you if:
- You are a high-income filer
- You would lose substantial equity in a home or other property
- You are facing a foreclosure or repossession
One common fear associated with bankruptcy is that your credit will be ruined and you won’t be able to participate in financial milestones like homeownership or buying a car until your bankruptcy is removed from your credit score.
Will Bankruptcy Ruin My Credit Score?
Any major financial decision can have an impact on your credit. The impact bankruptcy will have on your credit score depends on where you started. Higher scores will suffer the greatest impact from bankruptcy while scores that are fair or poor may not change or could experience a slight increase.
However, you should take any boost in your score after bankruptcy with a grain of salt. It is only one aspect of your overall credit report.
|Very Good and Excellent 701 – 850 ⬇|
|Your score may drop. If you have a good score of 700 or above you will probably see your score fall by 200 points or more.|
|Good 670 – 700 ⬇|
|Your score may drop. If you have a good score of 670 to 700 you will probably see your score fall by 130 to 150 points or more.|
|Fair 580 – 669 ⬅|
|Your score may stay the same or it may go up a few points. This depends largely on if you have any unused credit that is exempt from the discharge.|
|Poor 300 – 579 ⬆|
|Your score might rise or stay the same. If your existing score is poor your discharged debt could actually lead to an increase in your score because of a decrease in your debt to income ratio.|
The Impact of a Credit Score vs. a Credit Report
Your score is only one part of your overall credit history. While lenders look at your score as an aggregate of your overall credit health, it is possible to have good credit and still not be appealing to lenders. Bankruptcy stays on your report for 7-10 years and can have a lasting impact on your credit long after your score has been restored.
Things that Impact Your Credit Score After Bankruptcy
- What your credit score was before filing your bankruptcy
- What type of bankruptcy you file
- If you have any credit lines that are exempt from discharge
Which is worse for my Credit Score Chapter 7 or 13?
Chapter 7 and Chapter 13 bankruptcy have a similar impact on your credit score and you shouldn’t choose one over the other because of your concern about your credit.
However, the lenders who review your report after your bankruptcy may take note of which type you filed and have an opinion about it. It’s not possible to predict how a future lender will view the type of bankruptcy filed, so it’s better to focus on how you will build your credit moving forward.
Can I get a Credit Card After Bankruptcy?
Yes, but it may take some time and you should expect high-interest rates and additional fees. Your best bet will be credit card issuers that offer secured credit cards. This type of credit requires a refundable deposit and often an annual fee. In some cases, secured cards don’t require a credit check, instead the line of credit is dependent on the amount of your deposit.
In many cases, these cards are designed to help you build credit, so you should look at them as a means to an end rather than easy access to money that you don’t have.
Can I Rent an Apartment After Bankruptcy?
Renting after bankruptcy is possible but more difficult and may require you to jump through hoops like a higher deposit or a co-signer on your lease. Providing proof of steady income and keeping your rent to income ratio as low as possible gives landlords more confidence that you’ll be able to pay.
It helps to be upfront with potential landlords before you apply for an apartment. They will see your bankruptcy when they run your credit, so letting them know before they do is a great way to eliminate landlords for whom bankruptcy is an immediate disqualifier
Additional proof of responsible borrowing since your bankruptcy can help show prospective landlords that you are responsible and able to make regular payments.
Protect Your Credit Score Before Bankruptcy
Bankruptcy petitions require that you list all of your creditors. If you don’t owe money on an account you may be able to keep it open. You can request that an account be exempted from your bankruptcy as long as the balance is zero.
Accounts that survive a bankruptcy can have a positive impact on your credit score and provide a way for you to build your credit after your discharge.
You may decide that you want to pay off certain accounts so that they will survive the bankruptcy, however, you’ll have to do this at least 3 months before you file.
Paying $600 or more to creditors in that 90-day window can be considered preferential payment and the bankruptcy trustee can sue the company you paid to get that money back for your case.
Improve Your Credit Score After Bankruptcy
The best way to improve your credit after a bankruptcy is to make regular payments on new debt. You can do this by spending a small amount on an unsecured or secured line of credit, installment loan, rent, or utilities. Remember, this credit repair strategy only works if you know you’ll be able to make regular payments and keep your debt to income ratio below 40%.
Can I Buy Property or a Car After Bankruptcy?
Maybe. Getting a car loan will be much easier than getting a mortgage. In both cases, the debts are secured with the home or car as collateral. A bankruptcy will likely mean higher interest rates, so you’ll pay more for the debt over time.
Having money set aside for a down payment is a great strategy. However, you’ll have to begin saving this money after your discharge since any available savings will likely be put toward your bankruptcy.
As with securing other types of credit after bankruptcy, proof of income will be critical in determining whether or not you can afford to buy property after your discharge. If you have a good job and can show proof that you can afford your mortgage and car payment lenders will be more likely to trust you with a loan.
If your bankruptcy involved a mortgage foreclosure or repossession of a vehicle it will be more difficult to find a lender willing to take a risk on you.
Alternatives to Bankruptcy
Bankruptcy is a long and complicated process, not an easy out. While there are legitimate reasons to file bankruptcy it’s always a good idea to exhaust your other options first. Even if you are able to repair your credit score, the bankruptcy can still follow you for up to 10 years and can be a hindrance to your financial freedom.
A debt relief program can be a great alternative to bankruptcy. Debt Relief programs can help you pay off your debt in 12 to 48 months for less than you owe without the lingering mark of bankruptcy on your credit report. Before filing bankruptcy you should consult a debt relief specialist to see if there is a program right for you.
The information provided in this article is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. You should consult an attorney for legal advice with respect to any particular legal matter.