WILL A BANKRUPTCY FILING AFFECT MY FUTURE CREDIT RATING?

You may be thinking that your debts are out of control, and that perhaps you should be looking into filing a bankruptcy. On the other hand, you are concerned that if you do file a bankruptcy, then your credit rating will take a big hit. How a bankruptcy would affect your credit score is a valid issue to consider, and is actually one of the most common concerns people have when considering how to deal with their debts.

Credit has become so important in our lives that people are afraid of losing their good credit — or even their not-so-good credit. They may struggle for years to pay off their debts, and even go through garnishments of their earnings, and still end up having to file a bankruptcy at some point when their debts become overwhelming.

While a bankruptcy on your credit report doesn’t look good to future creditors, the weight of its effect on your credit rating depends largely on how good your credit was before you filed the bankruptcy. If you are behind on several accounts and your debt-to-asset ratio is high (which means that you have a lot of debts and not a lot of assets), your credit rating is already low. A bankruptcy filing may drop it a little more, but it won’t take a dramatic drop. In fact, it may be slightly beneficial to a potential credit provider, as you are taking a positive step to deal with your debts by filing a bankruptcy rather than just continuing to ignore them.

Further, if you file under chapter 13, in which you pay some percentage of your debts over three to five years, future creditors may look at you as being more responsible for repaying those past debts as best you are able, and thus regard you as a better credit risk in the future.

If you have a high credit score before you file, the drop in your credit rating will likely be more dramatic. However, that drop may be temporary. Bankruptcy can also be the quickest way to revive your credit score. If you are already behind on your debt payments or have accounts that were placed with collection agencies, bankruptcy can help to get you back on your feet sooner than other types of debt management programs. Filing a bankruptcy can wipe out many types of debts. It provides you with a fresh financial start. When you can reduce your debt load and regain control of your finances, you can start making loan and credit account payments on time, reduce your debt-to-income ratio, and start to rebuild your credit.

On the other hand, if you try to work with a debt consolidation service, your results may not be satisfactory. While a bankruptcy court has the power to force the creditors to accept a lower amount in full satisfaction of their debt, a debt consolidation service does not. The service cannot protect you from a creditor filing a lawsuit against you and ultimately collecting a judgment against you. Moreover, if the service helps you to negotiate a settlement of a debt, the creditor can present you with a 1099 form at income tax time, making you responsible for the unpaid portion of the indebtedness as “forgiveness of a debt”, which can’t happen in a bankruptcy.

A bankruptcy filing can remain on your credit report for up to 10 years. However, you can start rebuilding your credit right away. If you continue to make your mortgage payments and car payments during and after the bankruptcy, you are rebuilding your credit. If you have student loans, making the monthly payments on those will rebuild your credit, despite the fact that you can’t discharge them in bankruptcy anyway. If you keep your debt load low, that will help. Getting a credit card when you’re ready to handle it again, making small charges and paying the bill off in full every month will help to reinstate your credit.

You will likely be deluged with offers for credit cards after your bankruptcy. That may sound surprising, but keep in mind that you cannot file a bankruptcy again for several years. Therefore, if you don’t pay on them, the credit card companies know they can get a judgment against you and then take action to collect on that judgment through garnishment or bank attachment. However, keep in mind that the rate of interest they offer you on the credit card may be far higher than what they charge to people with a better credit record. For that reason, it would be best to have just one or two credit cards and pay them off every month.

For similar reasons, you should have no problem getting a car loan should you need to do so. But again, watch the interest rate.

If you are considering a bankruptcy, then chances are good that you’re already behind on paying your monthly bills. Your credit report will reflect that your payments are late, and other creditors will not look favorably on extending credit to you.   So what’s the benefit to your credit score if you don’t file a bankruptcy in that situation? Is your credit score going to look much better in a couple years? Are you likely to have saved money in a couple years so that you’re not going to need to borrow more money then? If you continue on as you have been, your credit score will only continue downward. But if you file under Chapter 7 or Chapter 13 now, you’ll be cutting your losses and can begin re-growing your credit score.

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