Effects of Chapter 7 Bankruptcy on Credit Scores
Potential client's frequently ask how filing for bankruptcy will effect their credit, and how long a bankruptcy will stay on their credit report. Many of these individuals are interested in learning whether their credit score will increase as a result of discharging their debt.
By obtaining a discharge of debts in a chapter 7 bankruptcy, the borrowers credit report should be updated to reflect a public record regarding the bankruptcy. This public record can be reported for a maximum of 10 years (a chapter 13 can be reported for up to 7 years). Additionally, each debt that was discharged should be updated to reflect that there is no balance, and that the account was discharged in bankruptcy. The specific accounts that were discharged in the bankruptcy will only be reported to the credit agencies for a maximum of 7 years (usually from the date of charge-off).
Will Bankruptcy Increase My Credit Score?
The effect that a bankruptcy will have on credit scores depends on a variety of factors. At our office, we obtain specialized bankruptcy credit reports that give a projection for what the client's credit score could be one year after filing for bankruptcy. While bankruptcy is certainly considered a "derogatory notation" for credit reporting purposes, we find that many of our client's benefit from an increase in credit score. This improvement in credit is, in part, due to the debts that are eliminated in the bankruptcy discharge. Many people are debt-free as a result of filing for bankruptcy, which can increase their credit worthiness. However, this absolutely varies on a case-by-case basis. For example, some people that have poor credit may see a larger increase to their score as a result of bankruptcy as compared to a person that file bankruptcy with a good credit score.
How To Improve Credit After Bankruptcy
The first step is to make sure that all of the debts that were discharged are being reported properly on your credit report. The balances on these accounts should be $0 or should be omitted. On some occasions, some debts remain reporting incorrectly with some bureaus. In these situations, it is important to alert the credit bureaus that the account was included in bankruptcy and is reporting incorrectly on the credit report. This communication will oftentimes be sufficient to fix the credit reporting errors. Learn how our lawyers can assist in fixing errors on credit reports.
Building new credit can be challenging, especially in the beginning when the bankruptcy is still fresh. A borrower might want to shop for creditors and banks that are known to extend credit lines to people with questionable credit and bankruptcy. It might be easier to get approved for some "store cards" and gas cards, which can give the debtor an opportunity to borrow and show responsible payment patterns. In due time, this can ultimately build credit high enough to apply for prime credit cards, car loans, or even a mortgage for a home.
Important Note: Pay close attention to the terms of any application you submit for credit cards in the post-bankruptcy filing period. the credit agreement, because the interest rate might be high, and there might be monthly fees as other costs associated with such an account. You don't wan to end up in a situation where you need to file bankruptcy again.
