Having an A+ Credit Report After Filing for Bankruptcy

Within the last two days, I have had several potential clients ask me the exact same question, “what will filing for bankruptcy do to my credit, and will I be able to get loans in the future?” My typical lawyer answer is, “it won’t be that bad and maybe.”  Kind of non-committal, I know, but the truth is that there is no surefire answer.

Bankruptcy is going to affect your credit.  It can’t be avoided. But most of the time, your credit has already taken a hit by the circumstances that have you lead you to our offices. Being late on payments, having accounts sent to collections agencies, and carrying multiple high balances are all things that are going to bring your credit score down.  In this situation, a bankruptcy filing can be just what your credit needs to wipe the slate clean.  Each of those individual negative blips will all be wiped out and replaced with a reporting of “included in Chapter 7 or Chapter 13 bankruptcy.”  This may even cause a quick jump in your credit score. Another reason bankruptcy doesn’t impact your credit score as negatively as one might imagine is that your credit score, or FICO score, is calculated by comparing you to others in your situation. So, the score of a bankruptcy filer is computed by looking at scores of other bankruptcy filers and not non-bankruptcy filers.

So, bankruptcy wipes the slate clean and everything is good to go?  Well, almost. After filing bankruptcy, particularly Chapter 7, you will receive numerous credit card and vehicle loan offers.  So new loans are a possibility, but you may not receive the same terms as you would  have pre-bankruptcy.  However, you can improve your credit over time and, in turn, improve your loan terms.  In order to do so, you need to make sure that your credit report has been properly adjusted and that no accounts are still listed as delinquent (call the credit bureaus if this is not the case).  After that you can attempt to get a unsecured credit card with a small credit limit or secured credit card.  Make minimal purchases and pay them off each month.  This positive reflection on your credit will help you quickly rebuild. Also, if you do have a  home or vehicle loan, make sure you continue to make timely payments on these installments. This is just another positive ding to your credit that will help over time.

Lastly, most clients ask if there is a difference in filing Chapter  7 or Chapter 13 for credit purposes. The answer is really no. Both are going to be reported on your credit and affect your credit score. The only real difference is that a creditor may be more willing to extend new credit to you, despite the bankruptcy on your credit report, while you’re in a Chapter 13 because you are making repayments on your debt.  However, this would really be more of a “personal” decision on the part of lender.

Despite which way you go, Chapter 7 or Chapter 13, it is clear that there is life after bankruptcy, and the decision to break free from your debt should not be hindered by fear of your credit future.