One of the most common questions of those considering filing for bankruptcy, is how will bankruptcy affect my credit score? You may be shocked to learn that for most people who have filed for bankruptcy, their credit scores actually go up and improves after they have filed for bankruptcy. Filing for bankruptcy is never an easy decision and is usually the path sought as a last resort by those in dire need of help. Many people who seek a free consultation with a bankruptcy attorney often want to know how bankruptcy will affect their credit score moving forward. I generally tell people that I am not a credit agency so you may want to talk to them about how they report your credit and what they take into account. With that said, I can offer some general insight.
If you are like most people who are considering filing for bankruptcy, then you probably do not have stellar credit to begin with. If you have been fighting to keep yourself afloat financially and have been unable to keep up with your scheduled payments, then filing for bankruptcy might surprising increase your credit score. This is because in a chapter 7 bankruptcy, all of your unsecured debts are wiped out, erasing your obligation to make these payments and wiping out your maxed out credit utilization. This means that you are now current on all of your payments and will continue to be current as long as you stay on top of your credit moving forward.
With that said it may be smart to take obtain a new credit card or obtained secured credit cards after you file for bankruptcy and stay current on the payments just to help rebuild your credit score. Additionally diversifying your credit also helps to improve your credit score. For instance having several credit lines in addition to an auto loan and home loan is known to improve a credit score. Finally, another trick of the trade is to have somebody with good credit, add you to their account as an authorized user. This way, their credit will report on yours for that car. Most importantly it does not impact them at all and they do not have to give you access to any credit cards moving forward and they can remove you at anytime.
For most people who file for bankruptcy, they will be able to obtain new credit immediately after filing for bankruptcy as banks know that you can’t file for chapter 7 bankruptcy again for 8 years. This makes extending you credit a good risk. further for most debtors they will be eligible to buy a car soon after filing for bankruptcy, and can even buy a home and qualify for a home loan after 2 years from filing chapter 7 bankruptcy and immediately after getting out of a chapter 13 bankruptcy plan with regards to federal home loans. It’s typical that I see debtors who file for bankruptcy end up in the 600’s regarding their credit score after they file for bankruptcy. Therefore if you have great credit and are in the 700+ range, you could see a drop in your credit score, while if you are under 600, you are likely to see an improvement in your score score, just by filing a bankruptcy.
The bankruptcy filing itself can remain on your credit report for up to 10 years in the public records section of your credit report. While this is a negative item, it typically is not as bad as having an excessive amount of debt and maxing out your credit lines. With regards to finding a place to rent after filing for bankruptcy, most consumers don’t have a problem as they can now pay their rent on time as well as other bills. With that said, on occasion i do here from a debtor who has filed for bankruptcy and states a rental office will not rent to them. While this does happen, I typically advise them to go try somewhere else and there is not an issue. As a general rule of thumb I have found smaller companies/landlords will be more flexible with rental terms vs. large corporate apartment buildings. Typically showing proof of income or pre-paying a few months in advance can go a long way in securing your next rental. Also it should be noted that as part of a bankruptcy filing, you can terminate an apartment lease or assume your current apartment lease without notifying your landlord so there is no need to have to worry about that moving forward.
At the end of the day, those who tell you your credit score will tank after you file for bankruptcy and you will never recover are simply wrong. The number one thing I hear after somebody files for bankruptcy is why do i receive so many offers for car purchases and credit after filing for bankruptcy and I often hear from former clients who are looking to purchase homes or refinance after filing for bankruptcy several years down the road as they need their bankruptcy paperwork to complete the process. So just know bankruptcy is not the end, but rather the chance to get a fresh start and new beginning by gaining your financial freedom and educating yourself on the tools to do that.