One of the biggest concerns for my clients is how their credit will be affected by filing for bankruptcy. Everyone knows there is some impact. Most disagree as to the size or the duration of the impact. That, and how to rebuild are two things I hope to shed some light on in this post.
What if I just grin and bear it?
A question you should ask your self is, “What is going to happen to my credit score if I don’t file bankruptcy?” For many people contemplating bankruptcy, they are already at the point where they are not able to pay their ongoing debt obligations. If this is you, your credit score is taking a hit every month that goes by where you aren’t making your monthly payments. To give you an idea, once you go 30 or 60 days late, your credit score starts to take a hit. If you let a payment get to the point where it is 90 days late, it will stay on your credit report for up to 7 years and will have a significant impact on your score. Having just a couple of these occurrences could be as damaging or more damaging than filing a bankruptcy in the first place. Because of this, once you recognize that you aren’t going to be able to find a quick way out of the situation, it is probably best to get the bankruptcy wheels moving. The higher your score is before the filing of the case, the higher it is going to be after you file the case and get your discharge.
Debt Consolidation Companies and Your Credit.
Many people try to do whatever they can to avoid bankruptcy, for some people this includes entering into agreements with debt consolidation companies. These companies come in a variety of flavors. That is a topic for another time though. What many of them will do is enter into an arrangement with you where you make a monthly payment to them, then they either hold the money until they have enough to make an offer on any one particular debt, or they make small monthly payments to all of the creditors at once. The problem is, this doesn’t stop those creditors from negatively reporting to the credit bureaus. It also doesn’t necessarily stop the creditors from suing you in state court, obtaining a judgment, and garnishing your wages. Another problem is that if they do settle, it will show up as settled for less than full amount which hurts your score. On top of that, if you settle, you will likely get a 1099 from the company and likely will have to claim the forgiven amount as income on your taxes. That will either mean you will have a smaller refund or will owe.
How long does it stay on your report and what does that mean to you?
First of all, if you are in a tough financial spot and are having trouble paying your rent or making your house payment, this should not be a factor in your decision to file. That said, how long it stays on your report and how long the bankruptcy notation negatively affect you are two very different things. If you file a Chapter 7 bankruptcy, it is generally going to stay on your report for 10 years. If you file a Chapter 13 bankruptcy, that will stay on your report for 7 years after the case is discharged. Seven to ten years seems like a long time. It is a long time, but within that seven to ten year period you can still buy cars, houses, and get credit. The general rule is about two years after a chapter 7 you can get a home loan (sometimes only one year), almost immediately after the case you can get car loan and credit cards. Not too bad right? You should tread lightly here. Look at the offers you are receiving and only accept the best, it isn’t going to help you if you start applying for many cards at once, limit it to one or two at the most. When you can get credit is going to be dependent on your income, and on your credit score. I have seen clients with scores in the 500s prior to filing a Chapter 7 have scores in the 700s one year after the case discharged. On the other hand, I have seen other clients with low scores come back a few years later and they still had low scores. So what is going on there?
How to improve your score after bankruptcy.
If you do as you did and nothing else has changed, your credit score is probably not going to change much. The lowest that your score could possibly be is between 300 and 403 depending on the type of FICO score. The highest that it can be is about 850 but that too depends on the type of score. If you use no credit your score isn’t going anywhere. So what can you do? The first thing that I recommend is going to www.annualcreditreport.com and getting all three reports for free. This is something you are able to do once a year. Once you have these, you will want to review them, possibly with the help of your attorney to determine if the credit reporting agencies are properly reporting your debts as discharged in bankruptcy. If they aren’t accurate and they refuse to fix the errors, you may have remedies either through your old bankruptcy case, or a cause of action under the Fair Credit Reporting Act (FCRA). Once your report is in order, you can start rebuilding. A good idea is to start with a secured credit card or with a store brand card. With a secured card, the creditor generally has you put down $300.00 to $500.00 and that becomes your credit limit. There is very little risk to the card holder because they have the security of your deposit, but the benefit to you is that they will report to the credit bureaus. If you are in need of a car, a car loan with a reasonable payment is another great way to improve your credit score so long as you are able to and actually do make your payments on time. My secret credit score repair weapon is IBR. If you have federal student loans and you are low income or living paycheck to paycheck, you should at least look into this program. IBR stands for Income Based Repayment, you can apply for it at the following site. https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven. The great benefit of this plan is that many people who had filed bankruptcy may be eligible for $0.00 payments. If you are eligible and you sign up for, and are approved for a $0.00 or whatever payment, each month that passes where you make that payment (yes, even the zero dollar payment, if you are eligible) is a month that your lender reflects as an on time payment to the credit bureaus. The more on time payments you have, the better your credit score will become.
Best of Luck,
Steven Palmer, Esq.
Licensed in Ohio and Washington