Many people worry about filing for bankruptcy because of what it will do to their credit score. Both Chapter 7 and Chapter 13 bankruptcy remain on your credit report for about ten years. Naturally, creditors don’t love seeing bankruptcy on a credit report, but any actual damage depends largely on your credit score before you filed.
If your credit was already poor due to a high debt-to-asset ratio (meaning the amount of debt is high compared to available credit) and account delinquency, claiming bankruptcy will lower your score.
But since it is already low, there won’t be a drastic drop. However, if you have a good credit score when you claim bankruptcy, you will see a much bigger drop immediately after filing.
Milwaukee area bankruptcy lawyer Steven R. McDonald provides a free consultation and helps you decide if filing bankruptcy is right for you.
Immediately after filing a Chapter 7 bankruptcy you will likely lose the use of all your credit cards, and it may be nearly impossible for you to get a mortgage at that time. The banks and finance companies that do make loans to those who have recently filed a bankruptcy do so at much higher interest rates.
A potential creditor reviewing your credit report may see Chapter 13 bankruptcy more favorably than Chapter 7. In a Chapter 13 filing, you repay some of or all of your debts over time and therefore, you may be considered a better credit risk than a person who filed Chapter 7.
No matter which type of bankruptcy you file, the effect on your credit score is the same. The potential difference is the way a particular creditor may view each type of bankruptcy when deciding whether to lend you money in the future.
Bankruptcy is a very effective way to reduce or eliminate many debts. Bankruptcy will never create an immediate improvement in your credit score.
If you are deeply in debt, continuing to fall behind on payments, or your accounts are in collection, bankruptcy may help you recover more quickly compared to other kinds of debt management strategies. Bankruptcy discharges many types of debt resulting in a fresh start.
When debt is reduced and you are able to control your finances and begin making on-time loan and credit payments, you can start rebuilding your good credit.
Bankruptcy gives you a chance to break the recurring cycle of debt. Unfortunately, if you continue to default on loans, and make late payments this will result in late fees, more accumulated interest and an increase in your overall debt. If you remain trapped in this cycle, you won’t have the chance to improve your credit score.
The trade-off for bankruptcy is a lasting blemish on your credit report in return for immediate relief from most debt, and the opportunity to improve your financial situation through responsible actions.
In some cases, living with mounting debt, repossessions, harassment from collection agencies, and even lawsuits, can be more difficult and complicated to explain to a future creditor than bankruptcy.