Filing for bankruptcy should always come as a last resort. While most people file after a significant financial setback caused by unfortunate events like health problems or sudden unemployment, declaring bankruptcy can drop a good credit score by at least 200 points.
According to FICO (Fair Isaac Corporation), a pioneer in developing a system for calculating credit scores depending on information forwarded by credit reporting agencies, bankruptcy is always an adverse event. It will affect your credit score once it appears on your credit report. Opting to file for bankruptcy is a big decision you must not take without first seeking the counsel of an experienced bankruptcy attorney.
Credit Score/Credit Rating Defined
A credit score is what lenders use to gauge your level of responsibility with credit and debt. It is a numerical representation of your financial health where a higher score implies a higher responsibility and ability to repay debts you borrow. On the other hand, a low credit score suggests you struggle to manage your income and debts.
Credit scores are generated from information gathered by credit reporting agencies like TransUnion, Equifax, and Experian. These companies collect information like your identification details, credit cards, loans, and lines of credit. Most importantly, they gather data from public records like bankruptcy filings and property liens.
Different credit reporting agencies use varying methods to measure your credit rating. For instance, TransUnion uses a scale of 300 to 900, where a 650 credit score implies that your rating is neither good nor poor.
Understanding How Personal Bankruptcy Affects Your Credit Rating
Bankruptcy affects a high credit score more severely than a low credit rating. This is because the score cannot go lower than 300 points. For instance, if you had an excellent score of 800 to 850, filing for bankruptcy can drop your points by 200. On the other hand, someone with a fair score between 580 and 669 could possibly only lose 130 to 150 points.
A drop in your credit rating means that lenders, landlords, insurers, and utility companies will be less likely to extend you credit. Fortunately, bankruptcy gives you a fresh start, and most people rebuild their credit in about two years.
Once you are declared bankruptcy, it is possible that you face some level of difficulty with the following on a short-term basis:
Obtaining a car loan
Renting an apartment or buying a home
Obtaining loans without one or more qualified co-signers
Receiving high limits on unsecured credit cards
Enjoying fair interest rates on any available financing options
Here are the effects to expect, depending on the type of bankruptcy you file:
Chapter 7 Bankruptcy
Chapter 7 is also referred to as straight or liquidation bankruptcy. It provides debt relief by allowing you to discharge unsecured debts like medical bills, credit card debt, and unsecured personal loans. Furthermore, this process allows you to get a fresh start in a quick period of time, possibly only 3 or 4 months.
If your financial position makes it impossible to catch up with your bills, Chapter 7 is likely the best resort. You can reset your finances by liquidating your assets and using the proceeds to cancel out any monthly payments.
Chapter 7 bankruptcy will negatively impact your creditworthiness and remain on your credit report for about ten years. Any debts you failed to honor and were declared delinquent before filing will stay on your report for seven years.
However, this is not the end of the analysis. While a bankruptcy can remain on your credit report for several years, you can start rebuilding that credit immediately. It is very common for people to be able to qualify for a car loan just days after the Chapter 7 is complete. For a house, the mortgage industry only requires (generally speaking) a 2-year waiting period to qualify for a loan to purchase a home. Thus, even though the bankruptcy can remain on your record for a long period of time, you will have the ability to make these purchases much quicker.
Chapter 13 Bankruptcy
Chapter 13, sometimes referred to as the Wage Earner’s Bankruptcy, is the closest thing to a soft landing that most people drowning in debt can enjoy. It involves getting into a program that reorganizes your debts and allows you to settle most of your debt. Unlike Chapter 7 bankruptcy, which can be resolved in 3 to 4 months, it takes 3 to 5 years to resolve Chapter 13 bankruptcy.
Moreover, Chapter 13 bankruptcy remains on your credit report for a shorter while. It will only be visible to lending institutions for up to 7 years.
Understanding How Business Bankruptcy Affects Your Credit Rating
Your company formation will play a critical role in dictating whether business bankruptcy will affect your personal credit rating. Corporations and Limited Liability Companies (LLCs) protect company owners from being responsible for business debt. However, your credit score can be on the line if you sign a personal guarantee for business debt.
If your business entity type makes you responsible for your business debt, creditors will report the delinquent dues on your credit report. Here are the various types of business structures and how they can affect your credit rating:
Corporations, LLCs, and Limited Partnerships
Limited liability companies, limited partnerships, and corporations protect company owners or members from business liability. The process will not impact your credit rating if an entity files for bankruptcy. While there are exceptions, business owners will typically maintain their credit score because they are not legally responsible for business debts.
One of the exceptions is if you signed a personal guarantee before a lender extended credit to the business. Your signature legally ties you to the debt and makes you responsible for ensuring it is settled. If you do not pay the debt and the business files for bankruptcy, the lender can report the unpaid obligation to the credit bureau under your name. This can have a negative impact on your credit rating.
Also, you could be liable to some forms of business taxes irrespective of the business entity type. For instance, members or company owners remain responsible for trust fund taxes even if the business files for bankruptcy. These are taxes collected from sales or the salaries of your employees. If the business collects the taxes but fails to forward them to the government, members become personally liable for the debt, which can affect their credit rating.
Sole proprietorships are a business structure where the business and its owner(s) are legally the same. A business owner is therefore liable for business debts. If your company is a sole proprietorship, your assets, personal finances, and credit rating will be on the line when you file for bankruptcy. The impact on your credit score will highly depend on whether you file for Chapter 7 or Chapter 13.
In general partnerships, like in sole proprietorships, all partners are liable for debts incurred by the business. A creditor can report any unpaid dues to credit bureaus under your name. If you file for business bankruptcy and proceeds from liquidation cannot cover the owed monies, each partner will remain liable for the unpaid debts.
Expected Duration for Your Credit Score to Improve After Bankruptcy
If you diligently work towards improving your credit score, you can improve your rating dramatically within 12 to 18 months. The first sight of improvement will typically occur immediately and with the proper strategy, will continue to increase month-over-month.
Unfortunately, you do not have much say over the amount of time bankruptcy will remain on your credit score. However, you can accelerate the pace at which your credit rating recovers.
Some of the simple steps you can take to rebuild your creditworthiness include:
Pay your bills on time — Once you receive bankruptcy relief, it is crucial to remain ahead of any debt obligations. For instance, pay your mortgage before the due date or ensure you do not fall behind the payment deadline.
Use secured credit cards — Secured credit cards offer one of the easiest ways to restore your credit worthiness. You need to deposit money equivalent to the card’s credit limit.
Charge up to 30% of your available credit – Charging too much is consider a high-risk factor. 30% usage is the optimal usage.
Keep an eye on your credit score — Once you start taking steps to rebuild your credit, it is crucial to monitor the improvements each month. Use credit responsibly and stay on top of your bills to revive your credit rating. You can consider obtaining an unsecured credit card to spruce up your score with time further.
Do not forget to settle debts not discharged by bankruptcy — Debts that cannot be discharged through bankruptcy include most unpaid taxes, student loans, victim restitution, child support, etc. It is crucial to gradually keep paying these debts on time to improve your credit rating.
Consider credit-builder loans — Obtaining a loan from traditional banks can be challenging after bankruptcy. However, some lenders, credit unions, and community banks provide loans for individuals with bad credit. Even though the interest rates can be higher, you can rebuild your creditworthiness by paying the debt on time.
Create a budget — Showing a change in managing your finances can also help rebuild your credit score. The idea is to show more disciplined trends through a predetermined spending strategy. Sticking to a reasonable budget will also minimize the risk of falling back into debt, especially when using unsecured credit cards.
It will take a while to regain the trust of lenders like banks and credit unions. However, a consistent repayment history of current and preexisting debts will prove that you are a worthy debtor. Eventually, sticking to a strategy that shows enhanced financial discipline will play a key role in rebuilding your credit score after bankruptcy.
Is There a Way To Legally Remove Bankruptcy From Your Credit Report?
If your credit report indicates inaccurate bankruptcy information, you must speak to a credit repair attorney immediately. The expert will seek an audience with credit reporting agencies, lenders, and credit card companies to ensure proper discharging of debts erased through bankruptcy and an accurate and up-to-date record on your credit report.
Whether you can remove bankruptcy from your credit record depends on your situation. If the record is inaccurate, untrue, or misreported, your bankruptcy lawyer can help ensure immediate correction of any highlighted blunders.
The following mistakes can force the court to remove a bankruptcy report from public records:
Incorrect personal information like name, contact details, and address
Untrue dates indicating when you filed for bankruptcy
Inaccurate information on your credit report
Discharged debts still appearing on your report
Information on your account that has stayed for 7, 10 years, or longer
Incorrect information from creditors when reporting bankruptcy or pending debts
Business bankruptcy showing on your report when you were a legally liable party
Unfortunately, the following situations do not qualify for legally removing a bankruptcy from your credit report:
You have paid your debts
You have rebuilt your credit score
You don’t want bankruptcy on your credit report
If your bankruptcy information is accurate, the Fair Credit Reporting Act (FCRA) stipulates the maximum timelines that a report can remain on your record. Bankruptcy will remain on your record for 7 to 10 years, depending on whether you filed for Chapter 7 or Chapter 13. After this, the record will automatically be removed from your credit report, and future creditors will not be able to see it.
You must not underestimate the need to check your credit report after bankruptcy. Your attorney can help you ensure that all information is accurate and you have a good chance of rebuilding your score quickly by following the steps mentioned earlier.
Find a Bankruptcy Attorney Near Me
Filing for bankruptcy can give you a much-needed fresh start if you are sinking into debt. It will legally stop creditors from harassing you and allow you to focus on rebuilding your financial health. However, filing is a serious step reflected by the number of years bankruptcy remains on your credit record. If you are considering a way out of debt, we encourage you to first consult with the Sacramento Bankruptcy Lawyer. We have a skilled team that will explain the bankruptcy process to you. Most importantly, we will assess your situation and educate you about other viable alternatives like consumer proposals or debt consolidation. Call us today at 916-800-7690 for a free and confidential consultation.