As bankruptcy attorneys, we receive a few common questions about the effects a bankruptcy filing will have on a person's credit and credit score, as well as "life after bankruptcy." Bankruptcy is obviously not a "gold star" on your credit report, so these common questions are very relevant, and worth addressing. Let's start with the most common question we receive from virtually every client and prospective client we speak with:
How does filing for bankruptcy affect my credit and credit score? A bankruptcy will appear on your credit report for up to 10 years (usually somewhere between 7-10 years). If you happen to have a high credit score at the time of filing a Chapter 7 bankruptcy or Chapter 13 bankruptcy (an 850 score is a perfect score), your score will come down significantly. However, this is the less common scenario. The more common scenario is that, by the time a person contacts a bankruptcy attorney, that person has gone through months, if not years, of trying to stay afloat and avoid having to file for bankruptcy. This scenario usually involves many missed and late payments. These late and missed payments have a continuous negative impact on your credit report, so by the time this person visits a bankruptcy attorney, his/her credit score is already in the 400s or 500s. In this scenario a bankruptcy filing will have much less impact on the actual credit score than for the person whose score was perfect.
Will I ever be able to get a loan after bankruptcy? Absolutely! There appears to be a common misunderstanding that, because a bankruptcy can stay on your credit report for up to 10 years, you are banned from getting extensions of credit (home loans, car loans, credit cards, etc.) for this same period of time. This is simply not true. Keep in mind that a credit report is simply a tool used by potential lenders to evaluate the risk of lending money to you, and they rely heavily on your credit score. It is our opinion that you are, in fact, a better credit risk after filing a bankruptcy than before, for two main reasons:
- After a bankruptcy, you don't owe anyone any money (excepting those debts that cannot be discharged through a Chapter 7 bankruptcy or Chapter 13 bankruptcy, or that you choose to keep like a car loan or home loan). In any event, you likely owe much less than you did before the bankruptcy. This means that, for the person considering lending you money, he or she knows that he or she is one of the first people (if not the only person) in line to get paid, and therefore a much greater likelihood of actually getting paid;
- After filing a bankruptcy and receiving a discharge, there is a waiting period before you can be eligible to do another bankruptcy. For instance, if you file a Chapter 7 bankruptcy today, you will not be eligible to do another Chapter 7 for eight (8) years, and you will not be eligible to do a Chapter 13 for four (4) years. This means that, for the person considering lending you money, he/she knows that you will not be able to bankrupt the debt that you owe him/her for many years.
In fact, it is not unusual to receive offers for new credit cards within one or two months after receiving your discharge. The credit card companies want you back in debt (largely because of the reasons stated above), and you definitely need to be cautious about getting back into debt. Additionally, while every lender has its own policies of when they will lend money to a person who has filed a bankruptcy, with proper steps taken to rebuild your credit (see below), you could be eligible for a home loan or car loan within one or two years after discharge.
Rebuilding Your Credit / Is There Life After Bankruptcy? Again, a bsolutely! There is life after bankruptcy, and steps should be taken to help rebuild your credit score., and get ready for life after bankruptcy. There are two main types of loans that weigh heavily in the credit rebuilding process: 1). Installment (i.e. car loans, home loans (mortgages), student loans, etc.); and 2). Revolving (credit cards, home equity lines of credit). So here are a few common steps that can be taken to aid in the credit score rebuilding process:
- Clean up your credit report. Unfortunately, the credit report agencies are not perfect. Even after a bankruptcy, it is not uncommon to see debts, that were included in your bankruptcy, continue to show as "due and owing." Contact the credit bureaus. Correct these errors.
- If you already have student loans or a home equity line of credit, make the payments, and make them on time.
- Get a pre-paid credit card that regularly reports to the credit bureaus. The kind where you load it with money ahead of time. This way you can't spend more than is already on there (i.e. more than you can afford), and the card's reporting to the credit bureaus will be positive. Remember...you just got out of debt and you want to be very careful about getting back into debt. Especially with credit cards!
- Get a gas station credit card. Use it for smaller purchases; a gallon of milk, some candy bars, even your gas. But be sure to pay it off in-full and on time! Again, be careful of purchasing more than you can afford. Which is precisely why this is a recommended course of action; in reality, how much can you really buy at a gas station.