People often focus on the harm to their credit score as the reason to not file a bankruptcy. In a sense they are worried about their ability to get credit again after bankruptcy. The concept of credit in our society is flexible. Credit availability changes based on our circumstances and also based on the economy as a whole. A few years before the housing crisis and financial collapse in 2008 credit was easy to obtain, perhaps too easy. For a few years afterwards it was very difficult to obtain credit even for people with good credit scores. Ability to obtain credit depends on various factors, some of which are out of your control.
Credit is only one part of the picture when we look at financial health. Anytime you are filing bankruptcy you are looking at a tradeoff between damage to your credit score/credit report and improving your overall financial health. There is no doubt that the bankruptcy will lower your credit score. How much the bankruptcy hurts your credit score at the time of filing is largely dependent on how bad your credit already is when you file. We have clients who are completely current on all their debt at the time of filing and those who have been behind on payments for years. Obviously, for someone who already has bad credit the damage from the bankruptcy is negligible.
Becoming debt free is in and of itself a kind of financial recovery. If the majority of the debts – credit cards, medical bills, past due utilities, deficiencies on repossessions, personal loans, and payday loans – are dischargeable in bankruptcy then you would see an immediate improvement in your budget and cash flow. Student loans will usually “survive” bankruptcy, your secured debts such as car loans or mortgages still have to be paid. However, the vast majority of the debt is probably gone and you should have enough cash flow to meet your basic needs and hopefully set some aside.
Bankruptcy is an opportunity to have a fresh start where you will not need to use credit to make purchases. If you had garnishments, collection law suits, non-stop collection calls and letters – all of those stressors are now in the past. Your finances should be a lot less overwhelming in general.
Part of the process of filing a bankruptcy is not only to sit down with your attorney and look at the current bills and expenses you have but to plan for the future. You will have a budget that will let you know how your finances will look going forward. That is the immediate future. What about your ability to purchase a house or a new vehicle at some point. Would you be able to do any of those things or are you forever barred from obtaining quality credit?
The fact that you file bankruptcy will stay on your credit report for seven years if you filed Chapter 13 and ten years if you filed Chapter 7. However, that does not mean that you do not have access to credit. In fact, the majority of people filing a Chapter 7 bankruptcy will start getting credit offers within months of filing bankruptcy. Those credit offers will most likely be costly at first but, as more time passes from the actual date of filing of the bankruptcy and as more negative items fall off the credit report, the interest rates on new credit offers will be lower.
The Chapter 13 bankruptcy process puts you in a very unique position to adjust to living without the use of credit on day to day basis. You are in a Chapter 13 for at least three years and no more than five, but during those years you are not allowed to incur any additional credit debt without the approval of the Court. Generally speaking the only debt you will be allowed to incur will be medical debt (since you cannot control that), reasonable car loans (you need permission from the court) and in rare cases mortgage debt (very difficult to do because most banks will not offer a mortgage loan to a person in bankruptcy and you also need permission from the court).
After seven or ten years, depending on which chapter you filed, the fact that you filed bankruptcy should be deleted off your credit report. There are a few things that you will need to do on your own to make sure your credit is as positive as possible:
1. Make sure your credit report does not have errors in it; dispute any information that is not accurate. Request all three credit bureau reports and dispute any inaccurate information. 2. Monitor your credit report. There are websites like www.creditkarma.com that will allow you to monitor your credit report/credit scores for free.
3. Use your new credit wisely. If you must use credit cards, pay off the balances in full or at least make more than minimum payments. Think twice before making any purchases on credit and try to buy everything with cash or debit cards.
Your credit score and your ability to get low interest loans after bankruptcy will depend on how successful you are in rebuilding credit after the bankruptcy will provide you a fresh start – using credit wisely, not carrying balances on credit cards and paying bills on time. If you have gotten this far and you think you need to get more information than contact us at no cost.