A big concern that we regularly hear from clients and potential clients is the fear that by filing for bankruptcy relief, their credit will be ruined forever. While it is absolutely true that your credit score will take a hit when you file for bankruptcy relief, the long-term effect on your credit score could help you out dramatically. Furthermore, a lot of time the person considering to file bankruptcy already has a damaged credit score and isn’t doing anything to fix that. Filing for bankruptcy could be the solution for them.
What are the main Credit Score factors?
- Payment History – Your payment history is the largest factor that goes into your credit score. The payment history will show to a potential lender whether you have paid your prior accounts on time, how many accounts you have missed payments on, how many payments you’ve missed on a certain account, and how late your payments actually were.
- Amount of Debt – Another factor to consider is the amount of debt that you actually have. A lender considering to extend credit to you is eager to see how much debt you are currently in because that helps them understand the risk they would face by extending you that credit. Logic would show that the more debt you are currently in, the more of a risk it would be to provide you future credit. Moreover, credit utilization goes into this factor. A credit utilization is the amount of the available credit you have actually used. For example, a person that has 3 credit cards that each have a $10,000.00 max credit has a total amount of $30,000.00. If this same person has a balance of $8,000.00 on each of these three cards, they only have $6,000.00 of available credit remaining, which isn’t good. A good rule of thumb is to keep your credit utilization ratio below 40%.
- Age of Credit History – Another factor your credit score considers is how old your current accounts are.
- New Credit – Credit scores also consider whether you have new credit as well.
- Mix of Credit – Having a good mixture of credit is the final factor going into your score. This factor looks at whether you have only credit card accounts or if you actually have a good mixture, meaning you have credit cards, car loans, mortgage loans, etc.
What are my Bankruptcy options?
The two most common types of bankruptcy filings are Chapter 7 and Chapter 13 Bankruptcy. While both of these options provide significant relief to the person filing, they operate in different manners.
- Chapter 7 – Chapter 7 bankruptcy filings are the most common chapter of bankruptcy that is filed. A Chapter 7 bankruptcy is a section of the bankruptcy code where the person filing the case is allowing the Court to take and sell their non-exempt assets and use those funds to pay certain creditors. This chapter of Bankruptcy is designated for people that can’t afford to pay their ongoing obligations with their current income.
- Chapter 13 – A Chapter 13 bankruptcy filing is less common than that of a Chapter 7 but still very important. In this Chapter, the person filing is using his or her regular income to fund a payment plan that generally lasts three to five years in length. Upon the completion of this case, the debtor receives a discharge, just as they would have received in a Chapter 7. Common reasons to file a Chapter 13 rather than a Chapter 7 are to save a home from foreclosing, protecting assets that would be liquidated in a Chapter 7, to pay back tax obligations, if the person’s income is too high to qualify for a chapter 7, or to reduce the amount owed on a vehicle.
What should I do after Bankruptcy to help my credit?
- Pay your bills on time – Payment history is the biggest factor of your credit score. Prior to filing for bankruptcy relief, it’s quite common that people start missing their monthly payments. Each of those missed payments are being reported to the credit bureaus. Each time these missed payments are reported, your credit score decreases. For a lot of people, they have multiple accounts and each of these accounts were reporting missed payments. This was causing significant decreases in your credit score.
Post-bankruptcy, ensure that you pay each and every bill timely. This will do exactly the opposite as what happens when you miss a payment. When you timely make the payment, the lender will report those timely payments to the credit bureaus and this will in turn improve your score drastically. Payment history will account for 35% of your credit score.
- Review your credit report – It’s not a guarantee that creditors are accurately reporting information to the credit bureaus. If creditors are incorrectly reporting negative information to the credit bureaus, your score is unfortunately taking a hit. If there is incorrect information on your report, you need to file a dispute with the credit bureau and provide them proof of why it’s incorrect. If you never pull your credit reports, you will be unaware whether any inaccuracies are being reported.
- Obtain a secured credit card – A great way to start quickly improving your credit score after your bankruptcy is complete is by obtaining a secured credit card. A secured card is a card where you put a deposit down and then you receive a card with that specific amount as the max spending. For example, if you put down $500.00, you will receive a card that a max spending limit of $500.00.
Using this and paying monthly will drastically improve your score. Try to keep your utilization ratio below 40%. Pay the bill in full each month, on time.
- Avoid high interest loans – With the advent of the internet, getting a loan is now extremely simple. You can find tons of websites who will loan you money online by going through a quick application process. The problem is that the majority of people getting these loans have no idea what type of interest they are actually being charged. It’s quite common that these loans charge extremely high rates. A small $2,000.00 loan could cost you more than the principal by the time you end up paying it in full. Avoid these unless absolutely necessary.
- Start saving – When you look at the very core of it, the purpose of filing bankruptcy is so you are able to retain (i.e., save) more of money rather than pay it to the creditors. Now that you have filed for bankruptcy relief and received a discharge of your debt, you should have more disposable income at your disposal. Be smart with this money. By having more money on hand, you’ll be able to have more money for a down payment on future credit, which could lower the interest rate. By having more money on hand, you’ll have a higher likelihood of covering an emergency expense that comes up rather than applying for one of those high interest loans.
- Be cautious of “too good to be true” offers – A lot of times you will hear from a company that tells you that they can fix and repair your credit report very quickly. While some of these companies are definitely legitimate and can help, some just unfortunately can’t deliver on that promise. Read the fine print before entering into any such program. Read reviews.
How do you start?
The first step in repairing your credit is by seeking the proper legal advice and hearing from a professional what your options are and how those options would work in your situation. Here at Modesto Bankruptcy Attorneys, we strive in fully discussing all options with our clients and potential clients and providing them the legal ramifications of their decisions. To discuss further, please schedule a free consultation with our knowledgeable bankruptcy lawyers by clicking HERE or calling 209-314-3010.
