Bankruptcy and Your Credit Score

People often worry about how a bankruptcy affects credit. They worry that if they file for bankruptcy, they won't be able to get credit or it will be very costly to do so. What they may not understand is, if their finances are unmanageable, their credit score may already be suffering.

The majority of those who file for bankruptcy make that choice because of financial problems that have left them overwhelmed. Often a job loss or other loss of income, a medical expense from an accident or illness, a divorce or a combination of these difficulties provides the catalyst.

If you have lost a job or encountered other significant financial trouble and have missed mortgage or credit card payments, your credit report has already been affected. A bankruptcy will also affect it, but it can also stop the cycle of too many bills and not enough income. This can allow you to "start fresh" and begin to rebuild your financial affairs.

The Bad News

A bankruptcy will remain on your credit report for up to seven years after a completed Chapter 13 and up to 10 years for a Chapter 7 bankruptcy.

The Good News

If you successfully complete a Chapter 13, you will already have made start at fixing your credit score. Your Chapter 13 plan should serve as a model of how to build a budget. Living within your means is important, as credit cards make it easy to get into financial trouble.

Credit will initially be expensive. That is good, for the moment, as it will help control your ability to spend. The first "credit" you should get, is a secured credit card. This is essentially a debit card, where you pay the card company before you use it. Then you can only "charge" up to your deposit.

This improves your credit score by allowing you to demonstrate your ability to pay regular bills on time. After a bankruptcy, this is perhaps the most important means of improving your credit score.

Paying Your Bills on Time

The ability to maintain regular payments on all of your bills will show credit providers that you are beyond your financial crises, and worthy of lower rates. It often surprises people how quickly they begin to receive solicitation for credit again.

You may be able to file a bankruptcy, obtain a fresh start, and regain your financial footing more quickly than if you had tried to struggle for years attempting to juggle one credit card against another, trying to fend off the onslaught of bills. If you are considering bankruptcy and have questions regarding your credit score, please contact an experienced bankruptcy attorney who can properly advise you.