Filing for bankruptcy is a decision that needs to be well researched and understood in terms of the ramifications it may have. While there are many dire warnings about what it can do to your credit rating, the upside is you are mostly free of debts and can rebuild your credit rating into something even better than it used to be. Be assured that your credit is not ruined forever.
According to various sources, declaring bankruptcy can drive your credit score down over 200 points and may remain on your record for 7 to 10 years and permanently tarnish your credit. There is so much information about how filing bankruptcy may affect your credit rating that it is difficult to know what to believe or what to do.
There are several misconceptions about how declaring bankruptcy affects your rating. At Melaragno, Placidi & Parini, we would like to discuss a few of them to help you understand the bigger bankruptcy picture.
The main thing to remember is that each bankruptcy case is different and unique and what may apply in someone else's Chapter 7 or Chapter 13 bankruptcy may "not" apply to you or even work for you. That's why we discuss your circumstances in great detail to get a sense of how we can help you navigate the bankruptcy process and determine which Chapter may be the right one for you.
This is one misconception that we have heard quite a bit, and it is that bankruptcy information stays on your credit report for 10-years, and there are no exceptions. The truth is that only the public record of a Chapter 7 bankruptcy remains on the record for 10-years.
Any other references to bankruptcy remain for 7-years and may include references to Chapter 13 public records, third-party collection judgments/debts, tax liens or a comment used often in credit rating reports "account included in bankruptcy."
Many people think that a low credit rating stays with them as long as there is bankruptcy information on file. While a lower credit rating is indeed the result of declaring bankruptcy, you have a chance to work on your history and rebuild it in four or five years, thus raising your credit rating.
You can do several things to make that happen, such as make all payments on time, whether on old or new debt, add a new secured credit card to offset the negative in your report, and keep your credit card balance under 30 percent utilization.
We have also heard from bankruptcy clients that if you do not have negative information on your credit report before declaring bankruptcy, you have a higher bankruptcy credit score after discharge. The truth is that not having negative information does not downplay the impact of declaring bankruptcy on your credit score. What affects your score the most is the fact you declared bankruptcy and how long that stays on your record.
Many of our clients also want to know if it is true that all debts are wiped clean from their credit reports. Bankruptcy erases past debts, but the bankruptcy record remains on your report for 7 to 10 years. Concerning this, student loans cannot typically be wiped clean. However, there is an exception if the student qualifies.
We have also been asked if a debtor can get a loan or credit card after declaring bankruptcy. It is a common myth that debtors cannot get further credit during or after their bankruptcy is discharged. This is not true. Debtors can get secured credit cards with a security deposit and loans secured with a deposit or collateral.