One of the most common reasons why people hesitate to consider bankruptcy as a solution to their financial problems is that they are concerned about how filing bankruptcy will affect their credit rating. While this is a legitimate concern, for most people who are struggling financially the benefits of bankruptcy far outweigh any impact it has on their credit rating.
If you are like most debtors who are considering bankruptcy, odds are that your credit rating has already suffered as a result of your financial difficulties. Although some debtors manage to keep their credit rating from dropping up to the point they file bankruptcy, they are typically only paying the bare minimum on their monthly bills and are unable to pay any more. Even if you have managed to keep your credit rating from dipping up to this point, chances are that you have had to do some creative juggling of debts and finances to accomplish this if you are facing a financial crisis that warrants consideration of bankruptcy. Therefore, most debtors start from a tenuous credit rating at best when they file for bankruptcy.
I did a recent poll of my clients to determine the effect of their bankruptcy filing on their credit rating. Almost universally, the clients showed a low credit rating when they became our clients. However, within six months of their Chapter 7 discharge, their credit rating was higher than the day they first walked into the firm’s office.
Why is this?
- Clients all take a great Debtor Educator course during their bankruptcy cases that help them realize the importance of paying bills early, but at least on time. They also learn other valuable tips regarding their finances which enable them to recover from their financial issues.
- Most Chapter 7 clients purchase a vehicle, with Erin’s assistance, after their case is filed. Purchasing the vehicle and paying the monthly vehicle payments early, or at least on time, will most certainly improve their credit rating.
- Most of Erin’s clients have an overwhelming number of debts when their case is filed. Erin eliminates those debts and lets them start anew. They then only have a few creditors and it is easier to pay those few creditors early, and most importantly on time.
If you file a chapter 7 bankruptcy case, your credit rating will likely begin to improve about four months after the bankruptcy is discharged. One reason is that your credit score improves when you have a significantly better debt to income ratio as a result of discharging your debts through bankruptcy. If you were behind on your home mortgage when your case was filed and want to keep your home, Erin will work with you to apply for a home loan modification during your Chapter 7 bankruptcy case. Your mortgage company will then no longer be able to report your mortgage as delinquent after your case is filed.
If you file a chapter 13 bankruptcy case, your credit score will simply not improve during your bankruptcy case. You will be in an active bankruptcy case for three to five years and legally prohibited from obtaining credit or purchasing any major assets during that entire three to five-year period. Therefore, Erin rarely advises her clients to file a Chapter 13 bankruptcy case.
Most of our clients see an overall positive impact on their credit rating as a result of filing bankruptcy. Please contact Erin to learn more about how filing a bankruptcy case can improve your credit score.