What effect does filing for bankruptcy have on your credit score?
Contrary to popular belief and what the big banks and credit card companies tell you, filing for bankruptcy improves credit. The reason is simple, when we eliminate debt, we are essentially eliminating all debt and when debt disappears, the credit score goes up. Now, the actual filing of the bankruptcy case itself may cost a few credit score points, but it is usually offset by eliminating debt.
Like most people today, you’ve done a lot of research on the Internet, but you’re still not entirely sure how a bankruptcy case affects your credit. I guess the answers you find depend on who is speaking. Creditors and banks will tell you that filing for bankruptcy is the worst for your credit and will convince you to do everything you can to avoid it, but why do they tell you that?
Consider the fact that those same banks were “too big to fail” during the Great Recession of 2008. It was also the big banks that made their lobbyists fight for changes to the Bankruptcy Code in 2005 as well. Some of those big credit card banks want to know “What’s in your wallet?” Because they want you to carry your credit cards there.
These big banks want you to fear bankruptcy like the plague because they can charge you interest for as long as you have a balance on your credit card. If you file for bankruptcy, they would lose and you would win. Now, if you are like many of my clients, you probably feel a moral obligation to pay your debts and I can certainly appreciate that. However, the United States Constitution, the Bible, and the Bankruptcy Code provide for the discharge of debts.
Note that the bankruptcy case will remain on your credit report for 10 years if you filed under Chapter 7, and seven years if you filed under Chapter 13 of the Bankruptcy Code. Also, you can get credit easily after bankruptcy, but I am biased by credit and debt after bankruptcy because I see cycles and patterns in debtors having trouble managing debt after bankruptcy when their budgets don’t have room to it. I know of at least two non-standard credit card issuers, Merrick Bank and Orchard Bank will issue credit cards to people immediately after filing for bankruptcy.
Remember that no one gets rich on credit cards and your credit score only tells others how well you manage your debt. If you are out of bankruptcy, improving your credit requires a few things. Do not keep more than 4 accounts open at any one time. It can be any combination of mortgages, student loans, and credit cards. Do not load more than half of the available credit line and cancel the card every month. After about five years after your bankruptcy case, you should be able to get standard bank credit cards again. I hope this information is helpful to you and I wish you much financial success.