One of the top concerns of many of our clients is how filing bankruptcy will affect their credit rating. This is a valid concern because credit scores are no longer used only for obtaining credit. Insurance companies, telecommunications companies, and employers are now checking credit histories and using credit scores to make decisions about more than simply issuing credit. So, how does filing bankruptcy affect your credit score?
Ironically, while bankruptcy is a negative mark on your credit report, your actual credit score typically increases post discharge. Why? You have less debt after discharge than before you filed the bankruptcy to begin with! In many cases, individuals who file bankruptcy have been struggling with financial problems for some time. As they try to handle their debt problems, they often fall behind on monthly payments; therefore, their credit score has already been damaged due to late payments, over the limit notations, and collection accounts. In many cases, filing bankruptcy can actually help improve your credit score by “cleaning up” many of these negative elements that lower credit scores.
Most individuals who file bankruptcy see an improvement in their credit score immediately after obtaining a bankruptcy discharge. The level of improvement, just as the level of the decrease, in your credit score will depend on several factors and your unique financial situation. Time is one of the biggest factors in repairing your credit score after bankruptcy; however, there are steps you can take to help repair your credit score after bankruptcy other than simply allowing time to improve your score.
Steps to Repair Your Credit Score After Bankruptcy
Step One: Thirty days after receiving your bankruptcy discharge, you should order copies of all three of your credit reports. If you have not requested copies of your credit reports from the three major credit reporting agencies, you can obtain free copies of your credit reports by following the directions on the Federal Trade Commission’s website.
Compare each of the reports to determine what is being reported on regarding debts that were discharged in your bankruptcy. If you discover incorrect information, send dispute forms to each credit reporting agency detailing the incorrect information asking them to remove the incorrect information from the report. Credit reporting agencies have 30 days to do so. Your request to remove the negative information is because the creditor was included in your bankruptcy and the debt has been eliminated. Include a copy of your bankruptcy discharge with your request. If there are other mistakes in your credit report, provide the correct details and request that the company remove and/or correct that information too.
You can find more information about disputing credit report mistakes from the Federal Trade Commission.
Step Two: Pay your utilities on time. Some utility companies report information to the credit reporting agencies. Paying these bills on time can help repair you credit report after bankruptcy by improving your payment history.
Step Three: Obtain small lines of credit (i.e. credit cards or bank lines of credit) when you are certain you can afford to make the payments on these accounts on time each month. Use these lines of credit cautiously and pay the accounts in full each month or pay them off early.
Step Four: Request copies of your credit reports every 12 months to monitor for incorrect information or fraudulent activity. Report any incorrect information to the credit reporting agency immediately. It is important that you review copies of your credit reports annually because one small mistake on your credit report can have a significant effect on your credit score.
Step Five: Remove judgments that have been entered against you and that are listed on the public record. If a credit card company has sued you, obtained a judgment against you, a bankruptcy discharge “voids” this judgment (ie the credit card company cannot collect on it. However, the judgment does disappear from the public record. There is a separate process to remove the judgment under Minnesota law. At Kain & Scott, we can help you with that process- just give us a call!
Putting off filing for bankruptcy will only hurt your credit score more if you are not making your monthly debt payments on time and your creditors are turning over accounts to collections. If you are unable to pay your debts, you need a fresh start in order to begin rebuilding your financial well-being. Filing bankruptcy is the first step on the road to recovering from a financial crisis.
