One of the biggest concerns people often have when considering whether to file for bankruptcy, is the effect it will have on their credit score. The main effect bankruptcy initially has on your credit score immediately upon filing for bankruptcy, depends in large part on how high your credit score was prior to filing.
If your credit score was high, then your score will take a greater fall, right after filing for bankruptcy. Thus, the initial damage will be greater if your credit score was high, because the drop will be more. However, if your credit score was already low to begin with, then filing for bankruptcy will only hurt your credit score modestly. Many people who are considering filing for bankruptcy do not have high credit scores, due to high debt, few assets, and/or have many past due payments on multiple accounts.
Regardless of whether you have a high or low credit score prior to filing for bankruptcy, bankruptcy itself will carve a pathway to positive effects on your credit score in the future. While it will not instantly cure your credit score, it will ultimately lead you to a higher score. This would take a much longer time, if you were to pay your debt directly with monthly payments, or enroll in a debt consolidation program. The initial drop in your credit score does minor damage on your credit profile as a whole because it would go against the philosophy of bankruptcy. Bankruptcy was created as a tool to help people who are struggling and are facing challenging financial circumstances. It was designed to make peoples’ lives easier and relieve the financial burden off their shoulders, by putting them in a better financial situation than they were in previously. Bankruptcy allows a person to get a fresh financial start and apply better financial decisions on a clean slate. Because bankruptcy wipes out your debt or lowers it significantly, your credit score will increase at a much faster rate. One of the best ways to do this is by enrolling in a new credit card and paying it off every month.
Does a Chapter 13 bankruptcy have less of an initial negative impact on your credit score than a Chapter 7? Both Chapter 13 and Chapter 7 bankruptcies have generally the same effect on your credit score; however, they appear on your credit report for different periods of time. A Chapter 7 bankruptcy will appear on your credit report for 10 years, while a Chapter 13 bankruptcy will appear on your credit report for 7 years. Even though the bankruptcy appears on your credit report for that length of time, it does not mean it will take that long to repair your credit. Credit rebuilding actually begins right after you receive your bankruptcy discharge, which for a Chapter 7, is 3-4 months after your case is filed.
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If you would like to learn more about how your credit profile is impacted by a Chapter 13 or a Chapter 7 bankruptcy, you should consult with an experienced attorney. See us at LifeBackLaw.com!
