How Does Filing for Bankruptcy Affect Your Credit Score?

If you have fallen behind on your mortgage payments and other debts, filing for bankruptcy may help you keep your head above water and provide some relief from your mounting debt obligations. While declaring bankruptcy is a last resort for most people, doing so can help you manage your debt, prevent foreclosure, and stop other aggressive collection efforts. However, it is important to understand the impact that filing for bankruptcy can have on your credit score.

Filing for bankruptcy can be a complicated process, so it is highly recommended that you contact an experienced bankruptcy lawyer who will thoroughly explain the bankruptcy process, including the different types of bankruptcy, the effect it will have on your credit, and the steps you can take to rebuild your credit after bankruptcy.

What Are the Different Types of Bankruptcy?

Two types of bankruptcy are most commonly used by consumers, including the following:

• Chapter 7 bankruptcy: Also known as liquidation bankruptcy, this involves selling some of your assets to pay off a portion of your debts. You do not have the option of excluding any debts or keeping certain creditors out of the filing. Chapter 7 is typically removed from your credit report after ten years.
• Chapter 13 bankruptcy: This type of bankruptcy reorganizes your debts by creating a monthly repayment plan. The program generally lasts three to five years, provided you receive approval from the bankruptcy court. If you complete the repayment program, you may be able to keep your property. Chapter 13 is removed from your credit score seven years after the bankruptcy is complete.

How Will Bankruptcy Affect My Credit Score?

Depending on your situation, filing for bankruptcy may be the best option to manage your debt and ultimately improve your credit score over the long term. However, you will likely drop to a poor credit score after filing for bankruptcy, even if you had excellent credit prior to filing for bankruptcy. In fact, the higher your credit score before filing, the more it will affect your rating. For example, if you had a credit score of 850-800, your credit rating could drop 200 points. If you filed for Chapter 7 bankruptcy, this will remain on your credit report for 10 years from the date you filed. If you filed for Chapter 13 bankruptcy, this will affect your credit score for seven years from the filing date.

How Is My Credit Score Calculated?

Your credit score is calculated based on several categories, each making up a percentage of your overall score. The categories include the following:

• Payment history: This category examines whether you have paid your bills on time. It makes up 35 percent of your credit score.
• Amount owed: This looks at your total debt and how much your debt is relative to your available credit. This category represents 30 percent of your credit score.
• Length of debt history: This looks at how long you have had credit accounts, including the age of your oldest and most recent accounts and the average age of your accounts. This represents 15 percent of your credit score.
• New credit: This category looks at your new or recently opened credit accounts. It represents 10 percent of your credit report.
• Credit mix: This looks at the types of accounts you have, including mortgages, credit cards, store cards, and student loans. This represents 10 percent of your credit score.

In addition to the above categories, there are additional factors that will be considered when calculating a credit score, including:

• Your age
• Your salary and occupation
• Your job, employer, and employment history
• Where you live
• The interest rates charged on your loans and accounts
• Child and spousal support obligations

How Do I Rebuild My Credit After Bankruptcy?

Rebuilding your credit after bankruptcy does not happen overnight. However, if you are diligent and committed to the process of repaying your debts, you can start to improve your credit score by taking the following proactive steps:

• Monitor your credit. Check your credit regularly to monitor your progress and address any issues that could further damage your credit score.
• Open a secured credit card. This is similar to a traditional credit card. However, it requires an upfront security deposit to get approved. Before opening a secured credit card, consider the reward rates, annual fees, and credit check requirements associated with different cards.
• Apply for a credit-builder loan. This is a type of installment loan that disperses the loan proceeds after you complete repayment rather than upfront. Loan amounts generally range from $300 to $1,000, and you have six to 24 months to pay it off.
• Consider using a credit repair company. A reputable credit repair company will negotiate with creditors on your behalf and provide the support you need to rebuild your credit. Make sure that you do your research so that you do not put yourself at risk for credit card scams.
• Make your payments on time. Certain debts are eligible for discharge through bankruptcy, including student loans, child support, alimony, and certain fines and taxes. Make sure that you continue making these payments throughout the bankruptcy process.
• Stick to a budget. This is an extremely important step in rebuilding credit and getting your finances back on track.
• Contact an experienced bankruptcy lawyer. A dedicated bankruptcy lawyer will thoroughly explain the bankruptcy process, address any questions or concerns you may have, and recommend strategies to improve your credit.

The Somerville Bankruptcy Lawyers at Lyons & Associates, P.C. Help Clients Navigate the Bankruptcy Process

If you have had to declare bankruptcy and you have concerns about the impact it will have on your credit, do not hesitate to contact the Somerville bankruptcy lawyers at Lyons & Associates, P.C. We will assist you with every step of the bankruptcy process. To schedule a free, confidential consultation, call us today at 908-575-9777 or contact us online. Our offices are located in Somerville, Morristown, and Freehold, New Jersey, where we serve clients in Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, Morris Plains, and Monmouth County.

• Category: Bankruptcy