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One of the biggest concerns for anyone considering bankruptcy is how filing will affect their credit. Everyone knows that there is some influence. Most disagree as to the size or duration of the effect. That, and how to rebuild are two things I hope to shed some light on in this post.
What if I just grin and bear it?
One question you should ask yourself is, “What happens to my credit score if I don’t file bankruptcy?” For many people considering bankruptcy, they are already at the point where they are no longer able to pay their ongoing debt obligations. If this is you, your credit score is taking a hit every month where you are not making your monthly payments. To give you an idea, once you go 30 or 60 days late, your credit score starts to take a hit. If you allow a payment to reach the point where it is 90 days late, it will remain on your credit report for up to 7 years and will have a significant impact on your score. Just a couple of these events can be as damaging or more damaging than before the bankruptcy filing. Because of this, once you recognize that you won’t be able to get out of the position immediately, it’s probably best to get the bankruptcy wheels rolling. The higher your score before you file the case, the higher it will be after you file the case and are discharged.
Debt resolution companies and your credit.
Many people try to do whatever they can to avoid bankruptcy, for some this includes making deals with companies that promise lower payments by consolidating their debt. These companies come in a variety of flavors. Although this is a topic some other time. Many of them will do an arrangement with you where you make monthly payments to them, then they either hold the money until they have enough to make an offer on a particular loan, or they give it all up. Make small monthly payments to creditors in one go. The problem is, it doesn’t prevent those creditors from being negatively reported to the credit bureaus. It doesn’t necessarily stop creditors from suing you in state court, getting a judgment, and garnishing your wages. Another problem is that if they settle, it will appear as settled for less than the full amount which hurts your score. On top of that, if you settle, you’ll likely receive a 1099 from the company and you’ll need to claim the forgiven amount as income on your taxes. This will either mean that you will get less refund or will be owed.
How long does it stay on your report and what does it mean to you?
First, if you are in a difficult financial situation and are having trouble paying your rent or making your home payments, that should not be a factor in your decision to file. That said, how long it stays on your report and how long the bankruptcy notation negatively affects you are two very different things. If you file Chapter 7 bankruptcy, it’s usually going to stay on your report for 10 years. If you file a Chapter 13 bankruptcy, it will remain on your report for 7 years after the case ends. Seven to ten years is a long time. That’s a long time, but within that seven to ten year period you can still buy cars, homes and get credit. The general rule is that you can get home loans about two years (sometimes only one year) after Chapter 7, with car loans and credit cards almost immediately after the case. Not too bad is it? One should tread carefully here. Look at the offers you are getting and accept only the best, it will not help you if you start applying for multiple cards at once, limit it to one or two at most. When you can get credit will depend on your income and your credit score. I have seen clients with scores of 500 before filing Chapter 7 with scores of 700 a year after the case discharge. On the other hand, I have seen other customers come back a few years later with low scores and they still have low scores. So what’s going on there?
How to Improve Your Score After Bankruptcy
If you keep doing what you did and nothing has changed, your credit score probably won’t change much. Depending on the type of FICO score, your score could probably be between 300 and 403. The highest it can be is around 850 but that also depends on the type of score. Your score isn’t going anywhere if you use No Credit. So what can you do? the first thing i suggest is going http://www.annualcreditreport.com And get all three reports for free. This is something you can do once a year. Once you have these, you will want to review them, possibly with the help of your attorney, to determine whether the credit reporting agencies are properly reporting your debts in bankruptcy. If they are not accurate and they refuse to correct the errors, you may have a cause of action either in your old bankruptcy case, or under the Fair Credit Reporting Act (FCRA). Once your reports have been recovered, you can start rebuilding. It’s a good idea to start with a secured credit card or store brand card. With a secured card, the creditor typically puts down you $300.00 to $500.00 and this becomes your credit limit. There is little risk to the card holder as they have the security of your deposit, but the advantage to you is that they will be reported to the credit bureaus. If you need a car, a car loan with reasonable down payments is another great way to improve your credit score as long as you are able and actually make the payments on time. My secret credit score repair weapon is IBR. If you have federal student loans and are low-income or living paycheck to paycheck, you should at least look into this program. IBR stands for Income Based Repayment, you can apply for it at the following site. https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driver, The big advantage of this plan is that many people who filed bankruptcy may be eligible for the $0.00 payment. If you are eligible and you sign up, and are approved for $0.00 or any payment, then every month that you make that payment (yes, even zero dollar payments, if you are eligible) is a month that your lender Represents timely payments to credit bureaus. The higher the on-time payments, the better your credit score.
Best wishes,
Steven Palmer, Esq.
Licensed in Ohio and Washington
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