How A Bankruptcy Affects Your Credit

Americans have been reeling in the aftershock of the downturn in the economy.  For some, this downturn has meant a job loss and a tightening of their finances.  For others, it has meant dealing with serious personal and financial hardships and mortgage difficulties that have resulted in foreclosure or even bankruptcy.

While bankruptcy does provide the ability to give individuals a fresh start, there are still a number of items to take into serious consideration.  One of the common questions that our clients have is how their credit will be impacted by a bankruptcy filing.  The truth is that it depends, and is impacted significantly by where your credit situation stands before the case is filed.

Impact on your current credit

A bankruptcy filing impacts each credit score differently.  For instance, if you had an immaculate credit rating prior to the bankruptcy, then you can likely expect a significant drop in your credit score.  For those who had several negative items reflected on their credit report (i.e. missed/late payments, judgments, etc.) prior to the filing, the drop may not be as significant.  And for those who have been fighting serious credit trouble for some time before filing bankruptcy, the impact on their credit will be negligible.  In some circumstances, credit scores can even improve.

Impact on future credit reporting

Most bankruptcy filings will stay on your credit report for 10 years.  Successfully completed Chapter 13 bankruptcies will typically be reported for only seven years.  While bankruptcy does mean that you might have a more difficult time securing credit, most debtors find that it is not impossible obtain credit shortly after filing bankruptcy, which gives them the opportunity  to actually start rebuilding their credit during this difficult time.

Impact on future ability to borrow

One significant impact of a bankruptcy, especially in the short term, will be your ability to get new credit and the difference in interest rates that are available.  Generally speaking, lenders will only be able to offer smaller loans and secured credit cards to those who have a bankruptcy on their credit report, and these will likely come with a much higher interest rate than the average.  These rates can be negotiated, but it is more important to use your new credit prudently and continue to make payments on the balance in full every month until your credit is re-established and you can secure a lower rate.

If you are in the market to finance a new home purchase, you could potentially secure a mortgage after two or three years from the date of your discharge, so long as you have taken the necessary steps to re-build your credit in the interim and remain debt-free.  Some brokers even suggest that your ability to obtain home financing post-bankruptcy can depend on the chapter of bankruptcy that you filed.  In the end, most lenders are going to be just as interested in your current debts and monthly budget as they are with your credit score.  Often times, family or friends can offer to co-sign the loan to help improve your ability to obtain get approved.  As always, no one can predict what mortgage lending guidelines will be, and this process is always subject to change.

If you are contemplating filing for bankruptcy, you should discuss your financial situation with a bankruptcy attorney to better assess the pros and cons and determine what option is best for you, including your ability to manage and re-establish your credit post-bankruptcy.