Here’s a fact: If you’re thinking about filing bankruptcy, your credit is probably down the drain as it is. Can bankruptcy make it worse?
Most people think so, but that’s not necessarily the case. Having a bankruptcy filing on your credit record does factor into the mysterious calculations that result in credit scores, but it can actually have a positive effect on your rating. Here are some points to ponder.
First, keep in mind that most people who consider filing bankruptcy are generally in pretty dire straights as it is. Often, they’re swimming in credit card debt, have high medical bills that aren’t covered by insurance, or they’ve lost their job. A borrower facing those situations is likely to have suffered a significant downgrade in his credit score. The Best Bankruptcy Lawyer San Diego will understand the need and requirement of the clients regarding the case. All the documents regarding the property should be disclosed to the lawyer.
A Chapter 7 bankruptcy, also known as a straight bankruptcy or liquidation bankruptcy, usually results in the discharge (forgiveness) of most of that pesky unsecured debt. Unsecured debt is the type of debt for which you did not put up collateral to secure payment – like credit cards, personal loans, payday loans, medical bills and the like.
Negative information, like slow pays and charge offs, continue to show up in your credit record for seven years, although as time passes, negative entries play a lesser role in credit score calculations.
In general, a Chapter 7 bankruptcy will appear on your credit report for ten years. While some unsecured debt, such as student loans, will not be affected by a Chapter 7 bankruptcy, most if not all of your unsecured debt will show up on your future credit reports as “included in bankruptcy” or “discharged in bankruptcy”.
What does this mean to a future creditor?
Bankruptcy attorneys and their clients have learned that it generally takes only about two years for a bankruptcy debtor’s credit score to improve substantially. Only two years. At the end of that period, if you’ve paid your remaining bills timely, you should be able to obtain credit at favorable rates. In fact, under Veteran’s Administration (VA) and FHA rules for granting government backed loans, a borrower must wait only two years after discharging a bankruptcy case before he becomes eligible to apply for a mortgage under those programs.
Will you be able to obtain credit during those two years? It’s quite likely, although you’ll probably have to pay more for the privilege.
So how exactly does a bankruptcy improve credit?
It’s quite simple really. Although your credit history might show problems in the past, in the eyes of a potential lender, your future looks much brighter because you are no longer saddled with buckets of credit obligations. Those thousands of dollars in card balances are no longer a drain on your income or other resources. Furthermore, as icing on the creditor’s cake, if you receive a discharge in your Chapter 7 case, you are restricted from filing Chapter 7 bankruptcy again for eight years.
For potential lenders, you look much more creditworthy than many others, including people who have high balances who struggle to make their minimum payments each month.
So, enter that time machine and project yourself two years into the future. Would you rather have a bankruptcy on your credit report and a steadily improving credit record, or high credit balances, perhaps the occasional late payment, with no end in sight and a credit score that doesn’t look much different than it does now?