Many people are really afraid of bankruptcy, and it makes sense as to why. They’ve been told that bankruptcy is one of the worst financial failures and that it will ruin a person’s financial prospects forever, especially when it comes to their credit. The word “bankruptcy” is often equated with “credit death”! However, there are many myths that have been perpetuated about bankruptcy that aren’t true, and the one about your credit being permanently damaged is one of them.
As experienced Miami bankruptcy attorneys, we’ve spent years helping people get out of massive debt and back on their feet through filing for Chapter 7 or Chapter 13 bankruptcy. We understand how confusing, scary, and overwhelming the process and its consequences may seem, but we also know exactly how bankruptcy works – including the truth about how bankruptcy actually affects your credit score – and what you need to know in order to make the best choices about your financial future!
Understanding what your credit score is based off of
Knowledge is power, and a lot of the fear you may be feeling about potentially filing for bankruptcy and what that will do to your credit score can be lessened when you know what factors influence your credit score and how that works.
Many people are only vaguely familiar with how their credit score gets to be what it is – it is a number that essentially summarizes your credit history and predicts the likelihood that you’ll default on future debts. It is used by lenders to determine a) whether or not to extend credit to you and b) at what interest rate they should do so. FICO scores, the most common type, are based on your debt payment history, how long you’ve had credit, how much debt you have, your debt-to-credit ratio, and other similar factors.
Your score can range from 300 to 850; the higher your score, the better interest rates and credit cards you will qualify for. Recent research showed that the average FICO credit score in America right now is about 714. Anything above 600 is considered fair – exceptional, while anything below 600 is considered poor.
Practically, what happens to your credit score when you file for bankruptcy?
Bankruptcy is a “negative mark” on your credit. Because bankruptcy is a way for people who have debt they can’t repay to legally discharge that debt, it is an indication that you have experienced a problem paying off debts, which lenders see as problematic when considering whether to take on the risk of loaning you money. Your score will go down (though it is not set as to what number of points you will lose), and depending on what kind of bankruptcy you file for, lenders will be able to see that you filed for bankruptcy for a certain number of years. Chapter 7 is “worse” for your credit score than Chapter 13, in most cases, but again it depends on your unique situation.
If you already have a low score, bankruptcy won’t hurt you that badly
It’s important to note that bankruptcy doesn’t affect everybody’s credit score equally. Most people who file for bankruptcy are already experiencing credit problems and a declining score anyway, so, the hit to a lower credit score won’t be as serious.
While no one knows exactly how much damage bankruptcy will do to your credit because credit scoring agencies don’t make their fomulas public and use changing criteria to evaluate customers, FICO has shared that a person who has a credit score above 700 could lose as many as 200-300 points or more by filing for bankruptcy, but a person who has a credit score of mid to lower 600s or less would only lose about 130 to 150 points. You just don’t have as many points to lose at that stage.
Bankruptcy won’t affect your score for the rest of your life
This is a quick but big thing to mention – just because bankruptcy leaves a negative mark on your credit doesn’t mean that it stays on forever! For Chapter 7 bankruptcy filings, bankruptcy will stay on your credit report for 10 years. For Chapter 13 bankruptcy filings, bankruptcy will only stay on your credit for 7 years, and the impact will lessen (for both types of filings) over time.
It doesn’t mean that you can’t get credit after filing, and it doesn’t mean that it will affect your credit as long as bankruptcy stays on
Another common misconception that you may have regarding how bankruptcy actually affects your credit score is that because bankruptcy is a mark on your credit, it prevents you from doing anything that requires credit until it disappears. That’s not true – after the filing is complete, which is usually a matter of months, you can start applying for credit cards, car loans, and other forms of credit.
While the interest rate may be higher, and while secured loans/cards are going to be your best bet, if you handle credit wisely and begin rebuilding good habits (such as paying your bills on time), then your credit score could start to improve as soon as a few months later and even be back to an average level in two to four years!
Bankruptcy gives you an opportunity to build better credit in the long-term
Because bankruptcy does lower your debt-to-income ratio almost immediately, you may see improvements in your credit score as soon as that happens (even if it plummeted initially). But regardless of what happens in the first months or year after filing, bankruptcy may be the best long-term solution, and that is something you should consider! If you have debt that you are continuing to build up and not repay, then you are only going to drive your credit score lower. You may suffer other negative consequences, such as foreclosure or wage garnishment or vehicle repossession, that could leave even worse marks on your credit and have severe impacts on your day-to-day life.
Filing for bankruptcy with the help of an experienced bankruptcy attorney can help you get a clean slate and start over. You can work with them and with other money professionals to learn how to handle your credit wisely going forward, which can make a difference not only for your financial well-being, but also for your children’s and for generations to come.
Call The Santos Law Offices, P.A. to talk about your options!
If you have questions about the bankruptcy process, or want more information on how bankruptcy will affect your credit and your goals, call The Santos Law Offices, P.A.! Our highly-rated law firm is passionate about offering clients personalized, affordable, effective legal counsel that gives peace of mind and maximizes opportunity. We can explain your next steps and guide you every step of the way! Schedule a free consultation.