Bankruptcy and Your Credit

As a bankrutpcy attorney, one of the most frequently asked questions that I receive is how will the bankrutpcy filing effect my credit. Most people come in with the pre-conceived (and incorrect) notion that they will have terrible credit for 7 years after the filing of a bankruptcy.
That is not correct. The 7 year term is the time period that a chapter 13 bankruptcy will appear on your credit report, which is also the amount of time that anything that is reported stays on your credit report. A chapter 7 bankruptcy can show up on your credit report for 10 years. This does not mean that you will have bad credit for 7 or 10 years, it just means that the bankruptcy filing will show up on your credit report for that length of time. The farther away you get from the bankruptcy filing, the less impact it will have on your scores.
What has to be realized is that in most cases if you are presently contemplating the filing of a bankruptcy then you credit scores are probably not looking that good. You are probably delinquent on some of your debts, like credit card payments, car loans or mortgage payments. As long as you remain delinquent on these accounts, the creditor will be reporting that delinquency monthly to the credit agencies. Your credit scores will not be able to recover unless you take action to stop the negative reporting.
If you have the ability to catch up on these delinquencies that would be one way to stop the negative reporting and rebuild your credit. However, that scenario is not likely for most people. As stange as it may seem, the filing of a bankruptcy is another way to stop the negative reporting. While a bankruptcy is obviously a negative item on your credit report, if your scores are already low the actual effect will be minimal. However, upon the filing of a bankruptcy you get the benefit of the automatic stay.
The automatic stay goes into effect upon filing and notice to your creditors of the filing. The automatic stay prevents your creditors from pursuing any further collection activity against you. This means the creditor can no longer send you statements, can no longer call and harass you, cannot institute or continue any legal action against you and also can no longer report negatively on your credit.
Thus, what happens post filing of a bankruptcy is that your credit has a chance to improve as there will be no further negative reporting from the creditors. The rest is up to you. If you maintain your post-petition mortgage payments or car payments with regular on-time payments, your credit scores will rise as the only items that will be reported are positive. You will also have the opportunity to obtain new credit cards within a few months after the filing of your bankruptcy petition. If you were to take out one credit card and charge on it and then make those payments every month on a timely basis that will also help you re-establish your credit scores.
While I am not an expert on credit, I can tell you through my experience with clients that if you continue to pay your remaining monthly bills in a timely manner post-filing, you could easily have scores back over 700 within 2 years of filing.
You are also eligible for an FHA mortgage once two years has passed since the filing of your bankruptcy. If you have maintained perfect credit since the filing of your case you will be looked at under the same criteria as anyone else that is applying for an FHA mortgage.
So in essence, despite what your creditors want you to believe a bankruptcy is not the end of your credit life, but it is sometimes the fastest way back to good credit scores.


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