How Does Filing for Bankruptcy Affect Your Credit Rating?
If you are facing insurmountable debt, bankruptcy may be the best option for righting yourself financially and getting a fresh start. The downside is that a bankruptcy filing will stay on your credit report for a lengthy period of time. However, there are ways that bankruptcy can put you on a better financial footing that can actually improve your credit rating.
The mere presence of the bankruptcy on the credit report, and its recentness, will have a negative impact on a debtor’s credit rating. A Chapter 7 bankruptcy will stay on a debtor’s credit report for 10 years from the date of the filing. A Chapter 13 bankruptcy remains on the report for seven years from the date of filing.
However, if your financial situation is grave enough to consider bankruptcy, your credit rating is probably already poor due to late payments and/or defaults on loans. The chances of rebuilding your credit without the fresh start offered by bankruptcy is very low. Most of our clients have higher credit scores one year after filing bankruptcy with us than they did before they filed. This is because bankruptcy discharges debts.
After a Chapter 7 discharge is granted or a Chapter 13 repayment plan is confirmed, there are several steps you can take to improve your credit rating. These include:
- Establishing new credit accounts to offset the negative information on your credit report — While credit may be difficult to come by at first, you may be able to obtain secured credit cards, which require upfront deposits. Similarly, you can likely obtain new credit cards with low credit limits from lenders like Capital One.
- Making on-time payments for all debts, whether existing or newly incurred — Late payments have a negative impact on credit ratings and should be avoided whenever possible.
- Keeping your credit card balances low — Credit counselors recommend balances below 33 percent of the card limit. The lower the balance, the better your credit score.
Crucial to success in rebuilding your credit is to make a budget that tells you how much financing you can obtain without going too heavily into debt again. Your budget can also help you develop disciplined spending habits.
The bankruptcy filing will be automatically removed from your credit report by the rating agencies after seven years for a Chapter 13 or 10 years for a Chapter 11. You should check to make sure it has been done; but, absent an error, you do not have to request the deletion of the bankruptcy from your credit report.
At the Law Offices of Michael Jay Berger in Beverly Hills, I help clients successfully navigate the bankruptcy process. I have decades of experience handling Chapter 7 and Chapter 13 bankruptcy matters. Schedule a free initial consultation by calling 310-271-6223 or contact me online.