Will My Credit Be Ruined for 7-10 Years Once I File for Bankruptcy?

One of the common myths about filing for bankruptcy is that it ruins your credit for many years. The answer is “it depends.” It depends on a number of factors including your current credit score, your debt load, and your previous credit history. As surprising as it sounds and contrary to mainstream beliefs on the subject, a bankruptcy can actually improve your credit. Let me say that again: A BANKRUPTCY CAN ACTUALLY IMPROVE YOUR CREDIT. Compare the following:

Debtor “A” is a cashier who makes $32k per year, and as a result of being out of work off and on for the last year, has accumulated $86k in unsecured credit card debt. He has not had the money to maintain his credit cards and consequently has many 30, 60, and 90 day delinquencies on his credit report. This persons credit is in the dumps.

In this scenario, a bankruptcy would likely improve this persons credit score. This is because it stops additional derogatory marks from hitting your existing credit accounts and ultimately eliminates the unsecured debt load. About a third of your credit score is based on your “debt to income” ratio and the bankruptcy discharge helps to balance that ratio which improves the score.

Debtor “B” is a mechanic who makes $53k per year and has accumulated $40k in credit card debt over the last several years. He has always been able to make the minimum monthly payments on his accounts, however the balances never seem to decrease due to the high interest charged. This debtor has no 30, 60, or 90 day lates on his credit report. His credit score is good.

In this scenario, the debtor has a much lower “debt to income” ratio and has been paying his bills on time to maintain his good credit score. A bankruptcy filing here would have the opposite effect on the debtor’s credit compared to the Debtor “A” case. As funny as it sounds, the better your credit is at the time of the bankruptcy filing, the more it will be effected negatively as a result post discharge. The worse off your credit is at the time of filing, the more likely it will improve as a result of the discharge.

So what’s the deal with getting credit after a bankruptcy is filed? Surprisingly, there are options available. Once your case is discharged, you will likely begin to receive new offers of credit. The reason is twofold. First, the credit card company knows you have already filed for bankruptcy so that if you default in the future, you will be unable to claim bankruptcy protection for a number of years. Second, you are more likely to repay your bills moving forward because of your desire to make the best of the fresh start the bankruptcy has provided. You are a better credit risk at that point.

For the small group of individuals who still have trouble obtaining credit after bankruptcy, a secured credit card is always an option. With a secured credit card, you give a bank between $200-$500 and they will give you a secured credit card for $500-$1,000. This is a good way to begin to re-establish your credit. My advice to all debtor’s seeking to re-establish their credit after a bankruptcy, is to get ONE credit card and use it only for two things; Food and Gas. These are two expenses you are going to have no matter what. You have to eat, and you need to put gas in your vehicle. Charging these two expenses and paying them off each month in full is a great way to quickly begin to put you on the road to financial recovery. Also, www.lifeafterbankruptcy.com is a website that has some helpful information for debtor’s seeking to re-establish their credit post bankruptcy.

For more information regarding credit, or for any other bankruptcy law questions, contact The Larkin Law Firm at http://www.live-debt-free-now.com