Every person I’ve met has asked, “what will bankruptcy do to my credit?” If you are considering chapter 7 or Chapter 13 bankruptcy, chances are that late payments, charge-offs, judgments, garnishments, and foreclosures may have already taken a significant hit to your credit. Bankruptcy is often a more productive tool at increasing your credit score than trying to make arrangements with creditors.
Let me back up. Bankruptcy will be on your credit for 10 years. The time begins from the day of filing your bankruptcy case. Other negative items (for instance, late payments) stay on your credit for 7 years. That looks better, right? 7 years instead of 10 years? But, if you take a closer look you will see that negative reporting that lasts for 7 years is usually staggered on your credit report. Let’s say that you have a credit card with Big Bank. You stop paying the credit card. After 3 months, Big Bank sends your account to collections. You now have a new negative item on your report. This goes on for a long period of time – passing your account along to new collections agencies, until finally one of them files a law suit against you. This will be true for most of your credit cards with all of the other Big Banks. When bankruptcy is listed on your credit report, it envelops those other debts. There is now a “last day” to begin counting the 10 years.
I know, that sounds like a long time. The good news is, you will be able to begin reestablishing your credit almost immediately. Even before you are out of bankruptcy, you can sign a reaffirmation agreement with your car lender. Your monthly payments will then be reported on your credit report. So make sure to make those payments on time. The debts discharged in your bankruptcy will no longer be part of your debt-to-income ratio. Therefore, your debt-to-income ratio will improve dramatically – a positive thing for your credit score. After your discharge, you can obtain a secured line of credit from your bank. It’s essentially a savings account that you borrow against. Be conservative, and gradually increase your credit score.
