How Does Filing For Bankruptcy Affect Your Credit?

The decision to file for bankruptcy is a difficult one to make. Although a bankruptcy filing gives the debtor a fresh start by allowing the debtor to get rid of most, if not all, of his or her debts, it has one of the most damaging and long-term effects on one’s credit rating. Therefore, it is advisable to explore all alternatives before taking this serious step. For example, the debtor can try to work out a payment plan with his or her creditors or consult with a credit-counseling agency that will negotiate on the debtor’s behalf.

Bankruptcy's Negative Impacts On Your Credit

Filing for bankruptcy negatively impacts the debtor’s ability to obtain credit for a considerable period of time. Therefore, it is unlikely the debtor will qualify for a mortgage or auto loan for some time after filing. However, if the individual is in such debt that filing for bankruptcy is the only option, it is likely that the individual’s credit score has already been seriously damaged due to late payments, charged off accounts, and high balances.

Under the Fair Credit Reporting Act, a bankruptcy filing can remain on an individual’s credit report for 10 years. Credit reporting agencies, such as Equifax, Experian and TransUnion, must remove the bankruptcy case from the individual’s credit report 10 years from the date the bankruptcy case was filed. Generally, if the debtor files for bankruptcy under Chapter 13, and successfully completes all of the requirements, the credit reporting agencies may remove the bankruptcy filing from the debtor’s credit report after 7 years instead of the 10 years allowed under the law. As a matter of policy, credit reporting agencies may do this to encourage more debtors to file under Chapter 13 and attempt to repay their debts rather than liquidate and receive a discharge of debts under Chapter 7.

The Road to Recovery

There is  no law that prevents a creditor from granting credit to an individual who has filed for bankruptcy. In fact, a creditor is free to extend credit immediately after the bankruptcy filing, although this is unlikely. If a creditor is willing to do so, it is likely that the interest rate charged will be exorbitant. However, there are some things an individual can do to help improve his or her credit rating as soon as possible after filing for bankruptcy.

For example, the debtor must make sure that none of the discharged accounts still appear on the credit report. If so, it is important to have the accounts deleted from the credit report as soon as possible. In addition, it is advisable to apply for a secured credit card. To obtain a secured credit card, the applicant deposits a certain sum of money with the credit card company. Purchases made by the cardholder are backed by the deposited amount, which is also the cardholder’s credit limit. After making 12 to 18 months of timely payments, the cardholder may be eligible for an unsecured credit card. In this way, the individual will begin to establish a positive credit history and improve his or her credit score.

Bankruptcy and Co-Signers

It should be noted that co-signers do not benefit from the discharge that the debtor may obtain by filing for bankruptcy under Chapter 7. Therefore, the co-signer will still be completely responsible for repayment of the debt unless they also file for bankruptcy. This could cause other problems for the debtor, particularly if the co-signer is a close friend or relative. Under Chapter 13, however, if the debtor agrees to pay the debt in full, remains in Chapter 13, and continues to make payments to the creditor, then the creditor cannot pursue the co-signer while those payments are being made pursuant to the debtor’s bankruptcy plan.