People worry about debt. They also worry about their credit score. One of the reasons people facing a difficult financial crisis avoid bankruptcy is because they are worried about its effect on their credit score and credit report in the future. However, while filing for Chapter 7 might lower your credit score in the short-term, it is often the quickest way to put you in a position to improve your score. In fact, usually, just by filing for bankruptcy, your score will eventually begin to climb. Below, our Roseville, CA bankruptcy lawyer from The Bankruptcy Group discusses Chapter 7 and your credit score.
The Average Credit Score After Chapter 7 Discharge
It is difficult to estimate what an average credit score will be after receiving a discharge in Chapter 7 because everyone’s circumstances are unique. If you were struggling but making every minimum payment each month, your credit score might have been significantly higher than someone who defaulted on three or four loans. However, a petitioner should expect about a 100 point drop when they file for bankruptcy. This average assumes that the credit score before filing was around 500 to 550. For someone with a 400 credit score, they will likely see a much smaller drop or even a slight increase.
Once your creditors begin reporting that your debt has been discharged and you no longer have many monthly installments on your credit cards or personal loans, your credit card will start to crawl up towards the high 500 range within six to seven months.
Chapter 7 bankruptcy will be reported on your credit report for ten years. This listing will influence your credit score. However, while it seems to be a long time, the actual effect will diminish as the years pass. The weight each credit bureau gives to a bankruptcy continues to drop the longer it is on your record. The most significant impact occurs at the time of the initial filing.
Improving Your Credit Score After Chapter 7 Discharge
Most people who file for bankruptcy are already suffering from a poor credit score. Therefore, the momentary initial drop of 100 or so points typically has no practical impact. However, because filing for bankruptcy eliminates debt and ends a petitioner’s obligation to make several monthly payments, they can begin rebuilding their credit from a firm foundation.
Because a petitioner’s debt-to-income ratio significantly changes in their favor after discharge, their credit score will increase naturally. Without any work, as long as an individual does not acquire new debt and defaults, their credit score will climb back to average.
If you start making regular payments and keep your spending frugal, you will help improve your credit score. You should begin to see a positive change in your credit reports from the first year following your discharge. By practicing reasonable financial measures, you could have your credit score back to 650 or 680 within two to three years.
One way to help increase your score is to obtain a secured credit card. If you have any monthly payments, such as utilities, it is a good idea to have them automated. Sometimes people get behind because they forget a bill or reallocate money for something less important. With automatic payments, you can ensure that your credit rebuilding is not adversely affected by a late payment.
Should I File For Chapter 7 to Improve My Credit Score?
Some people struggle with debt and worry about their credit score. However, the idea of bankruptcy is frightening, especially its impact on a person’s ability to obtain credit in the future. If you cannot get a loan because your credit score is bad or because you are carrying too much debt, filing for Chapter 7 could be the quickest way to reestablish your credit strength.
Chapter 7 is not for everyone. You have to qualify in terms of your household income and you might not want to have valuable property that could be sold to pay your creditors. Fortunately, many of the fears people have regarding bankruptcy are ungrounded. Yes, you could be forced to sell some property but, under California law, petitioners have many protections available. Before filing for bankruptcy, our experienced Sacramento bankruptcy attorney would thoroughly review your property so you understand what you can and cannot keep.
It is also true that your credit score will most likely take a hit if you file for bankruptcy. Furthermore, the bankruptcy will be on your credit record for ten years. However, you will not improve your credit score by continuing to default on loans or miss payments. The amount of debt you have also negatively impacts your ability to obtain credit and loans. Because you are paying the minimum amount of interest every month on several credit cards and loans, your credit score might not be bad. However, that amount of debt is not going down and your ability to obtain additional credit or large loans, such as a mortgage, could be adversely affected by the amount of debt you have.
Some people often try to negotiate with their creditors to lower their monthly payments or reduce the amount they owe. If you are paying the minimum balance each month, it is unlikely that a creditor will negotiate a better deal – they are being paid regularly. If you are in default, you might be able to negotiate a lower payment or a lumpsum settlement. These settlements also hurt your credit score and you will incur an income tax penalty for any debt that was forgiven. In many situations, filing for Chapter 7 is the fastest and most efficient way to start building your credit reputation. Many people in debt feel powerless and it is good just to talk with a knowledgeable Arden-Arcade Chapter 7 bankruptcy attorney to understand the pros and cons of filing.
Call Our California Chapter 7 Lawyer to Discuss Bankruptcy’s Impact on Your Credit Score
There are a host of misconceptions and myths surrounding bankruptcy. People worry about it killing their credit for a decade. While it is true that a Chapter 7 bankruptcy will appear on your credit report for ten years, it also gives petitioners the ability to start improving their credit scores. If you are overwhelmed with debt, contact our Citrus Heights Chapter 7 bankruptcy attorney at The Bankruptcy Group to discuss the benefits of filing for Chapter 7 bankruptcy. To schedule a free and confidential appointment, call 1-800-920-5351.