Bankruptcy Article #26

March, 2007

Many people struggle for years trying to complete debt consolidation programs rather than filing bankruptcy because they think a bankruptcy will ruin their credit forever. While a bankruptcy can appear on your credit report for up to ten years, there is no reason why your credit score should not be substantially higher one year after you filed than it was immediately before you decided to file your bankruptcy.

Credit Card companies and other unsecured creditors often tell consumers that filing bankruptcy is the worst thing you can do to your credit score. However, in many cases, not filing bankruptcy actually hurts your score far more, and prevents you from getting new credit far longer. When you consistently miss payments, or make less than full payment for two or more months in a row, your credit score is lowered dramatically. The credit reporting agencies keep track of how long you have been behind on your payments, so once you miss even one payment, on your your credit card or mortgage or car, your credit score will fall drastically, even if you make all the subsequent payments on time. Entering repayment plans with the creditor or the debt consolidation plans advertised on television hurt your credit score just as much as filing bankruptcy because entering the programs is considered a default, which will be reported like a late or partial payment every month, for as many months as you are enrolled in the program.

The single event of filing a bankruptcy does hurt your credit score significantly. However, once you complete the Chapter 7 or start making payments under Chapters 11, 12, or 13, you can start rebuilding your credit immediately instead of waiting as many as six or eight years to complete your debt consolidation program.

Once you finish your bankruptcy, all of your unsecured debts, including credit cards, medical bills and utility bills, should be discharged, which means the outstanding balance is wiped out. Because your debt to income ratio is lowered, your credit score should immediately start to improve. Nonetheless, there are several additional steps you can take to improve your credit score after bankruptcy.

IMPROVING YOUR CREDIT SCORE AFTER BANKRUPTCY

Open a credit card with a very low maximum balance and pay it off each and every month

Open a $500 maximum balance card and charge just your gas to it; pay it off at the end of the month.

Open a savings account at your local bank and make regular deposits every week.

Even $5 a week helps improve your credit score.

Make all your monthly utility bill, mortgage, car, and other payments on time.

One of the things that most hurts your credit score is being late on secured debts like cars or your mortgage.

Review your credit report or have your attorney review it for you.

Frequently, creditors fail to remove the account balance on your credit reports after you receive your discharge. Your attorney can make sure creditors correctly report your account, allowing your debt to income ratio to decrease and your scores to rise. If creditors refuse to fix your reports, you may be entitled to monetary damages.

Close any open accounts you don't use.

The maximum amount of credit available to you appears on your credit report as debt regardless of whether you have used all credit available. By closing unused accounts, you can increase your credit score and make lenders more willing to extend credit to you.

Open a secured credit card.

If you have money in your bank account to cover your charges, you can build your credit score without increasing your debts.

Make down payments for any large purchases.

If you take most of these steps, you should be able to increase your credit score to close to 700 within one-year of getting your bankruptcy discharge. Entering a debt repayment plan or consolidation program will only harm your credit score for as long as you are in the program. Where a Chapter 7 bankruptcy allows you to discharge your debts in less than 4 months and start rebuilding your credit. Most consolidation or repayment programs will harm your credit more each month until you finish paying off the debts.

If you follow these easy steps, your credit score should be better than 50% of Americans' scores within just one year of getting your discharge. For many people who fall behind on their obligations, bankruptcy truly is the best choice.