Does Bankruptcy Hurt Your Credit Score?
There are many misconceptions about bankruptcy. One of the most common is that filing for bankruptcy is a permanent and devastating hit to a consumer’s credit. That is simply not true.
At first, it can be a little difficult to get credit. A recently discharged consumer will likely have to pay higher interest rates and endure harsher penalties for default. This is because they are considered a greater risk. But in some ways, such a consumer is actually less of a risk because she has just eliminated her ability to qualify for a Chapter 7 for another eight years. From the perspective of a lender, this could actually seem like less of a credit risk.
Another way that bankruptcy can actually improve a consumer’s credit is that the discharge immediately and drastically reduces the debt-to-income ratio that bears great weight on a credit score. If the debtor is carrying 80 percent balances on several credit cards, and then files for Chapter 7 and receives a discharge, the credit utilization percentage drops to zero. This can, and often does, make it so bankruptcy actually increases a debtor’s credit score.
When choosing which sources of credit to use after filing for bankruptcy, it is extremely important to be very discerning. Watch out for predatory lending scams and pay day loans. Predatory lenders are on the look out for post-discharge consumers and will charge outrageous interest rates and fees for borrowing money. Pay day loans allow consumers to get money faster if they don’t have the benefit of a decent bank. These pay day loans can often lead a consumer to pay as much as 400 percent interest.
Many debtors want to get back into the game quickly and buy a house or a car. While it certainly varies from lender to lender whether they will extend credit to a recently discharged debtor, it is very common for consumers to be able to buy a car after bankruptcy. The problem is that the interest rate may be high. Thus, it behooves any debtor to take what they’ve learned about budgeting and make sure that the new car payments are manageable. It may take a year or two to be able to buy a home, but as with cars, it is generally a good idea to take it on a case-by-case basis and get expert information. There are many factors that can determine if a mortgage lender will be willing to help a borrower out.
Finally, the nitty gritty part of rebounding from a bankruptcy is making sure the credit report is as accurate as possible. There are many “quick fix” companies out there that are willing to promise to remove problems from a credit report. But the fact is that credit reports are complicated and the credit bureaus are large corporations without empathy, so it is often necessary to seek the advice of an attorney experienced in the area of fair credit reporting.
The truth is that bankruptcy seems to have only a temporary negative impact on a consumer’s credit. But with attention to detail, hard work, and the assistance of an experienced attorney, a motivated consumer has the ability to bounce back and overcome.