Credit Reports and Bankruptcy

People file for bankruptcy for different reasons. For some it is a result of poor financial management over a period of time, while for others it is the result of something totally out of their control like the loss of a job or a major illness. In both cases the person reaches the place where they can’t make their monthly payments and their bills fall farther and farther behind.

Declaring bankruptcy is the one thing that can damage your credit rating the most. The worst thing is that it remains on your record for 10 years instead of the 7 years that other negatives remain. How far your credit rating falls will depend on where it was before you declared bankruptcy.

Creditors have a tendency to react to bankruptcy in different ways. Some are willing to risk giving you credit because they know that you can’t file bankruptcy again for 7 years. There are no laws that govern credit and, therefore, each creditor has the freedom to offer credit to whomever they choose.

Generally this means that any credit extended to you will have a much higher interest rate than before. Most likely you won’t have a problem getting a new credit card. In many cases as soon as your bankruptcy case closes you will receive a number of offers through the mail. Most of these offers will come from sub-prime lenders and will have a considerably higher interest rate.

The worst a low credit rating can mean is that for a time you may have difficulty renting a home, getting a cell phone, turning on your utilities or getting unsecured loans. The advantage is that you can afford to buy food again, pay your monthly bills on time and begin to reestablish your credit.

There are two possibilities for filing bankruptcy. For a person who still has a steady income, but has gotten behind on his bills because of a major illness or a job loss, Chapter 13 bankruptcy offers you the possibility of working out a payment plan to pay off all of your creditors over a time period that you can manage. The fact that you are willing to work at paying off your bills instead of discharging them makes it possible for you to reestablish your credit within a shorter period of time.

Chapter 7 bankruptcy gives you the worst mark possible on your credit because it means that all of your debts except for alimony, child support or unpaid taxes are discharged and in most cases the creditors lose money. Restoring your credit will take much longer under this plan.

For some people, declaring bankruptcy could actually better your credit rating. Since most people who file bankruptcy are already behind on their payments, have very high credit card balances or collection accounts and their credit has already fallen to a low rate, things can’t get much worse. On the other hand when bankruptcy is filed your credit reports are wiped clean. Another advantage that you have is that your credit score will be determined by comparing how you do to other people who have also filed a bankruptcy claim at some time.

Although bankruptcy has a definite negative effect on your credit, there is no reason to despair. If you follow good financial proceedures you will always have the possibility of rebuilding your credit. Bankruptcy gives you the opportunity to start over and make wise choices in the future.