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Credit and Bankruptcy: What Happens to Your Score?

A common concern that many people have when considering filing for bankruptcy relief is how filing a bankruptcy will impact their credit score. While your credit score may be lower for a while, it is not permanent decrease in your credit score. In most cases, filing a bankruptcy case improves your credit score within a year or two after filing. Filing for bankruptcy will do the most damage when it first hits your credit report. As time elapses, the effects of your bankruptcy filing will lesson over time.

The two types of personal bankruptcy affect your credit differently. In both cases, bankruptcy creates a negative item on your credit report. However, the time this negative item remains differs between the two Chapters:

  • Chapter 13 Bankruptcy: 7 years
  • Chapter 7 Bankruptcy: 10 years

If you had excellent credit before filing then you will see a bigger dip in your score than someone who already has “beat up” credit.  FICO scores only go down to 300, but it’s rare to see anything below 500.

How to raise your credit score after bankruptcy

No matter where you started and ended up, the good news is that you can bounce back quickly. Most people see their credit score increase dramatically in 1 year.  In 24 months most of our clients have reached at least a 700 score if they have been paying their bills on time since discharge.

The formula that we see that works best for our clients to rehabilitate their credit is as follows :

  1. Six weeks after discharge you need to pull your credit report and make sure that your creditors are reporting correctly.  Accounts need to reflect a $0 balance. If you see any errors then you need to dispute this with the creditor and credit reporting agency.
  2. Secure one secured credit card in order to start rebuilding your credit.  Yes, you will get charged fees for this service but in 6-12 months this account will switch to a regular credit card if you maintain your payments on time.
  3. If you are reaffirming your car or home (and the lender agrees to report to the credit agencies) then make sure you maintain these payments on time.
  4. Sign up with CreditKarma (it’s free!) and monitor your credit.

Stay away from credit repair companies

You see the ads in newspapers, on TV, and online. You hear them on the radio. You get fliers in the mail, email messages, and maybe even calls offering credit repair services. They all make the same claims:

“We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!”

“We can erase your bad credit — 100% guaranteed.”

Don’t believe these claims: almost every time they are a scam. The fact is there’s no quick fix for creditworthiness. There are no overnight solutions to fixing your credit history.You can improve your credit report legitimately, but it takes time, a conscious effort, and sticking to a personal debt repayment plan.

Look for these signs to determine if a credit repair company is trying to pull a scam:

  • It promises to remove negative information from your credit report. No one can legally remove negative information from a credit report that is accurate and must remain on your report for a set amount of years; most information stays on your report for seven years while bankruptcy information can remain for ten years.
  • It requests an upfront fee before any type of credit repair is performed. A legitimate company will not demand payment before the service is provided.  Remember that improving your credit can be done, but it takes time.
  • It offers to create a new credit report for you with different identification such as another Social Security number or business tax ID number. This is illegal. It’s a federal crime to lie on a loan or credit application, to misrepresent your Social Security number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.
  • It asks you to sign blank forms and provide personal information so the company can act on your behalf to help with credit problems. Never sign blank paperwork. Never give out personal information without knowing the reason and with whom you are dealing. Once someone gets your personal information, you may be in danger of identify theft.
  • It sent you an offer through e-mail that you did not request. Many scam artists send out “official looking” e-mails in hopes that you will respond. This may be a phising scam. If you did not request information to be sent, do not deal with the company.

Additional Links:

https://www.consumer.ftc.gov/articles/pdf-0096-fair-credit-reporting-act.pdf

https://www.creditkarma.com

https://www.fico.com

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