What Affects Does Filing for Bankruptcy Have on Your Credit Score?



By:Mike Cibik


Bankruptcy and Credit Score


After months of working through an uphill struggle, it’s come as far as it can go. Creditors have lined up looking to be repaid. Monthly expenses have burned through everything you have. Your employees, who count on you for their livelihood, won’t be able to be paid much longer.


Uncomfortable financial questions are coming up that you don’t have answers for. This might sound familiar. It’s not uncommon after all, and it can happen even if you can manage to avoid some of the most common pitfalls leading to bankruptcy. Even in the face of all of the immediate hardships of coming to terms with having to file for Bankruptcy, what comes after.


Working through the period after filing for bankruptcy is no small feat. It can be difficult on an emotional, personal, and even social level, but the one thing most people filing for Bankruptcy want to know is what happens to them financially once a claim is filed.


The primary and most visible thing that happens is the effect bankruptcy will have on your credit score. Exactly what that effect will be varies from filing to filing, but there’s a few things you can take into account to predict what a Bankruptcy filing will do to you or your company’s credit. Credit scores are important as they tell potential lenders how reliable an investment you are. Take a look at creditknocks.com for some ideas on how to improve your individual credit score, as individuals need loans just as often as businesses do.


The Two Primary Types of Bankruptcy


Before you can determine what to expect in terms of your score and how long it will affect you, you need to determine the type of Bankruptcy you’re filing for. For individuals and corporations, there are two preeminent forms of bankruptcy: Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. Each one has its own unique sets of circumstances.


Chapter 7 Bankruptcy is the most basic type filed by individuals. It is used to liquidate assets and is referred to by many as ‘Straight bankruptcy.’ After this type of Bankruptcy is filed, there are few remaining assets in place as most assets will be liquidated to repay applicable debt.


Chapter 13 Bankruptcy is filed by individuals to reorganize finances while they work out debt repayment, and is also known as ‘Wage Earner Bankruptcy.’ People filing for Chapter 13 Bankruptcy may find themselves with fewer resources and assets, but can still carry on with their primary assets (home, car) after finances are restructured and its debts are addressed accordingly.


Deciding which type of Bankruptcy filing is optimal for you in the Commonwealth of Pennsylvania is something best discussed between you and a professional bankruptcy attorney. They can guide you through the emotional and fiscal minefield and make sure that you are prepared and are taking all of the steps you should take before filing for Bankruptcy in Pennsylvania.


What’s Going to Happen to Your Credit When You File for Bankruptcy?


Uncertainty will make anyone uncomfortable, and Bankruptcy comes with a surplus of it. But there’s a few general points to discuss when trying to discern its ongoing impact on your credit score.


To determine how long your credit score will be impacted after a Bankruptcy filing, refer to the type of Bankruptcy filed.


  • With Chapter 7 Bankruptcy, the impact remains on your credit score for seven years.
  • With Chapter 13 Bankruptcy, the impact starts at seven years, but can extend to a total of ten years depending on the circumstances you and your Bankruptcy Attorney account for in your filing.


Regardless of the type of bankruptcy, you can expect your credit rating to take a reduction. How severe the impact is depends on several factors, but the main ones to consider are:


  • Your credit score at the time of filing Bankruptcy
  • The amount of debt accrued prior to your filing
  • The type(s) of debt accrued prior to your filing


As for how much your score will come down by, this depends on where it is at the time of filing for Bankruptcy. If your credit score was high at the time of your bankruptcy filing, you can expect your score to lower more significantly (the high end is around a 260 point penalty). If your credit score was lower to begin with, the penalty may be less drastic than you might expect (with the low end penalty weighing in as low as 150 points).


How Can I Repair My Credit After Bankruptcy?


Naturally, the dip in your credit score can affect many of the financial aspects of your life. Activities such as buying a home, finding employment, or creating payment plans for any number of purchases can become daunting, but there are still several roads forward. Once you know how long the effects will last, and how far your credit rating has lowered, you can begin to plan your next steps to repair your credit score.


The first step is diligence in monitoring your credit score while the Bankruptcy is being carried out. You’re entitled to look into your credit up to three times per year at no cost to you via the three major credit service companies: Equifax, TransUnion, and Experian. Make the most of these free check-ins and use further checks if you feel that there are irregularities or remaining debts still standing. Clearing out debts via your Bankruptcy claim is often a long and detailed process, and you are ultimately responsible for checking up on the process of your debt removals.


The second step is to start making efforts to rebuild your credit score. While it will be difficult to get things like home loans or start up equity for businesses, smaller efforts can help at the beginning. Taking on a car note, applying for store credit cards with lower limits, or even maintaining remaining lines of credit can all help you to slowly build up credit score after a bankruptcy. It won’t make for an immediate boost, but using and establishing the above can slowly bring about results to repair your credit score.


The third, but not least important step, is to retain the assistance of a Bankruptcy Lawyer – someone you can trust to work for you in the case of all the instances mentioned prior. The attorneys at the Philadelphia, Pennsylvania debt-relief law firm of Cibik & Cataldo, P.C. have over 35 years of experience and can assist you with either Chapter 7 or Chapter 13 bankruptcy matters.


Our team of attorneys provides superior, cost-efficient, and value-oriented legal services, concentrating solely in consumer and business bankruptcy matters. If you are in need of representation or need help navigating the bankruptcy process, contact us at (215)-735-1060 for a free consultation.


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