One of the most concerning aspects for many people considering bankruptcy is its effect on their credit score. In this article, we’ll discuss how bankruptcy often impacts your credit score, along with strategies for rebuilding credit post-bankruptcy. A chapter 7 bankruptcy filing will stay on a debtor’s credit reports for ten years from the date of filing. A chapter 13 bankruptcy filing will stay on a debtor’s credit reports for seven years from the date of filing. The common mythology is that if someone files a bankruptcy that they will not be able to get credit again; or, in the minimum, they won’t be able to get credit during the time that the bankruptcy appears on their credit reports. The truth is a lot different than this common perception.
When someone files a bankruptcy, it is not essential for the bankruptcy lawyer to know the debtor’s credit score because it is not part of the bankruptcy petition itself. But over the years I have had many of my clients voluntarily tell me what happened to their credit score after the bankruptcy filing. For many people that file a bankruptcy, their credit score is bad or really bad at the time of filing due to getting behind in payments, facing lawsuits, and/or having a high amount of debt. The good news is that for an individual that has a bad credit score at the time of filing, more often than not, that person will see an immediate improvement in their credit score when they file. Indeed, many of my clients over the years have told me that their credit score increased by more than 100 points just by filing a chapter 7 (and some clients have told me that their credit score immediately improved by over 200 points upon filing the chapter 7). If a debtor has a high credit score at the time of filing, then the bankruptcy filing will cause the credit score to lower, at least temporarily. But there are simple strategies to start rebuilding the credit score that will be discussed below.
To give some context on the real world effects of filing a bankruptcy as it pertains to credit, it is normal for individuals that file a chapter 7 bankruptcy to immediately start receiving solicitations from local car dealerships to finance a car. There are some local car dealerships in the Portland, Oregon, area that will happily finance a car to an individual immediately after they file a chapter 7 or anytime thereafter. Of course, the debtor will need to have a consistent source of income to qualify for the financing, but the bankruptcy itself will not prevent the debtor from financing a car. Also, to give some more context on the real world effects of filing a bankruptcy on a debtor’s credit score, an individual that files a chapter 7 can qualify for a mortgage two years after a chapter 7 discharge (the discharge in a chapter 7 is about 91 days after filing a chapter 7). An individual in a chapter 13 bankruptcy can even qualify for a mortgage while they are in an active chapter 13 bankruptcy as long as they have been in the chapter 13 for one year or longer and are current on their trustee payments.
Rebuilding Credit After Bankruptcy:
As discussed above, it is common that individuals see an immediate increase in their credit score if their credit score was bad before the filing. It is also true that it is possible for a debtor’s credit score to decrease after the filing if the credit score was good before the filing. After a bankruptcy discharge, it is important to get a small credit card to start rebuilding credit. If the individual doesn’t qualify for a normal, unsecured credit card (i.e., no annual fee and a normal interest rate) after the discharge, then the individual should get a small secured credit card from their bank or credit union. I recommend using this credit card, making payments on time, and paying about 60% of the balance each month. If a car is reaffirmed in the chapter 7 or if a debtor obtains a new car loan after the bankruptcy was filed, then the on-time payments on that car loan will help rebuild credit. Also, if the debtor in the chapter 7 had a mortgage loan, it is normally advisable to reaffirm the first mortgage loan and on-time post-discharge payments on the mortgage will help rebuild the credit.
As discussed above, debtors in a chapter 13 can even obtain a mortgage while in a chapter 13. The chapter 13 trustee would need to approve the mortgage, but from my experience with the chapter 13 trustee’s office in Portland, Oregon, in the handful of chapter 13 cases of mine where my client was approved for a mortgage, the chapter 13 trustee’s office approved the mortgage also. (I am a bankruptcy attorney in Portland, Oregon, and most of my chapter 13 cases are with the chapter 13’s office in Portland, Oregon. Thus, other trustee offices in different jurisdictions could deal with the issue of approving mortgages for chapter 13 debtors differently than the chapter 13 trustee’s office in Portland, Oregon. It always best to speak with a bankruptcy lawyer that practices in the jurisdiction where you live since trustees in different jurisdictions may administer cases differently.) Also, debtors in a chapter 13 can also finance cars while in the chapter 13, although there are guidelines that must be followed for the chapter 13 trustee to approve the car financing. Debtors in a chapter 13 can also obtain other debt while in the chapter 13, but the trustee’s office will need to approve all debt that the debtor obtains while in an active chapter 13 bankruptcy.
In conclusion, filing a bankruptcy is not the credit deal breaker that people may believe to be the case. As discussed above, most people actually see an immediate improvement in their credit score upon filing a bankruptcy (sometimes a significant immediate improvement) and will continue to improve with on-time payments on credit (secured or unsecured credit card, mortgage, and/or car loan) after the discharge. Unfortunately, the perception of “bankruptcy” as being the worst thing that someone can do to their credit keeps many people that would otherwise benefit greatly from a bankruptcy filing from even talking to a bankruptcy attorney to explore what it actually means to file bankruptcy. My recommendation is to schedule a free consultation with a local bankruptcy attorney if you are struggling with debt issues to explore what a bankruptcy can or can’t do for you and the real life implications of filing a bankruptcy. I am a bankruptcy attorney in Portland, Oregon, with over 27 years of practicing law and more than 16 years of exclusively practicing bankruptcy law. I offer free consultations via phone, Zoom, or in-office.
