Bankruptcy and Your Credit Rating

Picture of credit score and magnifying glass

Many people are afraid of what could happen to their credit scores if they file for bankruptcy. The three credit bureaus have financial information that scoring agencies take into account when creating your credit scores. Lenders use these credit scores (there are many types) to make decisions on whether to offer lines of credit to borrowers.

There are many misconceptions about bankruptcy. There is a common misconception that bankruptcy permanently ruins your ability to access credit. This is not the case.

If you are considering filing for bankruptcy, then worrying about credit scores should not be at the top of your priorities list. Protecting your assets and improving your immediate financial situation should be a greater priority.

Are your properties at risk of being seized by creditors? Are your wages being garnished? If so, then you should know that waiting to file for bankruptcy could cause more damage to your credit scores in the long run. Your financial situation could continue to deteriorate, but bankruptcy allows you the chance to discharge debts that are causing you financial trouble in the first place. Therefore, you would be in a better position to begin improving your creditworthiness.

How Does Bankruptcy Affect Your Credit Scores?

When you file for bankruptcy, it remains on your credit history for ten years from your filing date. Depending on which chapter you file, your discharged debts may disappear from your credit history before your record of bankruptcy does.

However, you will also have an easier time fixing your credit scores due to having your financial issues resolved in bankruptcy. If it was difficult to pay your rent, car payments or other credit obligations before your bankruptcy, it should be easier now that your financial situation has stabilized.

Keeping Healthy Credit Scores After Bankruptcy

Lenders are looking at a couple of factors when considering whether to offer lines of credit. Depending on the lender and financial asset involved, they may use varying types of credit scoring models.

However, most lenders are concerned with whether you are financially stable. They want to know whether you are someone who can consistently make payments on time. For this reason, it is very important to take any future debt obligations extremely seriously after your bankruptcy.

It is important to remain employed or to have a steady flow of income. You should budget your money to prepare for disasters, such as an illness or job loss. Try to limit your spending as much as possible so you can save for assets that may help you in the future, such as your retirement.

If you have federal student loans, there are a couple of things you can do to limit your payments. You could enroll in an income-based repayment program. The Department of Education offers four of them, with eligibility depending on the type of loans you have and the standing of the loans. Enrolling in such a program can help you make these payments until you can get back on better financial footing.

You should also work towards identifying your bad spending habits. For some people, but not all of course, bad spending habits are a common cause of financial problems. It is important to avoid making the same mistakes in the future.

About Our New Jersey Bankruptcy Law Firm

Garland & Mason, L.L.C. can help you look at options for debt relief if you are facing insurmountable debts and lawsuits from creditors. If you want to explore these options, then we encourage you to give us a call. You can reach us at (732) 358-2028 or use our online contact form.

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