Bankruptcy and Rebuilding Your Credit

The biggest misconception the majority of my clients fear is that bankruptcy will devastate their credit forever. The truth is, the filing of a bankruptcy may be the only tool to fix their credit. You see, most of my clients have fallen victim to divorce, job loss, or medical bills. Most of my clients still have perfect credit when they first visit my office. They usually have made the appointment because they can see it is just a matter of time before they fall delinquent on their bills. Unfortunately, once your credit deteriorates to the point of no return, bankruptcy may be the only way to fix it. The public has been forced-fed a host of myths and lies (usually from the credit industry itself) on how horrible their credit lives will be if they declare bankruptcy.

Here are the facts:

  • While chapter 7 will remain on your credit report for ten years, and chapter 13 will stay for seven years, it will not take you a decade to reestablish your credit. An independent study has shown 96% of consumers were offered new credit within one year of declaring bankruptcy!
  • I will never get credit again. False! While life after bankruptcy is no cakewalk, this statement is flat out wrong! The most desired credit sought by my clients is new car loans, new credit cards, and new mortgages. The majority of my clients have told me they received a slew of credit card and car loan offers immediately upon receiving their discharge. Why? Because they are no longer a high credit risk!. They have relieved themselves from the tremendous financial burden which was weighing them down, now creating disposable income. Plus, they cannot file a new bankruptcy for several years. I even know of one local car lender who will finance cars (at reasonable rates) immediately after the filing of a bankruptcy.

Because credit scores are weighted more towards recent activity and not past mistakes, a consumer who pays his or her bills on time after the filing of a bankruptcy and responsibly conducts his financial affairs should see an above-average credit score within one year of filing a bankruptcy. The idea that filing a bankruptcy will condemn you to a life where you’re treated like a financial outcast and banished to years of credit exile is just not true!

 

Frequently Asked Questions

Q1: Does bankruptcy ruin my credit permanently?
A1: No, this is a common misconception. While bankruptcy remains on your credit report for a period, it does not permanently devastate your credit. In many cases, it can be a crucial step to eliminate debt, allowing you to establish a positive financial future and begin rebuilding your credit soon after the process.

Q2: Can bankruptcy actually help fix my credit?
A2: Yes, for many individuals, bankruptcy can be the most effective tool to fix severe credit issues. When debt becomes unmanageable, bankruptcy can clear the slate, stopping the cycle of delinquency. This provides a fresh start, enabling you to build a stronger financial foundation and improve your credit over time.

Q3: How long does bankruptcy stay on my credit report?
A3: A Chapter 7 bankruptcy typically remains on your credit report for ten years, while a Chapter 13 bankruptcy stays for seven years. However, this doesn’t mean it will take you that long to reestablish good credit; many people start getting new credit much sooner.

Q4: Will I be able to obtain new credit after filing for bankruptcy?
A4: Absolutely. The belief that you’ll never get credit again is false. Studies show a significant majority of consumers are offered new credit, such as credit cards or loans, within just one year of declaring bankruptcy. Lenders often see a cleared debt profile as a new opportunity.

Q5: What are some common reasons people consider bankruptcy?
A5: Many clients who visit our office are facing overwhelming debt due to unforeseen life events like job loss, divorce, or significant medical bills. Often, they still have good credit initially but realize they are on the verge of becoming delinquent, making bankruptcy a preventative measure.

Q6: What is the primary goal of filing for bankruptcy?
A6: The core purpose of bankruptcy is to either eliminate or significantly reduce your existing debt. This process is designed to relieve financial pressure, allowing you to regain control of your finances and build a stable, positive financial future without the burden of overwhelming obligations.