How Bankruptcy Affects Your Credit in Minnesota

A lot of people ask, what happens to your credit when you file bankruptcy? There is no set formula for how bankruptcy will affect your credit. It depends on 2 factors:

1. where your credit score is when you file for bankruptcy protection; and

2. the strategies you use to rebuild your credit after filing.

The law itself does not speak to getting credit after bankruptcy with a few notable exceptions:

1. bankruptcy does not affect your eligibility for student loans;

2. Under the FHA rules, bankruptcy does not affect your eligibility for an FHA home mortgage after eighteen months; and

3. federal law prohibits discrimination by an employer, or a government agency, based on a bankruptcy filing. Remember, bankruptcy is our right to exercise.

On the date your case is filed, your credit report will state that you filed Chapter 7 (or Chapter 13) bankruptcy on a certain date. That information stays on your credit report for up to 10 years. What is very important to understand however, is that this does not blacklist you from credit for 10 years. In fact, many of my clients receive credit card offers within weeks of filing their case. It is important to recognize that these credit cards have high interest rates. But the credit is available to you to use to begin rebuilding your credit. Before we discuss rebuilding your credit, let’s turn to the decision to file bankruptcy vs. settling debts by looking at how credit scores are affected.

For most people, bankruptcy is the last option. There is a negative stigma surrounding bankruptcy and most have bought into the myths and have continued to struggle each month as they try to avoid the solution. Each month as they miss payments on their debts, their credit score is lowered. There is no set number as your credit score is calculated based on a number of factors including: debt-to-income ratio, amount of unused vs. used credit, length of time at your employer, timely payments, etc. But the most significant damage to your credit is done by failing to make payments on your debt. As your accounts go 30, 60, 90, 120 days late, your credit score plummets. A common refrain for many of my clients is: “my credit was really great 2 years ago.” But because they hoped that the situation that caused them to stumble financially would get resolved before things go out of control, they keep waiting and waiting for things to get better. They begin using one credit card to pay another (raising their debt to income ratio) but once they’ve exhausted their credit (another hit to the credit score), they eventually begin missing payments. People then begin going 30, 60, 90, 120 days late (a huge hit to your credit score). Eventually, the original creditors charge off or write off the debt and sell it to a collection agency. The person begins hoping that they can settle with the creditors. But, unless they come into a large sum of money, the collection agency, such as NCO, IC Systems, or Midland Funding, will begin a lawsuit by hiring a law firm like Messerli & Kramer or Gurstel Chargo. The goal of the lawsuit is to get a judgment against the debtor, which eventually will be ordered by the court if the debt was legitimately owed. Once the creditor has the judgment (another hit to your credit score) they will being garnishing up to 25% of your net wages or levy out of a bank account that has your name on it. What this means is that your score can drop 200 points or more and you are in no better position in terms of resolving your debt situation. Then after they have let a bad situation get worse, and are about to be garnished, they decide that they must file bankruptcy.

If that same person instead of waiting until a bad situation became worse, simply would have come in for a free consultation, I could have saved them months, if not years of stress and helped them save their credit score. Rather than letting judgments, maxed credit balances and months of late payments destroy their credit score, they could file for bankruptcy protection and minimize the damage. When you file for bankruptcy, the filing date is posted on your credit report for a maximum of 10 years. If you had to obtain financing for a car loan right after your bankruptcy, you could, but you would not be able to get a very good interest rate. Most of my clients have rebuilt their credit within 1 to 3 years after filing their case. The key to rebuilding credit is paying debt obligations on time after filing your case. This requires having a debt obligation. If you do not keep a mortgage or a car loan after your bankruptcy, then this would require you to open a new credit card after your case is filed. Because the credit cards you will be offered after filing your case will be high interest rates, you want to make sure you only charge a small amount each month that you can pay off in full, so that the interest rate doesn’t cause the debt to snowball on you. Each month as you pay your bill on time your credit score increases.

Bankruptcy stops the bleeding. It freezes the creditors from negatively affecting your credit score, removes the over burdensome debt and allows you to begin rebuilding your credit immediately, rather than spending years getting out from under the burdensome debt. A stitch, in time, saves nine. Address the problem soon and the solution is straightforward and easy to complete. Allow the problem to fester and the solution is more complicated and drawn out. If you are struggling with debt, call us today for a no obligation, FREE consultation to learn more. You may not have to file bankruptcy. But you owe it to yourself to explore your options. Take an hour out of your week to speak with us and start resolving the problem before it gets worse.