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How Will Bankruptcy Affect My Credit Score?

I am a bankruptcy attorney in Grand Rapids, and this is the most common question I receive. Almost every person I meet with is worried about what a bankruptcy will do to their credit. At the end of the day, it rarely is a significant factor in whether someone should file bankruptcy, but at first people are worried about it. Once we walk down the logic road a bit (late payments and judgments have likely already wreaked havoc on the client’s credit score, or they will soon enough, and the client does not have a lump-sum of money with which to settle their debts), it is less of a concern.

A quick Google search for bankruptcy’s effect on one’s credit score will reveal the 2-cent answer that a bankruptcy will stay on your credit report for 7-10 years. On its face, the answer is accurate, but it’s what it doesn’t say, or what the writer doesn’t know, that can be misleading.

While bankruptcy will be reported on your credit report for 10 years (it’s the discharged accounts that will fall off your report after 7 years), what the client is really concerned about is whether they will be able to get credit within the next decade if they file for bankruptcy. And the answer to that is yes, and they will likely be able to get credit surprisingly quickly after a bankruptcy discharge. Sure, the interest rates will be astronomical, but credit will be available. In fact, I have many clients who tell me they receive credit card offers in the mail right after filing bankruptcy.

The truth is that if you have a 780 credit score, a bankruptcy will likely tank your score by 200-250 points. If your credit score is 600-650 because of late payments or judgments entered against you, the dip will be much smaller because you had less room to fall.

Rebuilding your credit after bankruptcy will take some time, but there are steps you can take to speed that process up considerably. Rebuilding your credit becomes less about the bankruptcy on your credit report and more about the positive reporting you can accumulate after filing bankruptcy. If you can keep some secured credit lines through your bankruptcy (e.g., home mortgages or an auto loans), the timely payments you make on those debts will help rebuild your credit. Alternatively, some banks offer pre-paid credit cards, which will report positively on your credit report. The cards are easy to obtain, because they are pre-paid, so there’s no risk that the bank will not be paid back.

Most people end up filing bankruptcy because it is the smartest option for them to preserve their assets, stop collection lawsuits, or to end judgment execution such as garnishments and foreclosures. While it is the most common initial concern for people considering bankruptcy, in the end it is rarely if ever a deciding factor in determining whether to file.  However, rebuilding your credit after a bankruptcy is an important issue that you should proactively address.

As always, you should talk to a qualified bankruptcy attorney before making any large financial decisions. Most bankruptcy attorneys offer a free initial consultation and are happy to answer any questions you might have. If you live in West Michigan, White Law Firm, PLC in Grand Rapids specializes in bankruptcy law and can be reached at (616) 920-1932 or via email at info@whitelawplc.com.  

 

 

Benjamin White