When you are thinking about filing for bankruptcy a common concern is what your financial life will be like after your bankruptcy is approved by the courts. Having accurate information on the effects of a bankruptcy is a vital piece of the whole picture when you are making a bankruptcy decision. While each individual situation is different, below is a summary of how personal bankruptcy can affect your credit score and your ability to secure credit.
Securing credit is possible after bankruptcy if you are careful with your income and credit use.
It’s important to understand the basics of what a credit score is and why it is important to your financial future. The company that introduced credit risk scores in 1981 is Fair Isaac Corporation or FICO. They remain one of the primary credit-rating companies in the U.S.1 Your FICO score, a three-digit number ranging from a low of 300 to a high of 850, is based on an analysis by FICO about how likely you are to pay your bills on time.
How your credit score is determined
In the analysis, FICO uses reports by credit reporting bureaus such as TransUnion, Experian and Equifax. These reports detail your payment history and amount of debt. You have the right to obtain a copy of each of these company reports once per year for no cost. It is suggested that you request a report from one of these agencies every four months so you can keep current with the information being posted. You should work to correct any misinformation contained in the reports.
Your credit score is used for a number of activities. When you are applying for a car loan, renting an apartment, or buying car insurance, the company you are seeking the loan or service from may access your credit report and FICO score and use them to establish if they will provide the loan or service. The rate they charge you for the loan or service may also depend on your credit report and/or FICO score. So, a higher credit score can translate into a better loan rate, a better price for your car insurance, or approval of your application to rent a house or apartment.
Improving your credit score
It may seem odd, but a FICO credit score can actually improve after a person emerges from bankruptcy. This is be because you may already have an inconsistent payment history, which is a factor accounting for about 35 percent of your total credit score.2 Another 30 percent of your credit score is based on the total debt that you owe, which would be discharged in a bankruptcy. However, it is rare that a FICO credit score is not damaged by bankruptcy. A Chapter 7 bankruptcy will remain on your credit report for 10 years and a Chapter 13 bankruptcy will remain for 7 years.3 The good news is that you can work to repair your credit score by using your income and credit wisely after your bankruptcy is discharged.
Building your credit
You will most likely be able to obtain credit after your bankruptcy, however, the interest rates will be higher, sometimes much higher, than those given to people with higher FICO credit scores. It is advisable to obtain a credit card with a modest spending limit and pay the balance each month as a way to improve your FICO score. You should also pay your other bills, such as utilities, on time in order to build a good credit history.
Maintain your bank account
Having a checking or savings account with a positive balance is a way to show creditors that you have a reliable cash flow.4 If you are having difficulty obtaining a credit card your bank balance can make it possible for you to obtain a secured credit card with a credit limit based on your previous credit history and how much money you have deposited in your account. Having a cosigner on larger loans, such as those for a car or a home, may make it possible to secure credit at a lower rate depending on the credit score of the co-signer.5 If you plan to buy a car, remember that insurance companies use your credit score to determine if they will ensure you and at what rate, so it is best to check out your options before proceeding with a car loan.
These are just a few of the effects that bankruptcy can have on your ability to secure credit. A bankruptcy lawyer can best advise you on what to expect in your particular situation.
If you have questions about personal bankruptcy and if it is the right choice for you, Hines Law can help. We are a full-service bankruptcy firm specializing in Chapter 7 and Chapter 13 filings committed to helping our clients get a fresh financial start and help rebuild their future.
Our bankruptcy attorneys have twenty years’ experience and knowledge and will guide you every step of the way with compassion. Choosing the right debt relief option for your financial situation is overwhelming and emotional. Don’t do it alone, call us for a Free Consultation.
1 What is a FICO score? by Louis DeNicola, 9/30/2020
2 How Bankruptcy Affects Your Ability to Secure Credit, 5/2/2020
3,4,5 Life After Banruptcy, by Mark P. Cussen, 7/27/2020