Bankruptcy and Credit Worthiness

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Bankruptcy’s Impact on Credit Worthiness

Credit scores reflect on the financial history of an individual or a business and are meticulously built over time. When there are moments of financial crisis and debts pile up, the individuals ultimately opt to file for bankruptcy. The biggest fear when the individual’s file for bankruptcy is how it impacts their credit scores. There are many reasons why credit scores will not be impacted in cases of bankruptcy as every individual commences their financial status afresh and they have time to rebuild their credit history

Checking with a bankruptcy attorney or a law firm such as Recovery Law Group, who serve the Los Angeles and Dallas regions, is a recommended option for individuals who seek guidance on building their credit history. They have the experience to share the best practices and impart the guidance in order to avoid any further mishaps in the financial arena of the individuals. The below points will also be a guideline to understand how your credit worthiness stands when you have filed for bankruptcy.

  • If an individual has filed for Chapter 7 bankruptcy, the filing will remain on their credit report for up to 10 years of tenure. If good efforts are expended on rebuilding the credit over time, then the filing & the discharged debts have very less impact. It is assessed that most of the discharged debts drop off a credit report in approximately 7 years.
  • If the bankruptcy filing is of Chapter 13 type, then it is displayed on the consumer’s credit report for seven years. It is the similar condition for discharged debts too even though they may be repaid within three to five years through a formalized repayment plan – discharged debts appear on the credit report even beyond the repayment tenure.

Credit worthiness will eventually improve as the time goes by – the impact of repayment and your rebuilding of credit worthiness will enable you to get offers from the creditors at large. So besides the amount of time that the bankruptcy filing remains on the credit report, the impact of the filing may reflect in high-interest rates (direct/ hidden) of new credit offers or may put individuals to deal with subprime lenders. Some of the mortgage lenders will view bankruptcy filing differently – say the eligibility of an individual to obtain an FHA mortgage can be one year if filed for Chapter 13 bankruptcy and will be two years if Chapter 7 filing is done. Few factors such as income, current debts, and down payment amount work beyond the bankruptcy filing and may affect the wait periods.

It is understood that individuals leverage bankruptcy filing to regain their financial stability. Though the impact to credit worthiness is there when you have filed for bankruptcy, it isn’t permanent!