Bankruptcy will not kill your credit for 10 years. Many of the clients who come into my office think that. This common misperception is the result of an intense and extended propaganda campaign by institutional lenders and credit card companies. Obviously, your creditors want you to repay your debts, no matter what the personal cost to you.
The truth is that bankruptcy may remain on your credit report for 7 to 10 years. But just because a bankruptcy is reported there doesn’t mean it will have a negative effect on your credit score or credit rating.
Bankruptcy Will Not Kill Your Credit
If you are carrying a very high debt load compared to all of your property, your income level and credit score may still be very good, but on the verge of sinking with one negative reporting. The credit bureaus calculate your debt-to-asset ratio, and they monitor that ratio very carefully. For those with high incomes, the debt-to-asset ratio is offset by your monthly disposable income.
Should your household income level drop, don’t default on loans, get sued, or suffer a foreclosure or repossession. Instead, preemptively discharge your debts through either a Chapter 7 or Chapter 13 bankruptcy. The defaults on payment obligations will kill your credit — much more than the sensible, if difficult, option of personal bankruptcy.
Others are not so fortunate, and carry a very high debt load without the benefit of commensurate income. For those clients, I suggest a Chapter 7 bankruptcy, which is finished in three months and completely eliminates almost all types of debt.
In Fact, Bankruptcy Could Improve Your Credit
Many people who file for bankruptcy protection find that their credit actually improves after a few months. Think about it. Many individuals already have poor credit standing, and bankruptcy actually helps these clients’ credit ratings. Their scores might take a temporary dip, but after five or six months of no debt, their scores will be better than before they filed bankruptcy.
In fact, people who go bankrupt often experience a sharp boost in their credit score. And credit score recovery is much slower for individuals who do not go bankrupt. In many cases, bankruptcy will actually improve your credit.
Time Heals All Wounds
The longer the bankruptcy remains on your credit report, the less relevant it becomes. Renting an apartment, buying a car, or obtaining an FHA loan — all of these things are completely possible after filing bankruptcy, but that depends on what steps you take once your get your fresh financial start. Bankruptcy will not kill your credit, but bad choices after you file can. Contact an experienced and affordable bankruptcy attorney for more information.