How Will Bankruptcy Affect My Credit Rating?

People often worry about the effect of bankruptcy on their credit rating and of course, a good credit rating is extremely helpful if you are trying to buy a house or a car.

Bankruptcy is rarely the first choice for dealing with debt, and, therefore, if your attorney finds that bankruptcy is your best alternative to a bad situation, your credit rating can’t be your primary concern. An individual with great credit but on the verge of default will suffer the biggest blow to their credit rating. However, at some point, the tipping point will be reached and that person’s credit will suffer either due to delinquent debts or bankruptcy.

Under the Fair Credit Reporting Act, 15 USC SEC. 1681 et seq., information regarding bankruptcy can be reported on a credit report for up to 10 years. On the other hand, negative information reported by creditors can be reported for seven years, and without bankruptcy, creditors often continue to report negative information until the debt is written off for tax reasons.

As a result, negative information can linger on a credit report for a longer period than seven years. Therefore, the effect of filing a bankruptcy on a credit report may not be drastically different than someone who simply allows delinquent debt to remain delinquent. Further, once the bankruptcy is completed, outstanding debt should be marked as discharged in bankruptcy on the credit report.

Following bankruptcy, it is recommended that you try to improve your credit rating. Often a good, secured credit card can be an effective tool. That card allows you to essentially borrow against your own funds on deposit with the credit card company while demonstrating a good payment history on the account. Over time, having positive information reported to the agency along with the passage of time can lead to an improved rating.

As a final warning, it not uncommon for an individual who obtains a discharge in bankruptcy to obtain a car loan. Car dealers are motivated to make a deal, but you are unlikely to get the kind of financing terms you really want. Before driving a car off the lot, make sure you are approved for the financing you actually applied for and that you can afford the payment. Never make a snap decision without thinking it through.