The Effect Of A Chapter 7 Bankruptcy Filing On Your Credit

One question that I have heard time and time again from people who are thinking about filing for Chapter 7 bankruptcy is “won’t it ruin my credit”? I think what they are really asking is “won’t it ruin my credit even more than it already is?”  Not all, but certainly most people who are facing the possibility of bankruptcy already have less than stellar credit.  Otherwise, they may be very close to the point where they can no longer keep up and are on the brink of defaulting on credit cards, medical bills and the like. Many have already been sent to collection agencies and don’t know what to do next. As much as they would like to pay their bills, they just don’t have the money after they have put food on the table, provided medical care for themselves and for their children, and filled up their gas tanks just so that they can get to work.

Here’s the real deal on how bankruptcy affects credit.  Before you can understand what I am about to tell you, I want you to know that there are time limits on how often someone can eliminate their debts in a Chapter 7.  Creditors know this. So, think about what that means from their perspective.  If someone has just been discharged in Chapter 7 bankruptcy (successfully having eliminated their debts), it will be a long time again before they can do it again. Also, the person who has just come out of bankruptcy has gone through credit counseling, debtor education, and likely has no desire to get behind on their bills again.  So, there will be a strong motivation on the part of the person to keep up with payments for any new credit that is extended to him or her.  Most creditors will be more likely to give credit to someone who has filed for bankruptcy than to someone who is still behind on all of their bills and has credit agencies after them and maybe even lawsuits going against them.  While some creditors have a policy against giving credit to previously bankrupt folks, others pride themselves on offering credit to the newly bankrupt.

Granted, you may get hit with a higher interest rate and will not get terms as favorable as someone who has never been behind on a bill and who has never filed for bankruptcy, but don’t compare yourself to people who have never been behind.  If you are overwhelmed with debt, how likely is it that your credit is terrific and is expected to stay that way?  Besides which, how much credit do you really want?

As for your credit report and credit score, bankruptcy does have a negative effect on your FICO score- no doubt about it.  But again, it is all relative. Someone with perfect credit will see an enormous drop in their score whereas for someone with already bad credit, it will just be another modest ding.  While a Chapter 7 Bankruptcy filing will appear on your credit report for 10 years, there are things that you can do as soon as you emerge from bankruptcy to start building up your rating.  With the passage of time and more positive things being done to move your credit upward, the less of a negative impact the bankruptcy filing will have. 

Good credit is very important, don’t get me wrong.  However, if you are buried in debt; the things that good credit will get you are going to be beyond your reach in the near future anyway, and you need to figure out a way out of that.  You can build your credit back up, slowly but surely, after bankruptcy in a way that you may not be able to do if your accounts keep going to collection and into default.  This is the silver lining in the bankruptcy cloud.

For more information on Chapter 7 bankruptcy in the Chicago suburbs, contact attorney Carol O’Connor Cadiz at 888 878-5442 to find out more. 

Carol O'Connor Cadiz
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Attorney & Owner at O'Connor Cadiz Law: Bankruptcy, Injury, Real Estate & Mediation