Everyone know knows that bankruptcy will have an impact on your credit score. Questions that we are often asked is include:
Which will affect my score more - Chapter 7 or Chapter 13?
How soon after bankruptcy can I qualify for a home loan?
Will bankruptcy save my current home from foreclosure?
Some questions are have a more straightforward answer than others. Because of the differences between Chapter 7 and Chapter 13, the timeline to buy a home will vary. With Chapter 7, you can qualify for a home loan 2 to 4 years AFTER the bankruptcy is discharged. With Chapter 13, it's possible to qualify immediately after it's discharged. This will, of course vary from lender to lender.
If your decision to file bankruptcy is based on you wanting to stop a foreclosure, that's possible as well, under wage earners, or a reorganization bankruptcy (such as Chapter 13). There will be some caveats and some do's and don'ts, but it can be easily done.
The more difficult question to answer is the exact impact a bankruptcy will have on your credit. There are five distinct factors taken into account when calculating your credit score. How credit bureaus determine your FICO or credit score is actually a closely guarded secret. However, we are aware that filing for bankruptcy will negatively affect your credit almost immediately. The magnitude will vary based on your health and history of your credit before declaring bankruptcy.
If you have a decent credit score at the time you file for bankruptcy and you are looking for relief from mounting debt, you could expect as much as a 100-point decrease. We've seen this many times in our experience working directly with customers. Again, this will vary from person to person. On the other hand, if you have a lower credit score to begin with, the reduction will be much smaller.
Even though declaring bankruptcy would negatively impact your credit score, ignoring your debts are even more detrimental to your credit, because on-time payment is a huge contributor to score calculations. The idea behind bankruptcy is that, if you think you cannot recover from your debt, filing for Chapter 7 or Chapter 13 may initially harm your credit, but the impact drastically decreases over time, even though they stay on your report for 10 years and 7 years, respectively. Following the agreement, you can begin the process of rebuilding your credit in a few steps.
Begin monitoring your credit. There are paid sites that have the most accurate versions of your FICO score. Then there are free sites, such as Credit Karma, that monitor your VantageScore, which is not quite the same, but helps if you can't afford to add another monthly subscription service.
Make on-time payments going forward. Not only do the credit score providers weigh this heavily, but to qualify for a mortgage loan following a bankruptcy, most lenders require 12-24 months of no late pays at the time of application.
Get a small secured credit card and keep it paid down. 6-7% utilization seems to be the magic number for many of the clients we have worked with. Similarly, you can get a credit builder loan with your bank or credit union. Having a mix of installment and revolving credit that is paid on-time proves to the credit agencies that you are, in fact, a responsible borrower.
If you need help with debt management, consider credit counseling as you re-build.
To understand bankruptcy’s full impact on credit scores, the best course of action is to discuss your circumstances with an experienced attorney. A seasoned attorney can explain the procedure and assist you in determining if filing for bankruptcy makes sense given your circumstances. Since 1999, Hoard Law has assisted clients with more than 1,000 bankruptcy filings. Call 704-954-8094 if you'd like further assistance on this topic.