Creditworthiness and the Impact of Bankruptcy

Sometimes due to unforeseen circumstances or lack of resources, a person might find themselves in an immense amount of debt. Depending on the situation, the best option may be for them to file for bankruptcy. It’s not an easy process, and most people have a lot of questions about the impact they can expect from their bankruptcy. One of the most common questions is how their bankruptcy will affect their ability to obtain financing from lenders. There are many factors that affect how your credit score will change during and after the filing. Most of the time, your credit will be negatively impacted in a major way, but with time and by using some specific strategies, you can begin to rebuild your financial stability.

What your credit score actually does for you

Everyone who has obtained credit at some point in their lives has a credit score, and it will fluctuate over time. Your credit score takes into account all of the debt you currently have, and computes a score based on how regularly you make your payments, how much debt you have, how long ago you opened your accounts, and a number of other factors.

This information gives lenders an idea of how likely you are to pay back any money that is loaned to you. Whether it’s a home loan or a credit card, your credit score says a lot about how trustworthy and responsible you are with your money. Not only does a good credit score help you to get a home or auto loan, but it aids in getting you a lower interest rate, and can even affect your prospects of getting a job.

How a bankruptcy changes your credit

When you file for bankruptcy, you are basically telling your lenders that even though you agreed to pay them back, you no longer can. Obviously, this will have a hugely negative impact on your score. Banks and credit card companies will no longer believe you when you say you will make your payments to them every month. It’s common for your credit score to go down hundreds of points after filing for bankruptcy, but it is possible to “heal” your credit over time.

Changes you can expect after filing

There are two main types of bankruptcy available for individuals. First, there is Chapter 7, which essentially wipes your debt slate clean. After filing for Chapter 7 bankruptcy, you might not have any more debt, but the filing will stay on your credit report for 10 years. Shortly after you file, you might find that you are already receiving offers in the mail for credit cards and auto loans. Be careful, as these offers specifically target people who have not yet rebuilt their credit history. These loans often come with extremely high interest rates, because the lender expects that you might not pay.

The other bankruptcy option is Chapter 13, and it differs from Chapter 7 in that you set up an agreement to reorganize and pay back some of your debt. Because you are showing a good faith effort to repay some of what you owe, a Chapter 13 filing only stays on your credit report for 7 years.

Either way you choose to go, it’s important to try to reestablish credit once you know you are stable enough to make your payments. Oftentimes a secured credit card is an option that works to show lenders you are recommitted to having good credit. Once you are able to get better loans, like a car loan or a credit card with a decent limit, be extra careful to make every payment on time. After a while, you’ll see your credit score begin to rise.

If you are considering filing for bankruptcy and would like to discuss your options, call The Law Office of Arnold, Wadsworth & Coggins today for a consultation.

Written by Arnold Wadsworth Coggins

Arnold, Wadsworth & Coggins Attorneys is a premier Utah law firm serving the Wasatch Front in the areas of family law, bankruptcy, criminal law, and civil litigation. Our attorneys provide clients with exceptional legal representation and personal attention. With over 35 years of trial practice and litigation experience, we bring big firm expertise at affordable rates