Chapter 7 and Chapter 13 bankruptcy filings can affect your credit score but the magnitude depends on a variety of factors. One of the most significant factors is the level of the credit score at the time of the bankruptcy filing. Debtors who are considering bankruptcy are usually doing so because of financial stress. Here, the usual signs of financial stress such as late and missed payments are come into play, increasingly weighing on credit scores with each missed payment.
People who are filing either a Chapter 7 or a Chapter 13 bankruptcy after months of missed credit card and/or mortgage payments are usually in a position where another black mark on a credit report won’t make a significant difference. Another consideration when payments are being missed is that unless a debtor’s financial situation takes a substantial turn for the better, payments will continue to be missed and the credit score will continue lower. Additionally, debtors with credit scores below 600 are essentially in a “nothing to lose and everything to gain” position in terms of filing bankruptcy due to lenders’ general reluctance to extend credit to borrowers in that category.
The “nothing to lose/everything to gain” favoring a bankruptcy filing has other considerations as well. For example, late payments and unpaid balances typically stay on a credit report for 7 years. A Chapter 13 bankruptcy stays on the same reports for the same amount of time, seven years. A Chapter 7 stays on a report for an extra three years but carries with it the benefit of the full discharge of all unsecured debts.
Regardless of what happens to a credit score, obtaining credit is quite possible, even likely, after a bankruptcy filing. It is increasingly common for lenders to approve credit after bankruptcy, due in part to the fact that a Chapter 7 filer is probably carrying much less debt as well as the fact that another full dismissal through bankruptcy cannot be filed for another eight years. A debtor who completes the court-approved payment plan also looks like a better credit risk by demonstrating that monthly payments over an extended period of time are sustainable.
Another consideration pertains to the anticipated need for future borrowing. Many seniors, with major purchases behind them, are using bankruptcy filings to get out from underneath burdensome medical bills as well as the credit card balances which have built up to finance the ever increasing costs of healthcare. Without any needs for future borrowing an increasing number of seniors are realizing the minimal importance of a credit score, as witnessed by the percentage of bankruptcy filings in the age group, which is now at the highest level ever.
For many people carrying the burden of overwhelming debt, filing a Chapter 7 or Chapter 13 Bankruptcy is the best solution to a difficult issue. In many situations, the benefits provided by either a Chapter 7 or a Chapter 13 far outweighs the possibility of a temporarily lower credit score. But while filing for bankruptcy may be an easy decision, the process is still very complex and best navigated by an experienced bankruptcy attorney.
