If I File for Bankruptcy is My Credit Ruined?

One of the most common concern my clients have is how filing for bankruptcy is going to affect their credit score. Obviously, having a bankruptcy on your credit report is going to do some damage, but that doesn't necessarily mean it's worse than NOT filing for bankruptcy. Most people are under the impression that avoiding bankruptcy by any means possible is always the best way to maintain your credit. This is not always true.

Your Credit in the Long-Term

If you are considering filing for bankruptcy, then you're probably not in a place where you are able to keep current on all you bills, and if you're like most of my clients, you're probably dealing with an over extension of credit.

If you have found yourself in a situation where you are becoming unable to stay on top of your credit card payments, then your credit is going to begin to decline, especially if you are nearing the limits on many of your credit cards. Unless you are able to solve this problem by reducing your balances, you are going to be "stuck in a rut" for a long time with little hope of building up credit.

Be Realistic

For most people, the only way to get out of credit card debt in a few years is to get a serious boost in income, or an otherwise large amount of cash. It's important to look at your financial situation honestly and realistically. Do you expect any significant infusion of cash in the near future?

As a general rule, if you can't repay all your debt in three years, then bankruptcy is probably a better option. The reason is, your bankruptcy can be completed in less than three months, after which you can immediately begin actively working on rebuilding your credit. If you allow yourself to simply stay in the rut you are in, your credit will likely decline slowly over time. Not to mention having to constantly deal with the stress and uncertainty of living under that financial burden.

What Happens to Your Credit Report When Your File Bankruptcy?

When you file for bankruptcy, most of your unsecured debts will be discharged and wiped off of your record, but the bankruptcy will be added in it's place. Essentially each line item, such as CitiBank Balance: $5,000, is replaced with "Included in Chapter 7 Bankruptcy", assuming you're like most people and file chapter 7.

All those credit card balances are removed and replaced with the discharged note. On it's own, that is not really a good thing for your credit, but it opens up a lot of doors to rebuild your credit score.

Starting Over and Building Credit

Once your bankruptcy is complete and your debts have been discharged, you can begin to start over with a clean slate. With no debt, it becomes a realistic option to use credit cards only for those "necessary" purchases, and pay the balance off immediately. No interest, no late fees, no balance.

BE CAREFUL! It's too easy to get yourself into the same situation again, so make sure that you only use your credit card to buy items you can afford to pay for now. If you maintain a low balance and pay it off before the end of every payment cycle, your credit will quickly begin to climb and you won't get yourself stuck paying interest and late fees.

Get Professional Advice

If you are struggling with debt, and don't have any realistic way of getting out of it in the near-term, talk to a local bankruptcy lawyer about your options. Most will offer you a free consultation, so you can get some qualified advice regarding your particular financial situation to find out if bankruptcy is something that might work for you.