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How does filing for bankruptcy impact a credit score?

On Behalf of | Jan 16, 2018 | Blog |

It is often overestimated how filing for bankruptcy will affect a credit score. People assume that a credit score will be ruined indefinitely. This is untrue, but filing for bankruptcy will have a negative impact on a credit score for a period of time. This is because credit scores are meant to communicate a borrower’s ability to pay back a loan to a lender. Filing for Chapter 7 bankruptcy essentially eliminates debts, and a lender may never secure the remaining amount of money.

Bankruptcy vs unpaid debts

Bankruptcy’s impact on credit is typically a top concern for debtors. Landlords can demand good credit for housing and lenders can require a specific score to qualify for a loan. However, Ohio residents considering filing for bankruptcy already struggle to pay down debts. Choosing to live with unpaid debt for years will have a lengthy and damaging affect on a credit score.

On the other hand, filing for bankruptcy will have an immediate and shorter-lived affect. The Chapter 7 bankruptcy filing date to relief from debt only takes about three to six months. Once it is over, all unsecured debts will be discharged, allowing the filer to start new.

People filing for bankruptcy with a good credit score can expect to see an initial drop of 100 to 200 points. After debts are discharged, the credit score can begin to slowly rise. Yet, most people who file for bankruptcy are managing several unpaid accounts. Failing to pay down loans or credit card bills likely means the debtor already has a low credit score. Bankruptcy’s impact on an already low credit score may be negligible.

Improving a credit score

While it is true that filing for bankruptcy will have a negative impact on credit, it may be a necessary step towards improving it. Bankruptcy can remain on your credit report for up to 10 years, depending upon individual circumstances and the type of bankruptcy. The sooner that someone with unmanageable debt files for bankruptcy, the quicker they will be able to improve their score.

Eliminating unsecured debts and focusing on paying down secured debts are steps in the right direction. Debtors will be able to heal their credit score and build trust with lenders. An attorney can walk you through the appropriate steps for elimintaing debt and building a better credit score.


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