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How does filing for bankruptcy affect my credit?  

 By Damon Duncan

The biggest reason those who need to file bankruptcy don’t is because they are afraid of what the implications will be on their credit. I constantly have people come in for free consultations and they tell me about how they heard their credit is ruined for the next 10 years and they won’t be able to finance the purchase of a house or car. That’s not true!

If that’s not true, what exactly is the impact filing bankruptcy will have on your credit? We’ll get to that answer in just a second but let’s start out by getting an understanding of how your credit score is determined.

How is my credit score determined?

When you have outstanding debt on your credit report you become a risk to those who may finance future purchases. The financing company is afraid you will get sued and defaulton, or fail to pay back, the money they loaned you. Your credit score is meant to be a measuring tool showing the likelihood you will be able to pay back a loan. To determine your FICO credit score five different factors will be looked at: payment history, amounts owed, length of credit history, new credit and types of credit used. If you have a good credit score you will be more likely to get good loans with low interest rates. On the other hand, if you have a poor credit score then you will have to pay a much higher interest rates on loans you are able to get.

Impact of Bankruptcy on Credit Report

Bad news first, when you file for bankruptcy it will stay on your credit report for anywhere between 7 – 10 years. Your credit score is going to take an initial hit because bankruptcy is one of the most negative marks you can have on your credit.

Now the good news, you can rebuild your credit fairly quickly. Although you may have a bankruptcy on your credit for the next 7 – 10 years it doesn’t mean you can’t still finance purchases and rebuild your credit.

Most of our clients have seen that after they file bankruptcy their credit scores will take an initial hit. However, you are able to start rebuilding your credit immediately after filing the bankruptcy. After about a year and a half to two years of working on their credit, most of our clients find they have a better credit score than they did before they filed the bankruptcy.

Filing bankruptcy allows you to lower, if not completely wipe out, one of the five main factors in determining your credit score – amounts owed. Since most, if not all, of your unsecured debts will be wiped out you become less of a risk to potential finance companies.

The Bottom Line

After filing bankruptcy your credit will take an initial hit but you will be able to typically rebuild your credit within a couple of years and be able to get pretty good interest rates on financed purchases such as houses and cars.

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