Misconceptions about bankruptcy and its effect on your credit score

Misconceptions about bankruptcy and its effect on your credit score

Bankruptcy is a legal process where individuals or organizations who are unable to repay creditors can seek relief from their debts. In various instances, a court order imposes bankruptcy, which is often commenced by the debtor. Bankruptcy may help you get debt relief, but it’s important to remember that declaring bankruptcy has a significant, long-term effect on your credit.

This is also a significant reason why people tend to be hesitant about filing for bankruptcy. But not filing for bankruptcy and allowing the accumulated debt to go to collections will also have a negative impact on your credit score.

Although the bankruptcy information stays on your credit report for a long time, there are numerous ways to repair your credit. The effect of bankruptcy diminishes over time, and being responsible for new debts after bankruptcy will make it possible for you to secure a loan in the future.

Bankruptcy lets you start over with a clean slate, it’s giving you a second chance. However, it comes at a price, as well. It hampers your credit score, reflects on your credit report, and therefore hurts your ability to secure future credit.

Filing for bankruptcy is not the common man’s cup of tea. It includes a lot of complicated legal procedures and preparation of various documents and financials. People hire attorneys to help them through the entire process of filing for bankruptcy.

People often get deluded about the entire situation because many myths and common misconceptions are surrounding the process and its effect on your credit. Let’s debunk those myths and understand how filing for bankruptcy affects you and your credit:

Myth 1: When you do not have negative information in your credit report before bankruptcy, you might have a higher credit score after bankruptcy than if your report held negative information before it was filed.

Truth: Healthy payment history and lack of unfavorable details do very little to mitigate the effect on your credit score after a bankruptcy. The existence of bankruptcy, and the amount of time that the bankruptcy has been on the report, are the most important determinants. The impact of bankruptcy may decrease over time, which can contribute to an improved credit score, along with favorable records post-bankruptcy.

Myth 2: Every bankruptcy detail, without exception, stays on your credit report for ten years.

Truth: Only the public record of bankruptcy under chapter 7 lasts ten years. All other references to bankruptcy remain for seven years on your credit report including:

  • Trade lines that say “account included in bankruptcy.”
  • Collection of debts by third parties, judgments, and tax obligations dispensed via the bankruptcy Section.
  • Chapter 13 Articles of public record.

When the above things start disappearing, your credit score can see a more significant boost.

Myth 3: You will have weak credit as long as the details about bankruptcy stay on your credit report.

Truth: Although following bankruptcy, you can expect a significantly lower credit score, you can start building your credit back-up with wise credit management. You may also be able to penetrate the successful credit score range (700-749) after four or five years. After the bankruptcy, you can start building your credit back up immediately by:

  • Mitigating the negative details on your credit report by adding new credit, such as secured credit cards or small installment loans.
  • Enable on-time payments on both current and existing debts.
  • Maintain credit card balance usage at 30 percent.

Consulting a credit repair expert will help you plan and restore a good credit score, which allows you to secure future credit.

Myth 4: Bankruptcy affects all consumers’ credit in equal measure, regardless of the amount of debt or the volume of debts included.

Truth: Your credit score will account for details such as the amount of debt dispensed and the proportion of negative to positive accounts. If you have a relatively small amount of debt and your bankruptcy contains just a few accounts, your credit score would be higher than those with a more extreme bankruptcy.

Myth 5: All bankruptcy claims are wiped off your credit report.

Truth: Although bankruptcy can help you remove or cover past debts, those accounts won’t vanish from your credit records. All bankruptcy-related obligations may stay on your credit report and affect your credit score for 7 to 10 years, but their effect may diminish with time. Additionally, federal student loans may still not be dispensed after bankruptcy, and you might still be on the leash for those.

Myth 6: After bankruptcy, you can’t get a credit card or a loan.

Truth: Credit cards are one of the easiest ways to add credit, and for those with a checkered credit background, there are choices out there. Secured credit cards, which require an initial security deposit, have a lower entry barrier, but just like a conventional card, they spend and create credit.

Likewise, loans – such as passbook, CD, or credit builder loans – are available that are backed with a deposit or collateral that can help you create credit while you pay them off. These loans are much easier to get through like secured credit cards since the lender is protected in case you can’t pay. Several creditors will begin providing credit immediately after the discharge. You will get new credit much earlier than expected with proper approach and counseling.

Myth 7: Bankruptcy will permanently destroy your credit.

Truth: In the near future, bankruptcy will do serious harm to your credit but will only reflect on your credit report for a period of 10 years. Any adverse activity, including tax, late payments, collection payments, and attorney fees, will terminate. The bankruptcy will be deleted from the credit record ten years after filing, creating a new slate. You are then safe and secure. Consult experts in your area, and work with them to develop your credit score, look for credit repair specialist California.

Myth 8: If you file for bankruptcy, lenders will avoid you.

Truth: False. Most of the stigma associated with bankruptcy disappeared after Congress passed the new bankruptcy laws in 2005. Most creditors understand our economy ‘s challenges and the impact of this crisis on consumers. So, many would give credit to the bankruptcy-affected ones. Although interest rates may be higher, following a bankruptcy filing, you can still get a loan.

Myth 9: Those who file for bankruptcy are stealing and might go to prison.

Truth: More than a million people elect to file for bankruptcy each year, whether via Chapter 7 or Chapter 13. There are decent people in tight financial circumstances. While there is always a bad apple in each category, most bankruptcy filers are in desperate need of relief and turn to bankruptcy advantages to get them through this challenging period. If you have lost your livelihood and are unable to pay for your credit cards, or have been sick or disabled and have incurred significant medical bills, you are not a criminal to choose relief from bankruptcy. Congress created the federal insolvency laws to help hard-working families get rid of their debts and move on with their lives.

Myth 10: Bankruptcy filing is very complicated and could result in an audit.

Truth:   It is now much more comfortable to file for bankruptcy than in the past. Although the statute involves filling out and sending different paperwork to the court, most of this work is performed online due to electronic filing. In most cases, it merely needs a completed intake form, values for your property, 3-month bank statements, 2-year tax returns, a list of your debts, etc. The rest will be handled by your lawyer or legal firm. A bankruptcy trustee appointed to your case may require additional financial reports after filing, but audits are exceedingly rare (the actual audit rate is around 1 in every 1000 cases filed).  In the rare case of an audit, legal firms help their clients through the inspection with no problems.

Myth 11: If you are married, you cannot file bankruptcy by yourself.

Truth:   The bankruptcy laws authorize anyone to apply for bankruptcy, either individually or jointly. If you are married, you and your partner must decide whether to make a joint filing. For example, you and your partner have joint debts, such as a mortgage, credit cards, loans, etc., then it makes sense to file together. The bankruptcy will either remove these mutual debts or restructure them. For new marriages, however, where one partner has good credit or no joint debt, it could be more prudent for the other partner to file separately to eliminate their own debt.

Myth 12: You can file bankruptcy only once.

Truth: Although the bankruptcy rules were strengthened in 2005, you can still file more than once for bankruptcy, depending on when you filed and the form of bankruptcy.

You can get a discharge once every eight years in Chapter 7, and every two years in Chapter 13. If you are discharged through Chapter 7, you must wait six years before you get a discharge through Chapter 13. When you get a discharge in Chapter 13, you will wait four years before you get a release by Chapter 7.

If the previous case has been dismissed, there will usually be no waiting period for refiling (although a case dismissed “with prejudice” would have an attached waiting period). In these cases, finding a competent bankruptcy attorney is essential, because there are some motions that need to be filed to expand the bankruptcy protection of your current case.

Myth 13: Some creditors are unaffected by bankruptcy and can press charges against you.

Truth: One of the critical reasons for filing bankruptcy is the termination of ALL collection operations. Once you file the application for bankruptcy, whether by Chapter 7 or 13, you and your properties obtain automatic immunity from the court from your creditors (known as the “automatic stay”), which also includes attorneys, collection companies, representatives and/or agents from the creditors.

Specifically, federal law forbids your creditors from contacting you for any cause, including written communications, monthly bills, or telephone conversations. Creditors must abandon all collection activities against you, which means they cannot file a new complaint, prosecute a prior case, or collect on a previous legal verdict.

Myth 14: Means test obstructs people from qualifying for bankruptcy.

Truth:  By the time the revised bankruptcy laws were enacted in 2005, many debtors were frenzied. Creditors tried to persuade the nation that bankruptcy would extend only to a small percentage of the poor and the vulnerable. It was a massive distortion of the new rules. In reality, the 2005 legislation changed the method by which debtors meet the criteria for bankruptcy under the Means Test, but it did not deter people from filing. Indeed, bankruptcy filings have significantly increased since the new laws were passed, particularly in the light of the foreclosure crisis. Don’t just believe anything you’re hearing — whether on TV, in the magazine, or from friends or family. 

Myth 15: Personal bankruptcy will lead your family to ruin.

Truth: Various things lead to family issues, but bankruptcy might help fix some of your problems. Owing to financial difficulties, you might be on the verge of divorce. In some instances, by filing for bankruptcy and getting a new financial start, you can end the family problem. While filing for bankruptcy can be a very tough decision in your life, the absence of all that tension will give your relationship a chance to survive.

While these realities make it easier to file for bankruptcy, it is still a decision that is emotionally taxing and mentally exhaustive. It can have unfavorable effects on your credit securing ability for the long term and might even hinder some of your life plans. Being cautious about your money and loans is of utmost importance; however, if you can’t keep up, it may be your best option to file for bankruptcy. To mitigate the damage, contact a credit repair specialist and get a start on resetting your credit after filing.

Misconceptions about bankruptcy and its effect on your credit score