Understanding Bankruptcy and Credit
Negative Impacts
What sort of effects will bankruptcy have on the personal credit score? The way that numeric credit scores are derived takes into consideration several factors, and the presence of bankruptcy on a credit report won’t necessarily create a very low score. What it will do, however, is alert potential creditors to some financial problems in the individual’s past, and it may make them hesitant to provide funds. Additionally, it could cause problems not normally associated with the credit score such as opportunities for work or even housing.
What the Courts Think
Bankruptcy and credit are a complex issue, and before someone even considers filing they should take the time to do the proverbial “homework”. For example, the federal judicial districts that hear all of the bankruptcy cases in any area will always require the individual to receive qualified credit counseling from a court approved provider. This is to ensure that all avenues for possible resolution have been identified and followed before the filing occurs. Some advance research and a meeting with one of the approved counselors might help someone avoid filing for bankruptcy altogether.
Why They Do This
Although it might seem that the courts are seeking to eliminate unnecessary cases through the insistence on counseling, they are also forcing individuals to consider the impact of bankruptcy on the credit score or report. This is because there are different ways of filing and one is a bit more damaging than the other. The two most common approaches are Chapter 7 and Chapter 13.
Two Ways to File
Chapter 7 will usually take all consumer credit accounts and even some tax debt and erase it completely. This usually involves the individual working with a court-appointed trustee to determine which personal assets can be liquidated, using any proceeds to reduce debt, and then formally filing for a “discharge” of the remaining debts. This makes it impossible for creditors to pursue further claims, but it also appears on the credit report too.
Chapter 13 will appear on the credit report, but the debts tend to never receive a “discharge” and instead are reorganized and paid in full when possible. For example, if the debtor is about to enter into foreclosure they might file for Chapter 13 in order to stop the process, reorganize their debts, and agree to a long-term payment plan that ensures most of the debt is paid in full.
Making Your Choice
How can you know which route to follow? Generally, the first step is to educate yourself a bit about the process, and then seek out a qualified bankruptcy attorney. They will usually go over the complete situation with you and make their recommendations. For instance, if you are someone without any assets such as a home, car, savings, CDs, or lots of costly personal possessions, and who is also carrying a lot of unsecured debt, they would probably recommend a Chapter 7 bankruptcy. If you did own a home, a few cars, and lots of expensive goods you might be able to sell off the assets and pay down the debt to a more manageable level.
Considering the Outcome
Where bankruptcy and credit are concerned you have to really consider the final outcome. Sure, it would be nice to be completely free and clear of the heavy burden of debt, but this could make it difficult for you in many ways you might not have imagined. For example, a bankruptcy on a credit report might prevent you from getting a job, an apartment rental, a car loan, or even an educational loan for your kids. This is the reason that where bankruptcy and credit are concerned you must consult with experts and make as many “future-friendly” decisions as possible.