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Understand How Bankruptcy Can Affect Your Credit Scores



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By : Alvin Smith    99 or more times read

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A lot of people who are considering bankruptcy are looking at either chapter seven or chapter 13. Chapter seven is when you are dealing the unprotected debts. This is a very quick process and only takes 90 days or so to complete. Chapter 13, however, is a much more involved situation which includes all debts and everything you own from your house to your car. And you will be in bankruptcy for over 3 to five years.

Why would someone turn to filing for bankruptcy? Most people believe that it is last resort. Not so, the last resort one should take is to allow your credit destroyed then file bankruptcy. In reality a 90 day payment on a credit card has as much impact on your credit score in a negative way as the public record for filing for bankruptcy causes. These two are identical in the amount of damage that they can do to your credit score.

What is the positive thing of it? First, eliminate all your unsecured debts which include all your credit cards, anything that is unsecured except for student loan, federal tax and state tax debt. Liability can be removed as well. If you are going for a short sale or foreclosure you already have experienced one, your tax liability will be forgiven, which is also called debt forgiveness income, where they forgive the debt that you had, writing it off. In return they will 10/99 you which has to be reported in your taxable income. Just before that event of you file for chapter seven you will not have to take that as part of your income - you are removing the liability. It also does nicely with vehicle leases.

Above all, your credit score is likely to go much higher. When you are declaring for bankruptcy and you are discharging these debts you are eliminating a lot of the bad things that are in the credit report. That means all your bad credit report is moot. All your bad credit report will be consolidated in one public record. It may appear strange, but if you think about it, your credit score will go up since the first one will go to an entirely new record and you can start anew. Of course, this does not apply to everyone, but it deserves consideration.

There is also the downside of bankruptcy. If you plan to buy a house or a car in the next two years, having a record for bankruptcy on your credit report will definitely keep you from being able to get it or it can also cause to make you pay a much higher interest rate. Of course, it is okay to pay a much higher interest rate, the question is, would you pay more during that period? The reality is that most people who would consider filing for bankruptcy do not think of buying a home or any property.

If you are thinking about filing for bankruptcy, it is better to do it using chapter 7. That way, it can even help improve your credit score in the long run.
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