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Two major concerns debtors may have about bankruptcy

As the economy continues to recover, many Americans still deal with debt problems. Whether it is due to natural disasters (i.e. Hurricane Harvey) or because of prolonged illnesses, financial difficulties can lead to despair for just about anyone.

Despite this, people may be ambivalent about seeking bankruptcy protection because of the potential effect on their credit report, and whether they would be able to obtain credit in the future. Indeed, these are two very valid concerns, so this post will address them. 

The following is presented for informational purposes only and is not legal advice.

Bankruptcy on your credit report        

Bankruptcies generally reduce a person’s credit score by up to 200 points, but it usually depends on the debtor’s previous credit history and the types of debts currently on the report.  According to Fair Isaac, the company that develops credit scoring formulas, bankruptcy filers are commonly compared to those in similar financial straits. Most people seeking bankruptcy protection do not have favorable scores to begin with, so a drop to 320 from 500, for example, may not be not a huge concern.

Like Fair Issac, loan officers and mortgage brokers consider the circumstances surrounding your bankruptcy if you seek a home or car loan in the future. Filing bankruptcy incident to a divorce is much different than enjoying frivolous spending sprees. After all, brokers and loan officers make money on every loan they originate, so it suits their interests to take a chance on someone who has learned from financial upheaval.

Equifax, Experian and Trans Union can report a bankruptcy on your credit report for seven years after the discharge. If you do not ask for it to be removed after that time, it can remain on your report for up to 10 years.

Life after bankruptcy

The good news is that those who discharge their debts through bankruptcy can achieve a favorable credit score within two years after filing. Most achieve this by adopting good spending habits and prudently using a secured credit card. There is one caveat about using bankruptcy to eliminate credit card debt. Once a Chapter 7 discharge is granted, a person cannot file bankruptcy again for seven years. This could be problematic if one files bankruptcy in 2011 to shed consumer debt, then accumulates massive medical debt or falls behind on mortgage payments three years later.

If you are in financial distress due to credit card debt, an experienced bankruptcy attorney can advise you of your rights and options.

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